Plaintiffs Prevail in Persuading Judge to Dismiss Motion to Dismiss

A federal judge has dismissed a multi-billion plan fiduciary's motion to dismiss an excessive fee/fiduciary breach suit.  

The defendants in this case—filed in the U.S. District Court for the Eastern District of Michigan in early 2021—are the fiduciaries of the Magna Group of Companies Retirement Savings Plans, a $1.6 billion plan (at the end of 2018) with some 27,000 participants that was charged by four participants[1] with failing to fulfill their duties as fiduciaries. The suit[2] alleged that Magna left its plan oversight responsibilities to plan trustee Principal Trust Co., and that in doing so, Magna essentially gave Principal the latitude “to lard the plan with funds managed by the trustee and/or its affiliates.” 

More specifically, this suit alleged—as have others in this genre—that the defendants did not act in the best interests of the Plan participants, that “to the detriment of the Plan and their participants and beneficiaries, the Plan’s fiduciaries included and retained in the Plan many mutual fund investments that were more expensive than necessary and otherwise were not justified on the basis of their economic value to the Plan,” that they “…failed to have a proper system of review in place to ensure that participants in the Plan were being charged appropriate and reasonable fees for the Plan’s investment options,” and that, as nearly all of these suits charge, they “…failed to leverage the size of the Plan to negotiate for (1) lower expense ratios for certain investment options maintained and/or added to the Plan during the Class Period and (2) lower recordkeeping and administrative fees.” 

The ruling here (Melvin Davis et al. v. Magna International of America Inc. et al., case number 2:20-cv-11060, in the U.S. District Court for the Eastern District of Michigan) comes in response to the Magna defendants’ motion for summary judgment. But it was preceded by a response to that motion filed by plaintiffs, a reply to that reply by the defendants, and a “series of ‘notices of supplemental authority’ and ‘responses in opposition to notice of supplemental authority.’”

Process in Place

Now, the defendants pushed back against those allegations, noting not only that they had in place, and relied upon, an investment policy statement (IPS), but offered testimony AND “Committee materials showing that the Committee conducted review of investment options two or four times per year and received investment updates at the meetings”—and used a “watch list” to monitor investments.

However, “the existence of a deliberative process does not alone resolve the issue,” wrote U.S. District Judge Nancy G. Edmunds, citing the case of Sacerdote v. New York University where it was commented that, “While the absence of a deliberative process may be enough to demonstrate imprudence, the presence of a deliberative process does not, ... suffice in every case to demonstrate prudence.”

Rather, she agreed with the plaintiffs here that “the record contains evidence to ‘create disputed questions of fact as to whether Defendants discussed or even understood the difference between certain types of fee arrangements . . . and whether Defendants acted prudently regarding the fees paid by the Plan.’”

Ultimately, and “viewing the evidence in the light most favorable to Plaintiffs, the Plaintiffs have raised genuine issues of material fact related to whether the Defendants prudently monitored the Plan’s challenged investments,” Judge Edmunds wrote, denying the defendants’ motion for summary judgement on that claim.

Recordkeeping Review

As for the issue of recordkeeping fees, the defendants again had argued that they had a prudent process for monitoring recordkeeping fees, and pointed to steps taken to reduce fees prior to the 2014 class period as evidence of that.[3] However, the plaintiffs argued that the RFP process employed was flawed, that (according to their expert), “the RFP ‘was issued in a manner that resulted in a number of recordkeepers declining to bid’ and set forth other reasons that the selection of Principal to continue providing recordkeeping fees was flawed.” Moreover, that was the last competitive RFP that was conducted, and Judge Edmunds, (citing Cunningham v. Cornell) noted that “Trustees also have an ongoing obligation to monitor the fees charged and services provided….” Ultimately, Judge Edmonds concluded that “plaintiffs provided enough evidence to raise an issue of fact and survive summary judgment on this claim.”

Other Claims

Regarding the breach of loyalty claims, Judge Edmunds noted that “Plaintiffs have pointed out that the Principal has interests in both recordkeeping and the proprietary TDF funds. The Court finds that Plaintiffs have provided enough evidence to survive summary judgment on the loyalty claim.”

The defendants did manage to prevail on one count—the claim of a fiduciary breach with regard to a failure of Magna’s board to monitor the plan fiduciaries. “Plaintiffs fail to identify any evidence that would support a failure to monitor claim,” Judge Edmunds wrote. “They make a conclusory allegation that they ‘will be able to prove at trial that Magna, if not the Board, failed to adequately monitor the committee.’ They do not identify any evidence as to who has the power to appoint or remove or to otherwise exercise control over the committee members or the conduct alleged in the complaint”—and granted Defendants’ motion on Plaintiffs’ second claim for relief: failure to adequately monitor other fiduciaries.

And so now—to trial? Or settlement? Stay tuned.

NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.

Footnotes

[1] Interestingly enough, in March Judge Edmunds refused to certify the proposed class, finding the named representatives' past criminal convictions—and lack of knowledge about the case—undermined their ability to represent the class, but in May allowed them to choose four new lead plaintiffs who were former Magna employees—subject to an evaluation as to whether these would qualify as adequate representatives.

[2] The plaintiffs here are represented by Capozzi Adler PC.

[3] Judge Edmunds noted that in 2014, defendants conducted a request for proposals (RFP) for recordkeeping services, engaged Mercer to assist in the search, reached out to “several nationally known recordkeepers to submit bids,” though only one (Fidelity) chose to bid (issues with the complexity of Magna’s payroll and “funding systems” were cited), and at a cost “lower than current fees at Principal”—a difference attributable to participant-initiated transactions (withdrawals, loans, distributions). In fact, Mercer noted that, although “fees are lower with Fidelity, the cost of switching to a new vendor may offset such costs [sic] savings.” Ultimately the committee accepted principal’s offer, and the core fee was lowered, therefore the committee’s efforts reduced the plans’ recordkeeping costs from 13 to 8 basis points near the start of the class period.