A recent court case (Wehner v Genentech) provides some potentially valuable insights into ways plan fiduciaries (and their attorneys) can approach fiduciary litigation. In order to fully understand the significance of this case, this blog will need to discuss some inside lawyer stuff; bear with me on this–it is key to understanding how to protect plan fiduciaries.
The Motion to Dismiss When litigation is brought, plan fiduciaries do not want to go to trial. Trials are expensive, messy and can lead to unpredictable results and significant awards. So, the goal is to win before trial-through a motion to dismiss. The key to a motion to dismiss is demonstrating to the judge (this is a pretrial strategy–so there is no jury yet) that even if the facts alleged by the plaintiff are true–those facts do not enable the court to plausibly infer that a breach has occurred. For example, a complaint that only states a fiduciary should be liable because the plan paid $100,000/year in recordkeeping fees would be dismissed. The only fact alleged is that the plan paid $100,000 in fees–but there are no facts alleged that support a claim that the $100,000 in fees was excessive or improper.
Equally important–and key to these recent cases–is the requirement that simple generalized assertions of a breach are not adequate. So, even if the complaint in our example stated that a breach occurred because $100,000 is excessive–the complaint would still be subject to dismissal. Generalized assertions–that are not supported by specific facts that pertain to the plan being sued–are not enough either.
One more important aspect of the motion to dismiss: the defendant does not have an opportunity to present witnesses to testify about the facts favorable to the defendant–that occurs at trial. The motion to dismiss is based on legal principles and whether the plaintiff has alleged specific facts which (if true) would justify a verdict against the defendant.
So What? Application ofthese principles resulted in a complete dismissal in Genentech). Here’s how:
- The plaintiffs in Genentech alleged that administrative and recordkeeping fees paid by the plan were excessive. As the basis for this allegation, the plaintiffs relied on data from the 401(k) Averages Book. The court concluded that the fees analyzed in the 401(k) Records Book were different than the fees paid by the Genentech plan that were alleged to have been excessive. As a result, the plaintiffs had not alleged facts that supported a claim of fiduciary because they failed to allege facts that pertained to the plan being sued.
As stated by the court:
Federal district courts in California have held that a plaintiff must plead administrative fees that are excessive in relation to the specific services the recordkeeper provided to the specific plan at issue. A plaintiff must allege “facts from which one could infer that the same services were available for less on the market.”
In particular, the allegations in Wehner’s Complaint do not make clear why the market comparator from the 401(k) Average Book provides an accurate comparison to the fees charged by the Plan at issue in this case. Nor is there any indication of how Wehner calculated the per-participant fees for recordkeeping and administrative costs and whether that calculation includes services that go beyond the regular amount of recordkeeping and administrative services reflected in the 401(k) Average Book.
- The Genentech court used the same rationale to dismiss claims that the plan paid excessive investment management fees. The plaintiffs alleged that the plan failed to pay reasonable investment management fees and cited fees paid by “comparable” plans. The court rebuffed this allegation, noting that:
The Complaint only states that “[f]rom 2014 through 2018, the Plan paid out investment management fees of 0.31%–0.32% of its total assets, a figure higher than that of comparable plans.” Compl. ¶ 27. There is no explanation of what those “comparable plans” are and why they are comparable.
- Finally, the Genentech court addressed claims that the plan’s (custom) target date funds were too costly–and generated poorer performance–than other target date funds. Here too, the “comparable” funds cited by the plaintiffs were not considered by the court to be truly comparable–because the funds used by the plaintiffs were retail funds and included some actively managed funds. The court agreed with defendants that “disparities between investments, investment strategies and cost structure” made it “implausible to meaningfully compare” a retail target date fund with a custom fund. Similarly, the court rejected plaintiffs’ attempt to compare actively managed funds (used in the plan’s target date funds) with index funds, agreeing with another court’s conclusion that passively-managed funds are “not comparable to actively-managed funds in any meaningful way” because the two types of funds “have different aims, different risks, and different potential rewards that cater to different investors”.
Motion to Dismiss (Part II) The court’s conclusion that plaintiffs did not provide “comparable” data–regarding administrative fees, investment fees and investment performance–deprived the plaintiffs of a key factor needed to withstand the motion to dismiss: the need to provide facts that enable to the court to plausibly infer that a breach has occurred. As a result, the complaint against the Genentech plan was dismissed and Genentech was spared the cost and risk of a trial.
Of course, not all defendants are so fortunate. In another recent case (Parmer v Land O’Lakes), the court agreed that a fiduciary claim could not be based on generalized comparisons–and required allegations based on more finely calibrated comparisons. The plaintiffs in Land O’Lakes based their claim on four points:
(1) funds that had excessive fees based on the comparison of expense ratios from a study issued by the Investment Company Institute (ICI) ICI Study;
(2) defendants should have invested in the lowest cost share class available due to the plan’s size;
(3) defendants failed to investigate the availability of lower cost collective trusts; and
(4) defendants failed to select lower cost passively managed funds.
The court agreed with the defendants on three points–that the ICI study, the collective investment trusts and the alternative funds cited by the plaintiffs did not provide comparable benchmarks that could support a claim of a fiduciary breach. However, the court concluded that a claim could be based on failure to utilize less expensive share classes of the funds in the plan–these provided a comparable benchmark and the allegation that the plan failed to utilize these funds could plausibly support a claim of fiduciary breach.
Making the Point. As noted earlier, the motion to dismiss is decided without witnesses who can testify about the facts at issue. This can make it difficult for a defendant to refute claims (such as by presenting evidence that alternative providers or investments were considered by fiduciaries–but that they made their decisions after following a prudent fiduciary process). But, the Genentech decision points to a strategy that may help fiduciaries bolster their arguments for dismissal of these cases.
Although courts do not use witnesses’ factual testimony in deciding a motion to dismiss–the courts can consider public documents (such as a plan’s 5500 or a fund prospectus)–by taking “judicial notice” of these documents. In the Genentech case, the court took judicial notice of the plan’s investment policy statement and fee policy statement–and noted that these documents could be used to demonstrate that the plaintiff’s allegations were “insufficient.” This makes it harder for plaintiffs to simply allege that a decision made by the plan was not prudent–judicial notice of these documents could require plaintiffs to allege facts (with more specificity) showing that fiduciaries did not follow these policies or that these policies were not prudent. This use of “judicial notice” could prove to be a helpful tool for fiduciaries in using motions to dismiss as a way to avoid the expense and risk of a trial.
Some Caveats. Both of these cases were at the district court level (the lowest level in the federal system)–this means they are not binding precedent on other federal courts and that these rulings can be appealed. Also, plaintiffs may sharpen their analysis and try an amended complaint.
Nonetheless, the analysis used by these courts could provide useful tools for fiduciaries in defending litigation.