Themes in 401(k) prudence litigation: standing and “meaningful benchmarks for comparison”
Two recent decisions – in Singh v. Deloitte and Locasio v. Fluor Corporation – granting defendants’ motions to dismiss in ERISA prudence litigation illustrate emerging themes in these cases: challenges to the standing of plaintiffs who have not actually invested in the funds (or in one case, were not participants in the plan) being targeted; and challenges to the adequacy of the comparators whose allegedly superior performance (or lower cost) is used to “infer” imprudence.
In this article we briefly review these cases.
Singh v. Deloitte
On January 12, 2023, the United States District Court for the Southern District of New York issued an opinion granting defendants’ motion to dismiss in Singh v. Deloitte, in which plaintiff-participants had claimed that the defendant-fiduciaries had violated ERISA’s prudence standard with respect to two Deloitte defined contribution plans, a 401(k) plan and a profit sharing plan. As is common in these cases, plaintiffs claimed that the fiduciaries (1) caused the plans to overpay for recordkeeping services and (2) included funds in the fund menu that had “excessively high” expense ratios.
Standing – no injury in fact: The court found that none of the plaintiffs had participated in the profit sharing plan, and none had invested in four of the six funds with respect to which claims had been made. The court held that, in order to have standing to sue, plaintiffs must allege an “injury-in-fact,” which “requires the plaintiffs to show that they have suffered an actual or imminent injury that is concrete and particularized as to the plaintiffs.” As a result, the court dismissed, for lack of standing, claims with respect to the profit sharing plan and the four funds that the participants did not invest in.
Recordkeeping – no allegation that comparator plans received similar services. In support of their allegation that the Deloitte 401(k) plan’s recordkeeping fees – which plaintiffs estimated (for the period 2015-2017) to range from $59.58 to $70.31 per participant – were “unreasonably excessive,” they compared them to the fees of $27 and $33 per participant charged, by the same recordkeeper, to comparable plans. The court rejected this argument, and dismissed this claim, holding that “plaintiffs must allege more than just that the 401(k) Plan’s recordkeeping fees were higher than those of other plans. Well-reasoned decisions in this Circuit have found that plaintiffs must plausibly allege that ‘the administrative fees were excessive relative to the services rendered.’” Plaintiffs had made no allegations with respect to the services provided either to the Deloitte plan or the comparator plans.
Fund expense ratios – no adequate allegation that comparable funds are in fact comparable. In support of their allegation that the expense ratios for the challenged funds were “unreasonably high,” plaintiffs compared them to “aggregate medians and averages offered by the ICI [the Investment Company Institute].” The two challenged funds – the T. Rowe Price Emerging Markets Equity Trust B and the T. Rowe Price Real Estate Fund – had expense ratios of 0.80% and 0.78% respectively. The ICI Median/Average expense ratios for these funds were 0.50/0.49% and 0.30/0.34%, respectively. On this basis, plaintiffs claimed that “[f]ailure to select funds that cost no more than the average expense ratios for similar funds in similarly-sized plans cost Plan Participants millions of dollars.” The court rejected this argument, finding that plaintiffs’ “metric does not allow for comparison because the plaintiffs do not specify the details of the funds captured in the aggregate by the ICI Medians and Averages. In effect, the plaintiffs have only alleged that some funds in the world are more expensive than other funds.” Moreover, “the mere fact that a fund charges an expense ratio higher than the mean or median, in and of itself, does not imply that the cost was excessive. Otherwise, by definition, half of all funds would charge excessive fees.”
Locasio v. Fluor Corporation
On January 12, 2023, the United States District Court for the Northern District of Texas, in Locasio v. Fluor Corporation, dismissed claims against the fiduciaries of the Fluor defined contribution plan. This was an “underperformance” claim, with plaintiffs arguing that the plan’s target date fund, which mirrored the BlackRock LifePath Index Funds, was imprudently included/retained in the plan because it underperformed (alleged) comparator funds. (Similar claims involving the BlackRock LifePath Index Funds have been made in recent lawsuits against a number of large plan sponsors.) Similar claims were made with respect to the Fluor plan’s Custom Large Cap Equity Fund, Custom Small/Mid Cap Equity Fund, and Custom Non-U.S. Equity Fund.
No standing where no investment in targeted fund: The court held that “[a] plaintiff must demonstrate standing for himself or herself, not just for others he or she professes to represent.” And that “Plaintiffs must allege an individualized and particular injury.” On this basis the court rejected plaintiffs’ argument that they could make a claim based on “a generalized injury to the Plan and its participants.” The court therefore dismissed, for lack of standing, all claims by one plaintiff (Locascio) because she had not invested in any of the funds complained of, and it only allowed claims by the other plaintiff (Summers) with respect to the three funds in which he had invested.
No adequate pleading of a “meaningful benchmark:” As is typical of these cases, plaintiff’s claim was based on a comparison of the performance of allegedly similar funds. The court noted that prudence is ultimately determined by process, not a retrospective comparison of investment results: “Put bluntly, a flawed fiduciary process can result in great returns while a diligent and complete fiduciary process can result in underperformance.” Nevertheless, such an imprudent process may be adequately alleged via “circumstantial factual allegations.” Quoting Main v. Am. Airlines Inc. (N.D. Tex. 2017):
The prudence standard normally focuses on the fiduciary’s conduct in making investment decisions, and not on the results. But when the alleged facts do not “directly address the process by which the Plan was managed,” a claim alleging a breach of fiduciary duty may still survive a motion to dismiss if the court, based on circumstantial factual allegations, may reasonably “infer from what is alleged that the process was flawed.”
In this regard, “meaningful benchmarks for comparison” may be useful (especially at the motion to dismiss stage, where no discovery has taken place). But “’simply labeling funds as ‘comparable’ or ‘a peer’ is insufficient to establish that those funds are meaningful benchmarks against which to compare the performance of’ the allegedly imprudent funds.” For this reason, the court dismissed plaintiff’s (remaining) claims, with leave to amend to cure this flaw in his pleadings.
With respect to standing, not all courts have applied a rule that a plaintiff must have invested in a specific fund to sue with respect to it. Last year we published an article reviewing this issue of standing to sue – Which participants can sue? In that article we discuss a Third Circuit decision upholding a lower court decision for plaintiffs in Boley v. Universal Health Services on this issue. Critically, in that case, every plaintiff had invested in at least one of the plan’s (allegedly) “excessively expensive funds.” The court held that all plaintiffs had “adequately alleged they suffered injury from Universal’s imprudent investment evaluation process,” and could therefore sue with respect to all funds.
With respect to (what has now become the standard for plaintiffs’ complaints) inferred-imprudent-process-based-on-comparison-to-other-plans, we are now seeing more and more courts question the adequacy of comparators. Thus, both the Singh and Locasio courts cited the recent Sixth Circuit decision in CommonSpirit, which dealt with this issue in detail.
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We will continue to follow these issues.