The plaintiffs in an excessive fee case have managed to keep their case alive on appeal – in a case that also has an intriguing dissenting opinion.
The suit was not only one of the first of the university 403(b) excessive fee suits to be filed, the district court decision, in favor of the fiduciary defendants for the University of Pennsylvania Matching Plan, had been cited in a number of these cases, including those that had been settled.
While at least 20 universities have been sued over the fees and investment options in their retirement plans since 2016, settlements have been struck with Brown University, Vanderbilt University and the University of Chicago.
On the other hand, St. Louis-based Washington University, New York University, and Northwestern University have prevailed in making their cases in court, following the University of Pennsylvania decision.
Specifically, the suit alleged that:
- the defendants breached their fiduciary duty by “locking in” plan investment options into two investment companies;
- the administrative services and fees were unreasonably high due to the defendants’ failure to seek competitive bids to decrease administrative costs; and
- the fiduciaries charged unnecessary fees while the portfolio underperformed.
On appeal, U.S. Court of Appeals for the 3rd Circuit revived the employees’ proposed class action, partially reversing (by a 2-1 vote), the 2017 dismissal of the suit. They did so by considering whether the plaintiff in this case (Sweda) “…stated a claim that should survive termination at the earliest stage in litigation,” noting that when a court dismisses a complaint without trial (as the district court did in this case), “it deprives a plaintiff of the benefit of the court’s adjudication of the merits of its claim before the court considers any evidence,” going on to explain that they considered this appeal construing the complaint “in the light most favorable to the plaintiff.”
Now, this is the same standard that the district court judge applied in their consideration of the case. But in this case two of the three appellate judges came to a different conclusion. While the district court judge ruled that the complaint “did not state a plausible claim,” observing (as the appellate court decision noted) that “at various points in its memorandum that “[a]s in Twombly, the actions are at least ‘just as much in line with a wide swath of rational and competitive business strategy’ in the market as they are with a fiduciary breach.” However, the appellate judges were more inclined to see the pleas through the prism of another excessive fee decision, Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 597 (8th Cir. 2009). In that case on appeal (eventually settled), the 8th Circuit not only said that the lower court “ignored reasonable inferences supported by the facts alleged,” it went on to criticize that court for not only drawing inferences in favor of the party (Wal-Mart) that had made the motion to dismiss, but for criticizing the plaintiff for “failing to plead facts tending to contradict those inferences.” Here the judges noted, “to the extent that the District Court required Sweda to rule out lawful explanations for Penn’s conduct, it erred.”
‘More Than Good Intentions’
Turning its attention to the allegations of a breach of fiduciary duty, the court outlined the expectations ERISA imposes, noting, “a fiduciary’s process must bear the marks of loyalty, skill, and diligence expected of an expert in the field. It is not enough to avoid misconduct, kickback schemes, and bad-faith dealings. The law expects more than good intentions,” going on to include the famous (to ERISA lawyers, anyway) citation, “[A] pure heart and an empty head are not enough.”
Citing its prior decision (Renfro) that, in turn, cited Braden, the court here acknowledged that “a fiduciary breach claim must be examined against the backdrop of the mix and range of available investment options.” That did not mean, however, the court cautioned “that a meaningful mix and range of investment options insulates plan fiduciaries from liability for breach of fiduciary duty.” Indeed, they noted that “such a standard would allow a fiduciary to avoid liability by stocking a plan with hundreds of options, even if the majority were overpriced or underperforming.” Moreover, they noted that establishing such a “bright line” would undermine the obligation of a fiduciary to act prudently under the “circumstances then prevailing,” concluding that “practices change over time, and bright line rules would hinder courts’ evaluation of fiduciaries.”
In sum, the court here determined that the plaintiff’s claims had been dismissed prematurely, that she had made the plausible case that the district court failed to acknowledge, and that the arguments that the Penn fiduciaries had put forth – that they had, in fact, employed a prudent process – was “misplaced at this early stage.” The judges wrote “Although Penn may be able to demonstrate that its process was prudent, we are not permitted to accept Penn’s account of the facts or draw inferences in Penn’s favor at this stage of litigation.”
