0Tenth Circuit Court of Appeals Affirms Dismissal of Claims Alleging Excessive Fees
Key Takeaway: The Tenth Circuit sided with the Third, Sixth, Seventh, and Eighth Circuits in affirming dismissal of claims alleging excessive investment and recordkeeping fees where the plaintiffs had failed to allege meaningful benchmarks.
On September 6, 2023, the Tenth Circuit Court of Appeals affirmed dismissal of excessive fee claims brought by two participants in Barrick Gold of North America’s retirement plan. The plaintiffs alleged that the plan’s fiduciaries breached their duties of prudence by offering high-cost funds in the plan and causing the plan to pay excessive recordkeeping fees. The defendants moved to dismiss, and the US District Court for the District of Utah granted that motion. Plaintiffs then appealed.
The Tenth Circuit affirmed dismissal. In so doing, the court noted that the appeal presented a novel question in that Circuit: what must a plaintiff plead to plausibly allege that fiduciaries breached their duty of prudence in cases alleging excessive investment and/or recordkeeping fees? The Tenth Circuit answered that question by looking to decisions from the Third, Sixth, Seventh, and Eighth Circuits, all of which have held that, to survive a motion to dismiss, plaintiffs must allege that the fees were excessive in comparison to a meaningful benchmark. Adopting that standard, the Tenth Circuit affirmed dismissal of the plaintiffs’ investment management fee claims because the plaintiffs’ purported comparator funds were not a meaningful benchmark. Specifically, the plaintiffs did not allege that their chosen funds shared similar investment strategies, investment objectives, or risk profiles with the plan’s funds. The court similarly affirmed dismissal of the plaintiffs’ recordkeeping fee claims, ruling that a comparison to averages in the 401(k) Averages Book does not allow for the like-to-like comparison of services necessary for a meaningful benchmark. It also rejected the plaintiffs’ argument that the plan’s alleged failure to complete a request for proposal process was itself sufficient to suggest wrongdoing.
The case is Matney v. Barrick Gold of North America, No. 22-4045, in the Tenth Circuit Court of Appeals, and is available here.
0Ninth Circuit Court of Appeals Reverses AT&T’s Summary Judgment Victory and Remands for Further Proceedings
Key Takeaway: The Ninth Circuit partially reversed the district court’s grant of summary judgment for AT&T, ruling in part that plan fiduciaries must evaluate fees received by a plan’s recordkeeper from arm’s length agreements with a third party.
On August 4, 2023, the Ninth Circuit Court of Appeals partially reversed and remanded the district court’s grant of summary judgment in favor of AT&T. The AT&T plan’s 401(k) recordkeeper received revenue sharing from funds available in the plan’s brokerage window and received a “data connectivity fee” from the plan’s third-party managed account provider, which was paid to the recordkeeper in exchange for access the participants’ accounts. The plaintiffs alleged that the plan’s fiduciaries breached their duty of prudence and committed prohibited transactions by failing to evaluate the reasonableness of that compensation, which they argued should have been considered as part of the recordkeeper’s total compensation in addition to the recordkeeping-specific fees paid by the plan. The District Court for the Central District of California granted AT&T’s motion for summary judgment on both claims, ruling that AT&T was not required to monitor those amounts.
On appeal, the Ninth Circuit reversed, holding that AT&T committed prohibited transactions when it amended its agreement with the recordkeeper to incorporate a brokerage window and the services of the managed account provider. In doing so, it rejected prior rulings from the Third and Seventh Circuits declining to interpret the Employee Retirement Income Security Act of 1974 (ERISA) as creating per se prohibited transactions whenever a plan service provider receives fees. The Ninth Circuit also reversed the district court’s judgment in favor of AT&T with respect to the plaintiffs’ duty of prudence claim, holding that the fiduciaries are required to evaluate all compensation paid to the recordkeeper with respect to the plan, regardless of source. The Ninth Circuit then remanded the case to the district court to consider whether AT&T had actually monitored the at-issue fees received by the recordkeeper and whether AT&T could avail itself of one of ERISA’s prohibited transaction exemptions.
The case is Bugielski v. AT&T Services, Inc., No. 21-56196, in the Ninth Circuit Court of Appeals, and is available here.
0Defendants Prevail After Bench Trial in Case Concerning 401(k) Plan
Key Takeaway: A district court entered a defense verdict after a bench trial, finding that the evidence showed that plan fiduciaries engaged in a prudent process to monitor plan investments and recordkeeping fees and that the plan’s investments and recordkeeping fees were objectively prudent.
