Staying Ahead of the Risk Curve: Lessons from Litigation

The United States Supreme Court’s Hughes v. Northwestern University decision has had the expected impact: more success for plaintiffs. In particular, Federal courts have become much more inclined to deny companies’ and fiduciaries’ motions to dismiss, instead permitting participants’ claims to proceed into the discovery phase. If you have experienced litigation, you likely understand the time, energy, distractions, and expense associated with discovery. You may also understand why discovery – whether it be the experience or the desire to avoid it – results in settlements. In essence, once a plaintiff survives a motion to dismiss a retirement plan fee lawsuit, the balance of power shifts sharply to those who filed the lawsuit.

Procedure v. Substance. ERISA’s fiduciary responsibilities are inherently procedural in nature. One might say that they don’t require that fiduciaries arrive at the right answer, but they do require that fiduciaries deploy a prudent process aimed toward the right answer. Your high school math teacher may have given you partial credit for showing your work on a problem you answered incorrectly. With fiduciary responsibilities, a court might give you full credit in an analogous situation. But if you arrive at the wrong result and can’t show genuine effort to do otherwise, the stakes are much, much higher than in your high school algebra class.

This begs an interesting question: Should your organization’s fiduciaries care more about the process or the outcome? Current litigation trends suggest the answer is: both. But if fiduciary responsibilities are procedural, how can that be? Consider the following perspectives:

• Your Employees? They’re ultimately impacted most by whether you get the right answer. Yoda may have had your employees’ retirement prospects in mind when he said: “Do or do not. There is no try.”
• Fiduciary Responsibility? This is clearly procedural, as noted above.
• Fiduciary Liability? Liability hinges upon a mixture of procedure (was there a breach of responsibilities?) and substance (did that breach cause damages?).
• Your Employees? Yes, this starts and ends with your employees. The best path to a good outcome is the implementation and adherence to a prudent process. The two are inextricably linked.

Recent Litigation Developments. During September’s Fiduciary 15 webinar, we’ll take a deeper dive into the following litigation developments that highlight various aspects of the above backdrop and help to build out the roadmap for staying ahead of the curve:

• Defendants Win at Trial. In Nunez v. Braun (E.D.Pa. August 18, 2023), the court held a three-day bench trial in which it considered arguments that the plan committee had failed to: (i) investigate or select lower cost alternative funds for the plan; and (ii) monitor or control the plan’s recordkeeping expenses. The court’s opinion provides a lengthy analysis of the plan’s investment options, recordkeeping fees, and committee efforts to monitor both. The court then set out a point-by-point recitation of the various monitoring steps reflecting a prudent process, including: (1) meeting regularly; (2) relying on an advisor and watchlists; (3) frequently considering changes to lower share classes and collective investment trusts; (4) negotiating lower recordkeeping fees; (5) benchmarking recordkeeping fees; and (6) conducting a recordkeeper RFP.
• Defendants Win at Trial. In Vellali v. Yale University (D.C. Conn. June 28, 2023), a jury sided with the defendants in one of the many large 403(b) plan lawsuits alleging excessive recordkeeping fees, overpriced investments, and the failure to monitor service provider and investment expenses. The jury sided with the Yale fiduciaries because of the extensive testimony and evidence reflecting consistent, prudent plan governance. In fact, even where the jury determined that some of the expenses had indeed been unreasonable, it sided with the fiduciaries — because it was so impressed with their prudent processes.
• Defendants Win at Motion to Dismiss. In Mateya v. Cook Group Inc. (S.D. Ind. June 16, 2023), the court granted the defendants’ motion to dismiss a lawsuit alleging that the plan fiduciaries had failed to remove a recordkeeper charging unreasonable fees. It found the complaint to be insufficient, despite its demonstration of relatively excessive fees in comparison to the details reflected on a page-long chart including the participant count, assets, total recordkeeping fees, and per recordkeeper fee of 11 similarly sized plans. The court described a pleading requirement that a plaintiff “identify similar plans offering the same services for less.” Said another way, the plaintiff must “allege which services each plan provided and plead facts indicating ‘fees were excessive relative to the services rendered.'” The court disagreed with the assertion that all recordkeepers provide the same services; it dismissed the case because the complaint didn’t meet the pleading burden requiring a deeper exploration of the services provided to the plan at issue and the 11 similarly sized (and lower-priced) plans.
• Defendants Win at Motion to Dismiss. In England v. DENSO International America, Inc. (E.D. Mich. July 28, 2023), the court reached a similar solution, despite the complaint’s inclusion of a chart reflecting that the plan’s $71/participant recordkeeping fee greatly exceeded the $32/participant average recordkeeping fees paid by 15 comparator plans. The court emphasized that the complaint provided “no details regarding the specific types or quality of services that the comparator plans received relative to the DENSO plan.” The court also rejected claims seeking to impose a “lowest net investment expense” standard and to second-guess the selection of two active fund managers.
• Plaintiffs Survive Motion to Dismiss. However, another court reached the opposite conclusion – with significantly less comparator plan data reflected in the complaint – in McDonald v. Lab. Corp. of Am. Holdings (M.D.N.C. July 28, 2023). The court cited the same “related to the services rendered” standard expressed above, but felt more convinced by the notion that most recordkeeping services are commoditized and fungible. Here, a chart comparing the plan at issue with only four plans was enough for the court to believe the case should proceed. It also permitted the plaintiffs’ share class allegations to proceed to the next stage of litigation.
• Plaintiffs Survive Motion to Dismiss. Finally, the court reached a split decision on the motion to dismiss in Fritton v. Taylor Corporation (D.C. Minn. August 21, 2023). It dismissed claims of excessive recordkeeping fees because the participants hadn’t met their pleading burden, but permitted the share class arguments to continue. Although the fiduciaries argued that the use of expensive share classes was justified by their use of the corresponding revenue sharing, the court felt it was inappropriate to resolve those issues in the fiduciaries’ favor at the motion to dismiss phase. As various courts determined shortly after the Hughes decision, that is a matter for discovery and a potential trial.

Closing Thoughts. These cases are important for your organization – not necessarily because you’re going to face litigation, but because they set out a number of procedural best practices that will help with the substantive details of how your plans operate. The Braun and Yale University cases, in particular, further highlight a number of specific practices and procedures that should be in place for your plans, without regard to their asset size or participant count. Please join us for the Fiduciary 15 webinar for a deeper dive into these recent litigation developments and the lessons we can learn at others’ expense.

– Matthew Eickman, J.D., AIF®