On November 20, 2012, the U.S. District Court for the District of Minnesota denied a motion to dismiss ERISA claims in a case challenging the use by a financial services company of affiliated investment products as options for its 401(k) plans. The case is Krueger v. Ameriprise Financial, Inc., No. 11-cv-02781, 2012 WL 5873825 (D. Minn. Nov. 20, 2012).
Krueger involves the 401(k) plan sponsored by a financial services company. The plan makes available as investment options proprietary mutual funds and collective trusts, along with a company stock fund and a brokerage window. Until last year, the brokerage window was managed by the sponsor. And until a 2007 sale, the plan’s record-keeper was also an affiliate of the sponsor. The case was brought by seven current and former participants of the plan. Plaintiffs raised seven counts under ERISA, alleging breaches of fiduciary duty, prohibited transactions, co-fiduciary liability, and knowing participation in other’s alleged breaches of duty. Plaintiffs asserted one claim alleging unjust enrichment under supposed federal common law.
Plaintiffs alleged that the investments managed by the sponsor or its affiliates were selected as options for the plan because they generated profits to the sponsor and its affiliates. Plaintiffs alleged that, as to some of those investment options, the sponsor used the plan’s investments to “seed new and untested mutual funds,” which had the alleged effect of making those funds more marketable outside of the plan. Among other things, the complaint also: (i) alleged the improper use of two tiers of fees in the proprietary target date funds made available on the menu, when supposedly comparable funds charged one tier of fees; (ii) challenged purported limitations on the funds available on the affiliated brokerage window — limitations which they allege were imposed because of “kickbacks” paid to the sponsor or its affiliates; and (iii) asserted that various fees charged in connection with the brokerage window and trust and recordkeeping services were improper.
The court followed the holdings in other “excessive fee” cases in its district — the Eighth Circuit Court of Appeals decision in Braden v. Wal-Mart, 588 F.3d 585 (8th Cir. 2009), and an earlier decision by the U.S. District Court for the District of Minnesota (Gipson v. Wells Fargo, 2009 WL 702004 (D. Minn. Mar. 13, 2009)) — to deny defendants’ motion to dismiss. The court held that, like in those cases, plaintiffs’ allegations plausibly alleged that the defendants selected affiliated funds “to benefit themselves at the expense of participants” and that the selection process was “flawed,” each of which it found sufficient to support a claim of breach of ERISA fiduciary duty. The court also held that the fact that defendants included a range of investment options under the plan — which included investments managed by unaffiliated entities — did not shield defendants from liability. It further found that defendants could be liable for allegedly excessive record-keeping fees and for profits derived from the sale of its record-keeping and trust business if, as plaintiffs alleged, defendants used the plan’s relationship to “prop up” the trust and record-keeping business for sale.
The Krueger court further held that (i) the plaintiffs’ allegations sufficiently stated a claim for prohibited transactions given the affiliation between the plan sponsor and the fund managers; and (ii) exceptions to the prohibited transaction rules did not apply on a motion addressed to the pleadings as a procedural matter because such exceptions are of the nature of an affirmative defense. Largely on the basis of its rulings as to fiduciary breach and prohibited transactions, the court also allowed claims of failure to monitor and co-fiduciary liability to proceed. The only claim the court dismissed was a claim for common law unjust enrichment, which the court found to be preempted by ERISA.