Not that the decision to allow the claims to move to trial was a total victory for the plaintiff here, dismissing five of the seven counts in their appeal. Specifically, one of the plaintiff’s claims was barred by ERISA’s six-year statute of limitations, and the appellate court also held that she failed to plausibly state a claim for relief in three counts of the suit (that a prohibited transaction occurred when Penn allowed TIAA-CREF to require inclusion of CREF Stock and Money Market accounts among the Plan’s investment options), and also held that she did not “plausibly allege that revenue sharing involved a transfer of Plan property or assets under §1106(a)(1)(A) or (D),” nor did she “plausibly allege that Penn had subjective intent to benefit a TIAA-CREF or Vanguard by a use or transfer of Plan assets,” nor did she allege facts showing “that Penn intended to benefit TIAA-CREF or Vanguard.” The judges also said that she did not “plausibly allege” that “Penn caused the Plan to engage in prohibited transactions when it caused the Plan to pay investment fees to TIAA-CREF and Vanguard.”
What’s also interesting is the dissenting opinion in the case from Judge Jane Richards Roth. She noted that between 2009 and 2014, the plan’s assets increased in value by $1.6 billion, a 73% return on investment, and that “despite this increase, plaintiffs have filed a putative class action, claiming that the plan’s fiduciaries have imprudently managed it and seeking tens of millions of dollars of damages.” She also noted that, “having convinced this Court to reverse in part the District Court’s dismissal of the action, the plaintiffs will continue to pursue their remaining claims, which will be litigated extensively, at large cost to the university.” This, she wrote, puts the university “…in an unenviable position, in which it has every incentive to settle quickly to avoid (1) expensive discovery and further motion practice, (2) potential individual liability for named fiduciaries, and (3) the prospect of damages calculations, after lengthy litigation, with interest-inflated liability totals.”
She also cautioned that “this pressure to settle increases with the size of the plan, regardless of the merits of the case. Alleged mismanagement of a $400,000 plan will expose fiduciaries to less liability than mismanagement of a $4 billion plan. Thus, notwithstanding the strength of the claims, a plaintiff’s attorney, seeking a large fee, will target a plan that holds abundant assets.”
She noted that this “strategy has substantial consequences for fiduciaries of these plans, particularly at universities,” and that “while the fiduciaries for large corporations may have experience in dealing with potential liabilities, fiduciaries at universities are often staff members who volunteer to serve in these roles.”
She also noted that “while benefits to the plan may result from the settlement, they are substantially diluted by the fees’ calculation, even before considering the litigation costs that the universities shoulder through the motion to dismiss stage. Indeed, while there is no comprehensive listing of ‘jumbo plans’ maintained in this country, this pattern of bringing class actions against large funds seems to have sustained itself and could continue as long as more plans can be identified.”
Her dissent cautioned that the end result “would not only discourage the offering of these plans, but it would also discourage “individuals from serving as fiduciaries,” and that therefore “courts must take great care to allow only plausible, rather than possible, claims to withstand a motion to dismiss.”
What This Means
While the decision is surely a victory for plaintiffs, most of the claims were rejected by the appellate court on the same grounds as has the district court, and the remand basically “only” means that the same court that felt that plausible arguments weren’t made in the pleadings to go to trial will now get to hear those same arguments, albeit a significantly trimmed list of arguments in a somewhat different context. Will that change the result?
More significantly, the dissent, from the bench, raises the specter of the impact that this kind of litigation might have on plan formation and the involvement of individuals as plan fiduciaries. On the latter point, she would seem to be on shaky ground; ERISA’s protections aren’t conditional based on the expertise of the fiduciary. Rather, the law implicitly acknowledges that possibility by instructing non-expert fiduciaries to engage the services and expertise of those who are able to fill those gaps. And the realization that not fulfilling those obligations fully could result in litigation with personal consequences is something that ERISA fiduciaries would do well to keep in mind.