On November 13, 2018, in an unpublished 3-page opinion, a three-judge panel of the Ninth Circuit Court of Appeals upheld the dismissal of plaintiffs’ claims in the White v. Chevron 401(k) fee litigation. The court sided with defendants on one of the critical issues in current 401(k) fee litigation: whether a plaintiff may state a claim for breach of the ERISA duty of prudence merely by alleging that there was a less expensive, “identical” alternative to the service/fund provider selected by plan fiduciaries. In this article we provide a brief note on the case.
Current 401(k) litigation targeting sponsor fiduciaries is broadly focused on recordkeeping and investment management fees, with plaintiffs alleging that sponsor fiduciaries have breached their ERISA duty of prudence (and, somewhat less commonly, their ERISA duty of loyalty) by, in effect, overpaying for recordkeeping and investment services.
At its broadest (and oversimplifying), the substance of this litigation divides into two main theories: (1) that sponsor fiduciaries should (under ERISA’s prudence standard) be held responsible for getting the “best deal” for participants; or (alternatively) (2) sponsor fiduciaries need only show that they got a “good enough” deal for participants.
The importance of the motion to dismiss
The critical stage in the legal process for this litigation has generally been the motion to dismiss for failure to state a claim. If plaintiffs can survive that stage, they can via discovery (e.g., depositions and interrogatories) “fish” for facts supporting their allegations and impose litigation costs, improving their case and making settlement more likely.
In a typical case, the plaintiff files a complaint alleging that recordkeeping or investment services were available to the plan at a lower price than the plan paid. For instance, in Tussey v. ABB, plaintiffs compared the (higher) recordkeeping fees paid by the ABB plan with the (lower) fees paid by the “comparable” Texa$aver Plan (the employee retirement system for employees of the State of Texas). In Bell v. Anthem, plaintiffs alleged that plan fiduciaries violated ERISA by selecting an S&P 500 index fund with an expense ratio of 4 basis points when the same fund provider offered an S&P 500 index fund with an expense ratio of 2 basis points. The complaint in Troudt v. Oracle (filed at more or less the same time as the complaint in Anthem) involved allegations similar to those in Anthem.
In these cases, the question presented to the courts has been: is the allegation that identical services/fund investments were available at a lower price, without more, sufficient to state a claim for breach of the fiduciary’s duty of prudence under ERISA?
(We discuss Tussey, Anthem and Oracle in more detail in our article 401(k) fee litigation update.)
Sponsors, in response, have pointed out that there may be any number of explanations for why a higher priced service/fund may have been selected. The comparable service may not in fact be “identical,” e.g., there may be important ancillary services provided by the plan’s recordkeeper that are not provided by the comparison recordkeeper. The fund used by the plan may in some non-obvious way be fundamentally different from the “comparable” fund, e.g., the fund the plan uses may not engage in securities lending and the comparison fund does.
Preliminary decisions by the courts
What is the right standard – what sort of allegation can survive a motion to dismiss – is still being litigated in the courts. Some courts have sided with the plaintiffs, allowing these sorts of claims to proceed. Thus, in March of 2017, the United States District Court for the Southern District of Indiana denied defendants’ motion to dismiss in Anthem. The same month, the United State District Court for the District of Colorado took a similar position in Oracle.
The court in White v. Chevron, however, has (consistently) sided with defendants. The Ninth Circuit’s most recent decision, upholding the lower court’s dismissal of plaintiffs’ case, while brief, included a pointed discussion of the critical issue:
Where there are “two possible explanations, only one of which can be true and only one of which results in liability, plaintiff cannot offer allegations that are ‘merely consistent with’ [its] favored explanation but are also consistent with the alternative explanation.” “Something more is needed, such as facts tending to exclude the possibility that the alternative explanation is true, . . . in order to render plaintiffs’ allegations plausible within the meaning of Iqbal and Twombly.” … [A]s to each count, the allegations [by plaintiffs] showed only that Chevron could have … sought lower fees for administration of the fund. None of the allegations made it more plausible than not that any breach of a fiduciary duty had occurred. [Citations omitted.]
That’s about as plain a statement as possible that the mere allegation that there was a cheaper alternative service provider or cheaper fund is not an adequate basis for a 401(k) fee lawsuit.
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Unpublished opinions generally may be cited but do not have precedential value. The lower court decision in White v. Chevron, in favor of defendants on these issues and upheld by the Ninth Circuit in this decision, is not subject to those restrictions.
Bottom line: different courts are coming to different conclusions on the same issue in these cases. At some point, these differing approaches will have to be reconciled.
We will continue to follow this issue.