If you thought a heightened pleading standard in ERISA breach of fiduciary duty claims based on the fees or performance of funds in 401(k) and 403(b) plans was helping plan sponsors beat back these lawsuits, think again.
According to Euclid Fiduciary’s Mid-Year Review of Excess Fee and Performance Litigation, released on Aug. 1 in a blog post by Daniel Aronowitz, the statistics tell a different story.
“The actual year-to-date results [through July 31, 2023] reveal that plan sponsors are only winning approximately 30% of dismissal motions—even less than the 35% success rate from the prior year,” writes Aronowitz, Managing Principal and Owner of Euclid Fiduciary. “Yet even that is not the whole story, as most of those dismissals are pyrrhic victories, because plaintiff law firms nearly always amend the complaint and the litigation continues.”
The Euclid report found only 17% of cases in 2023 have been dismissed with prejudice [8 out of 46], and half of those dismissals with prejudice involve “anemic challenges to BlackRock LifePath index funds, cases that never had any merit.”
Aronowitz said the BlackRock LifePath cases have no merit because the highly rated LifePath funds have experienced long-term excellent performance, and noted that four of those 11 cases have been dismissed with prejudice in less than one year of their filing.
Heightened standard having little impact
To state a viable claim in these cases based on fees or performance, a plaintiff must, among other things, allege “a meaningful benchmark” against which to compare the cost and performance of the plan’s funds, notes an Aug. 3 brief from Dorsey & Whitney LLP. Many courts will reject a proposed benchmark unless it (1) provides an “apples” to “apples” comparison to funds with similar investment aims and strategies and (2) reflects the market generally, as opposed to cherry-picked examples of funds with lower fees or higher returns.
Despite this heightened standard, many recent excessive fees cases are surviving Rule 12 motions to dismiss.
“The results show that most excessive fee and imprudent investment cases survive a motion to dismiss,” Aronowitz writes. “And even when certain claims are dismissed at the pleading stage, it rarely reduces the damages model enough to reduce the settlement leverage created in these cases.”
He added that the dismissal percentage following the March 2023 Hughes II decision continues to decline as plan sponsors lose traction in the Sixth and Seventh Circuits.
In that case, as explained in this brief from Faegre Drinker, the Seventh Circuit issued a long-awaited decision in Hughes v. Northwestern University, the case remanded from the Supreme Court’s 2022 decision of the same name. Following the remand, the Seventh Circuit was called on to consider the appropriate pleading standard that applies to ERISA fiduciary-duty breach claims, specifically as to the duty of prudence. In its order, the court did so and concluded that two of the plaintiffs’ three remaining claims could continue.
“The most disappointing trend in the evolving pleading standard is the lack of traction in the Sixth and Seventh Circuits following the Hughes II decision in March 2023,” Aronowitz writes. “Many more claims of excess recordkeeping fees are being allowed to proceed on the flimsy assertion that recordkeeping fees for large plans is a commodity with no differentiation in service standards. The District of Massachusetts has proven to be an ERISA judicial hellhole based on allowing most excess fee and performance cases to proceed to discovery.”
The Euclid Fiduciary Mid-Year Review concludes by stating that the use of a motion to dismiss is an imperfect and weak tool for plan sponsors in combating excess fee and performance cases. “But given how difficult it is to win summary judgment in these cases, we have no choice but to continue the long slog of advocating for a pleading standard that weeds out meritless cases.”
SEE ALSO:
• Hughes v. Northwestern: A Missed Opportunity to Establish a Workable Pleading Standard
• The Dramatic Rise in Excessive 401k Fee Litigation—And Who’s Fighting It