The ink was barely dry on the Supreme Court’s recent ruling in an excessive fee case—and a federal judge who “…been awaiting the Supreme Court’s decision in Hughes v. Northwestern University,” has applied its ruling in refusing to dismiss another, similar suit.
The participant-plaintiffs[1] here (Goodman v. Columbus Reg’l Healthcare Sys., Inc., M.D. Ga., No. 4:21-cv-00015, complaint 2/2/21)—a whopping seven—had, nearly a year ago, claimed that their employer—Columbus Regional—had fallen short of their duties as a fiduciary for a list of transgressions routinely cited in these cases, including (among other things) a failure to select and monitor prudent investment options, choosing funds that had “unjustifiably high” management fees, and failing to disclose to participants the information they needed to make informed investment decisions. One unique fact: The plan in question was terminated effective May 31, 2019, but at that time had approximately $183 million in assets and some 4,700 participants.
In response, Columbus Regional moved to dismiss all of Plaintiffs’ claims, “arguing that Plaintiffs are merely second-guessing Columbus Regional’s investment decisions with the benefit of hindsight.” In issuing his decision on that motion, Judge Clay D. Land of the U.S. District Court for the Middle District of Georgia said (Goodman v. Columbus Reg’l Healthcare Sys., 2022 BL 24373, M.D. Ga., No. 4:21-cv-00015, 1/25/22) he had been awaiting the Supreme Court’s decision in the Northwestern case before making his ruling on the motion.
‘Motions’
Harkening to the legal standards that apply in considering a motion to dismiss—that the complaint “must include sufficient factual allegations to raise a right to relief above the speculative level,” in other words that the allegations made must “raise a reasonable expectation that discovery will reveal evidence of the plaintiff’s claims.”
More specifically, Judge Land repeated the allegations—that Columbus “offered mutual funds in the form of retail share classes even though it could have obtained otherwise identical institutional share classes of the same investments with significantly lower fees,” that they “selected and maintained investments with a history of underperformance, then failed to remove them from the investment menu when they continued to underperform,” that the “investment menu focused on an active management strategy which (a) highlighted actively managed mutual funds with investment management fees that were higher than fees for similar passive index fund options (even though the higher fee actively managed funds were not reasonably expected to outperform similar passive funds),” and that they “limited the passive index fund options, and (c) made the more expensive actively managed mutual funds the default option in the absence of a participant’s investment instructions.”
‘True’ Colors
Now, “Taking the allegations in Plaintiffs’ complaint as true and drawing all reasonable inferences in Plaintiffs’ favor—as the Court must do at this stage in the litigation…” Judge Land concluded that the plaintiffs here “adequately allege that some of Columbus Regional’s investment decisions were imprudent.” He did so because he said, citing the Northwestern case, that “the Supreme Court has suggested that a defined contribution plan participant may state a claim for breach of ERISA’s duty of prudence by alleging that the plan fiduciary offered higher priced retail-class mutual funds instead of available identical lower priced institutional-class funds,” and he noted that “…the Court is satisfied that Plaintiffs state a plausible claim that continuing to offer underperforming mutual funds with excessive expense ratios despite a consistent history of underperformance would violate ERISA’s duty of prudence.”
In this case the Columbus defendants had, in Judge Land’s recounting, relied on a defense that very much resembled that in the Northwestern case (indeed, they cited the Northwestern case)—that the plan offered a variety of options, including lower-cost passive ones, and that therefore the plaintiffs couldn’t establish that the other investment decisions were imprudent.
“The fact that Plaintiffs in this action had some lower cost index fund options is not dispositive of whether Columbus Regional satisfied its duty of prudence as a matter of law,” Judge Land wrote. “Dismissing this claim would not comport with recent Supreme Court precedent.”
Recordkeeping Rates
As for the allegations regarding recordkeeping fees, here they claimed that “Columbus Regional’s recordkeeper received fees that were nearly double what a reasonable recordkeeping fee would have been for a similarly sized ERISA plan,” and they “…further allege that Columbus Regional’s recordkeeper received additional indirect compensation that was excessive and should have been more carefully scrutinized by a prudent plan fiduciary.”
And then—“taking these allegations as true and drawing all reasonable inferences in Plaintiffs’ favor, the Court finds that the complaint adequately alleges that Columbus Regional breached its duty to prudently manage administrative costs.”
And dismissed the motion to dismiss those claims.
What This Means
When the unanimous decision of the Supreme Court was announced last week, we opined that it would likely make it harder to dismiss these suits. Indeed, and while this suit’s allegations were more detailed and specific than some, one could easily read the application of the rule to be as long as the plaintiffs allege certain facts, the court will accept them at face value, and reject the dismissal. If that seems a relatively low bar to force litigation (or, perhaps more accurately, settlement)—well, that may well be where things now stand.
Of course, in this particular case, the defendants weren’t helped in making their case by a heavy (if not complete) reliance on the rationale put forth in the Northwestern case—and the Supreme Court did, in fact, clearly state not only that there was a duty to monitor all funds on the menu, but that providing a choice of ostensibly prudent options wouldn’t preclude liability for also including options that weren’t prudent.
The best solution, of course—and arguably one that didn’t require the Supreme Court’s clarity—is to ensure that all options provided are selected and monitored for prudence by plan fiduciaries.
Footnote
[1] Williamson & York LLC and James White Firm LL
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