On August 18, 2023, after a three-day bench trial, the US District Court for the Eastern District of Pennsylvania entered a verdict in favor of B. Braun Medical and other defendants in a case challenging the investments and recordkeeping fees for the B. Braun 401(k) plan. In its opinion, the court reviewed the evidence presented at trial in detail and found that the defendants’ actions were prudent because the plan’s fiduciaries carefully evaluated the plan’s investment options and recordkeeping fees during dozens of committee meetings held throughout the class period. With respect to investments, the court noted that the plan’s investment advisors prepared reports detailing investment performance on a monthly and quarterly basis and before each committee meeting. Using that information, the committee created a watch list to monitor underperforming investments and removed investments from the plan at appropriate times. With respect to recordkeeping fees, the court found that the committee conducted multiple requests for proposal and benchmarked fees to ensure that recordkeeping fees paid by the plan were market, and they switched recordkeepers when warranted.
The court also found that the plan’s investments and recordkeeping fees were objectively prudent. The court determined that the plan’s target date funds — which formed a majority of the plan’s assets — performed strongly throughout the class period, while the plan’s investments as a whole performed in the top half of all comparable funds 66% of the time (and were in the bottom quartile just 16% of the time). In addition, the plan’s regularly conducted requests for proposals and benchmarking studies showed that the plan’s recordkeeping fees were consistently below average. The court further found that, even though the plan did not ultimately select the lowest-cost recordkeeper, the selected recordkeeper’s fees were only slightly more expensive than others. The court also found that the recordkeeper provided the services that the plan required and did not require the plan to change its investment lineup as part of the recordkeeping contract.
The case is Nunez v. B. Braun Medical Inc., No. 20-4195, in the Eastern District of Pennsylvania, and is available here.
0District Court Dismisses Lawsuit Against Plan Sponsor Regarding Drug Rebates
Key Takeaway: Goodwin client MetLife successfully argued that the plaintiffs lacked standing to bring suit alleging misallocation of drug rebates earned by a self-funded medical benefits plan by the plan’s sponsor.
On July 18, 2023, the US District Court for the District of New Jersey granted MetLife Group’s motion to dismiss a lawsuit alleging that it had violated ERISA by allocating drug rebates earned in connection with its self-funded medical benefits plan to itself rather than to offsetting costs for plan participants. The plaintiffs had alleged that this practice constituted breaches of fiduciary duties, prohibited transactions, and violations of ERISA’s anti-inurement and trust provisions. MetLife moved to dismiss, arguing that the plaintiffs lacked standing because the plan documents stated that drug rebates would not inure to the benefit of participants. MetLife further argued that the plaintiffs’ complaint failed to state a claim upon which relief could be granted, including the reasoning that the plan documents stated that drug rebates would be used to pay plan expenses and therefore contradicted the plaintiffs’ allegations that MetLife used the drug rebates for its own benefit.
The district court held that the plaintiffs lacked standing to bring their claims and did not reach MetLife’s other arguments. The court found that the plan was a defined benefit plan, not a defined contribution plan, and that therefore the Supreme Court’s logic in Thole v. U.S. Bank N.A. applied. Accordingly, the plaintiffs were only entitled to the benefits set forth in the plan documents and had not suffered injury because they were suing only to receive drug rebates that those documents explicitly stated would not inure to their benefit. The district court concluded that allegations that plaintiffs had an equitable interest in the amount of the rebates or that their out-of-pocket expenses could have been decreased had rebates been allocated differently were therefore insufficient to establish their standing.
The case is Knudsen v. MetLife Group, Inc., No. 23-426, in the District of New Jersey, and the decision is available here. The plaintiffs have appealed the decision to the Third Circuit Court of Appeals. Goodwin represents MetLife.
- Speaking Engagement: DCIIA Academic Forum 2023 (November 29) Jamie Fleckner, Goodwin partner, will speak on the panel “Effects of Litigation Risk on the Investment Menu and Participant Outcomes.”
- Speaking Engagement: DCIIA Webinar (September 27, 2023) Jamie Fleckner Goodwin partner, spoke on the webinar “Policy Implications of Recent ERISA Litigation” about cases and decisions notable for their potential to shape the future of the retirement system.
- Speaking Engagement: The Practising Law Institute’s ERISA 2023: The Evolving World (July 31 – August 1, 2023) Alison Douglass, Goodwin partner, spoke on the panel “ERISA Litigation Update” about the latest developments in ERISA class action litigation.
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