Courts of Appeals Reject Generalized Allegations

The ERISA world focused much energy and attention on the U.S. Supreme Court’s decision in Hughes v. Northwestern University, in which the Court reinstated a fiduciary suit against Northwestern University. In the aftermath of the Court’s decision, many analysts concluded that the decision would make life even more difficult for plan fiduciaries seeking to fend off litigation. However, in recent months the federal courts (including several appellate courts) have issued decisions in ERISA fiduciary decisions and these post-Hughes decisions offer some hope to plan fiduciaries (and their insurers). 

In reviewing these cases, a brief commentary on the rules governing these lawsuits (known as “civil procedure”). When a lawsuit is filed the plaintiff alleges facts that, if proven in trial, will support a claim against the defendant. One way to knock a case out of court is to respond with a big “so what?”—even if the facts alleged are true, there is still no liability. Winning at this stage is the gold standard for defense attorneys—it means no discovery, no need for protracted settlement talks and no trial.

Much of the good news involves these motions to dismiss and this blog will highlight some key takeaways from these cases:

This lawsuit involved complaints against the plan’s use of actively managed funds (rather than lower cost indexed funds), the specific funds selected (Fidelity Freedom Funds), and the plan recordkeeping fees. The Court of Appeals upheld the dismissal of the lawsuit, noting that the facts alleged, even if true, did not provide the basis for a lawsuit. 

In considering the claims about the use of active funds the Court noted that the choice of active funds over passive funds could not, by itself, represent a fiduciary breach.  As stated by the Court “such investments 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.”

The Court acknowledged that a breach can occur if the particular fund selected is not prudent—another allegation made by Smith. But, here too, the Court determined that the facts alleged fell short:  

[Smith] mainly compares the Fidelity Freedom Funds’ performance to the Fidelity Freedom Index Funds’ performance for a five-year period, noting that the Freedom Funds trailed the Index Funds by as much as 0.63 percentage points per year.… But that factual allegation is not by itself sufficient. … [T]hese claims require evidence that an investment was imprudent from the moment the administrator selected it, that the investment became imprudent over time, or that the investment was otherwise clearly unsuitable for the goals of the fund based on ongoing performance. Merely pointing to another investment that has performed better in a five-year snapshot of the lifespan of a fund that is supposed to grow for fifty years does not suffice to plausibly plead an imprudent decision—largely a process-based inquiry—that breaches a fiduciary duty. (emphasis added). 

Finally, the Court dealt with claims that recordkeeping fees were too high, which claim was based on comparison to other recordkeeping fee arrangements. As noted by the Court: 

[Smith] has not pleaded that the services that CommonSpirit’s fee covers are equivalent to those provided by the plans comprising the average in the industry publication that she cites. Smith compares CommonSpirit’s fees, for example, to some of the smallest plans on the market, which might offer fewer services and tools to plan participants. Smith has failed “to allege that the fees were excessive relative to the services rendered. [She] also allege[s] no facts concerning other factors relevant to determining whether a fee is excessive under the circumstances.” 

Here too, the court affirmed the district court dismissal of claims that various fees were too high and determined that even if the facts alleged by plaintiffs were true—those general facts did not point to a fiduciary breach by this particular plan. 

With respect to recordkeeping fees, the plaintiff claimed that the Oshkosh plan fees of $87/participant and that fees elsewhere were “around $40 if not lower.” In affirming the dismissal the Court agreed with the lower court that the facts alleged—“that the Plan paid higher recordkeeping fees than a potentially random assortment of nine other plans from around the country” was not enough to allow the case to proceed—even if true. Rather, the court was looking for more facts that would support a claim that the fees paid by the Oshkosh plan were not prudent—in the specific context of the services received by the Oshkosh plan. 

The Court then used a similar analysis to dismiss claims that investment management fees and investment advisor fees were not prudent. In effect, the Court was looking for specific, meaningful comparisons that might support a claim that the Oshkosh fiduciaries were not prudent—and blanket claims that other plans paid lower fees—without a basis for comparison—were insufficient.

This case involved claims that recordkeeping fees were too high, and fund returns too low.  As with Smith v CommonSpirit and Albert v Oshkosh, the claims were based on generalized comparisons –MidAmerican’s recordkeeping fees were compared to two general industry reports (including the 401K Averages Book) and fund performance was compared to an (allegedly) peer group of funds. 

But, for both claims the Court emphasized that there were not enough facts alleged to support a claim that these were valid benchmarks—and without valid benchmarks the facts alleged (in effect, other plans paid less in recordkeeping and other funds performed better)—even if true—did not allege a breach of fiduciary duty.

The Court stated that a plaintiff can defeat a motion to dismiss by alleging enough facts to infer that the fiduciaries’ process was flawed. In effect, the facts alleged must support a plausible inference that the fiduciary acted imprudently. As stated by the Court: “The key to nudging an inference of imprudence from possible to plausible is providing ‘a sound basis for comparison—a meaningful benchmark’—not just alleging that ‘costs are too high, or returns are too low.’”

It is noteworthy that three appellate courts all used very similar analysis in dismissing these claims; this means this approach controls lower courts in broad swathes of the country. In all three cases the courts rejected claims based on generalized allegations that fees were too high or returns too low. In effect, these courts are forcing plaintiffs to come up with more specific facts that support an inference of imprudence. This is good news for fiduciaries who do engage in diligent processes to manage their plans.

However, do not draw too much optimism from these cases. The plaintiffs’ attorneys are not going away—we can expect that plaintiffs’ attorneys will draw some lessons from these decisions and refine their focus in finding facts to allege fiduciary imprudence.  But, for now, the Courts are looking at blanket assertions of breach with a more critical eye. That is good news while it lasts.