Key Takeaway: The Sixth Circuit Court of Appeals issued a published opinion that takes a broad view of the deference due to plan fiduciaries, noting that ERISA “does not give the federal courts a broad license to second-guess the investment decisions of retirement plans.”
On June 21, 2022 the Sixth Circuit Court of Appeals affirmed the district court’s dismissal of a lawsuit against CommonSpirit Health. The underlying complaint (filed in the Eastern District of Missouri) alleged that the fiduciaries of the CommonSpirit 401(k) plan had violated ERISA’s duty of prudence by including actively managed funds (alongside passively managed funds) as plan investment options, selecting certain allegedly underperforming funds as plan investment options, and paying an allegedly excessive amount in recordkeeping fees. The plaintiff’s allegations relied heavily on comparing the investment options in CommonSpirit’s plan to purportedly similar options in third-party plans. In the plaintiff’s view, those comparisons established that CommonSpirit could (and should) have selected less expensive and/or better performing funds. The district court granted CommonSpirit’s motion to dismiss.
The Sixth Circuit Court of Appeals affirmed. In broad strokes, the court held that the plaintiff’s performance-based allegations merely suggested “the possibility of imprudent conduct—that parallel offerings performed differently over a few years.” That was insufficient to state a plausible claim because “disappointing performance by itself does not conclusively point towards deficient decision-making,” especially after accounting for “competing explanations” and other “common sense” rationales for long-term investment decisions. For example, the Sixth Circuit observed the different risk profiles of the challenged funds and funds used by the plaintiff as comparators, explaining that fiduciaries can offer actively-managed funds “suited for risk-tolerant investors” that might underperform other funds in certain market conditions. And, while noting that a plan sponsor cannot simply “offer a broad range of options and call it a day,” the court held that the plaintiff could not plausibly allege imprudence merely by pointing to another investment that “performed better in a five-year snapshot of the lifespan of the fund.” As to recordkeeping fees, the court explained that the plaintiff had failed to allege that the at-issue fees were excessive relative to the services that the recordkeeper offered.
The decision is Smith v. CommonSpirit Health, No. 21-5964, in the Sixth Circuit Court of Appeals, and is available here.