Some heartening news for 401k plan sponsors and fiduciaries came down in the form of a recent decision from the U.S. Court of Appeals for the Sixth Circuit in an excessive fee case.
In the case of Smith v. CommonSpirit Health, the court upheld a district court decision to dismiss the case where the plaintiff, a participant in a defined contribution plan sponsored by a predecessor of CommonSpirit Health, alleged that the plan fiduciaries breached their duty of prudence by offering actively managed investment options instead of lower-cost, better-performing passively managed index options. As a result, plaintiffs said, it allowed the plan to pay excessive recordkeeping and management fees.
“Yosaun Smith claims that her retirement plan should have offered a different mix of fund options, in particular that it should have replaced actively managed mutual funds with passively managed mutual funds. But the Employee Retirement Income Security Act, ERISA for short, does not give the federal courts a broad license to second-guess the investment decisions of retirement plans,” the Sixth Circuit’s opinion reads. “It instead supplies a cause of action only when retirement plan administrators breach a fiduciary duty by, say, offering imprudent investment options. Because Smith has not alleged facts from which a jury could plausibly infer that CommonSpirit breached any such duty and because Smith’s other claims do not get off the ground, we affirm the district court’s dismissal of her complaint.”
In doing so, the Sixth Circuit became the first court of appeals to issue a published opinion applying Hughes v. Northwestern. It held that courts deciding motions to dismiss in fee-and-expense cases under ERISA must engage in a “context-specific inquiry” that give “due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”
A June 24 ERISA Class Actions Update from Chicago-based law firm Sidley Austin LLP notes that since Hughes, the Ninth Circuit has issued two unpublished decisions reversing dismissals in fee-and-expense cases, but no court of appeals had issued a published opinion. “The pro-defense decision in CommonSpirit reverses this trend and provides a roadmap for district court dismissals in future cases,” the update states.
“As a complete defense victory, CommonSpirit is a welcome development in that it carefully scrutinizes the generic allegations made in virtually every fee-and-expense case. It shows that the impact of the Supreme Court’s decision in Hughes is still in flux,” the update continues. “And it suggests that, on balance, Hughes may ultimately provide more protection to plan sponsors and fiduciaries than originally thought by requiring courts to, in the Supreme Court’s words, ‘give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.’”
Case background
The plaintiff, Yosaun Smith, once worked for Catholic Health Initiatives, now known as CommonSpirit Health, one of the largest healthcare providers in the United States. Starting in 2016, she participated in CommonSpirit’s defined contribution 401k plan, which serves more than 105,000 people and manages more than $3 billion in assets. It offers 28 different funds in which employees may invest their contributions. These include several index funds with management fees as low as 0.02% and several actively managed funds with management fees as high as 0.82%. The actively managed Fidelity Freedom Funds are the default investment if employees do not choose to place their contributions in a different fund instead.
Smith sued CommonSpirit and the plan’s administrative committee under ERISA’s remedial provision for breach of fiduciary duty and sought to represent a proposed class of similarly situated participants in the plan. She claims that CommonSpirit breached its duty of prudence by offering several actively managed investment funds when index funds available on the market offered higher returns and lower fees. In addition, she separately alleged that the plan’s recordkeeping and management fees were excessive.
CommonSpirit moved to dismiss the complaint. The district court granted the motion, concluding that Smith failed to allege facts from which it could plausibly infer that CommonSpirit acted imprudently in violation of ERISA.
In affirming the district court’s dismissal, the Sixth Circuit opinion noted that actively managed funds represent a common fixture of retirement plans, “and there is nothing wrong with permitting employees to choose them in hopes of realizing above-average returns over the course of the long lifespan of a retirement account—sometimes through high-growth investment strategies, sometimes through highly defensive investment strategies. It is possible indeed that denying employees the option of actively managed funds, especially for those eager to undertake more or less risk, would itself be imprudent.”
As the Sidley Austin update notes, the court rejected the recordkeeping claims, too. “Plausibly pleading an excessive fee claim, the court explained, requires ‘context,’ including allegations that ‘the services that [the plan]’s fee covers are equivalent to those provided by’ comparator plans and ‘excessive relative to the services rendered.’ Plaintiffs failed to provide proper context for their claims, so the court affirmed dismissal of their excessive fee claims as well.
SEE ALSO:
• The Dramatic Rise in Excessive 401k Fee Litigation—And Who’s Fighting It
• Hughes v. Northwestern Bottom Line: Harder to Dismiss Cases
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
