Analysis: ERISA Fee Litigation in 2016

© 2016 The Texas Lawbook.

By James R. Griffin of Jackson Walker and Ekaterina G. Long of Cooper & Scully

(Jan. 5) – Litigation involving the reasonableness of fees in ERISA plans was more prominent in 2016. New suits were filed against plan sponsors, universities and investment companies. The fees of plans with balances less than $25 million have also drawn scrutiny.

One of the largest excessive fee cases of 2016 was Jerry Johnson et al. v. Fujitsu Technology and Business of America, Inc. et al., which was filed on June 30 in California. Interestingly, seven of eight Fujitsu plaintiffs are residents of North Texas. In their pleadings, the plaintiffs described the Fujitsu plan as “the most expensive plan in America in 2013 and 2014 among plans with over $1 billion in assets.”

The common complaint is that plan sponsors have breached their fiduciary duties of loyalty and prudence to participants by, among other things, using revenue sharing arrangements to compensate service providers but failing to disclose the arrangements to the participants, using retail mutual funds, and incurring excessive recordkeeping and investment management fees.

The plaintiffs are seeking to require their employers to be more transparent in administering the retirement plans, opt for recordkeeping services through a competitive bidding process, use passively managed funds, avoid retail mutual funds, engage independent consultants, and overall lower participant fees.

Some plaintiffs have achieved success in reasonable fee litigation through settlements. Only a handful of cases have reached a decision at trial. Courts are increasingly careful in the pleading stage, and plaintiffs must state plausible allegations and not unsupported conclusions.

Another important case in 2016 was White v. Chevron in the Northern District of California. In late August, the court granted Chevron’s 12(b)(6) motion, finding that the plaintiff failed to plead facts that give rise to a reasonable inference that Chevron committed the ERISA violations.

The Chevron court dismissed the participants’ loyalty claim, because they failed to differentiate between the duty of loyalty and the duty of prudence. The allegations in the complaint did not support the conclusion that Chevron incurred unreasonable expenses in managing and administering the plan to benefit themselves or a third-party at the plan participants’ expense, acted under a conflict of interest or engaged in self-dealing.

The plaintiffs’ prudence claim suffered no better fate. As the Chevron court found, the plaintiffs failed to plead facts sufficient to rise above a sheer possibility that the fiduciaries acted unlawfully in selecting a money market fund over a stable value fund. Apart from the fact that ERISA does not mandate the inclusion of a particular type of investment in a 401(k) plan, the plaintiffs pleaded no facts showing that the Chevron fiduciaries failed to evaluate whether the stable value fund would yield a higher return than the plan’s money market fund.

As to the plaintiffs’ claim that the fiduciaries imprudently opted for retail-class shares of mutual funds over lower priced institutional-class shares, courts are particularly resistant to these types of claims. The Chevron court dismissed this claim, explaining – in the words of the Seventh Circuit in Hecker v. Deere – that ERISA does not require fiduciaries to “scour the market to find and offer the cheapest possible funds.”

The plaintiffs’ claim that the fiduciaries paid excessive fees as a result of utilizing an asset-based revenue sharing arrangement with its service provider raised a “conclusory assertion that fees under a revenue-sharing arrangement are necessarily excessive and unreasonable.” In connection with this claim, the Chevron court also noted that ERISA does not compel the fiduciaries to solicit competitive bidding for recordkeeping services.

The plaintiffs’ claim that the fiduciaries did not timely remove a fund that incurred excessive fees and substantially underperformed its benchmark also failed Rule 12(b)(6) scrutiny. The Chevron court held that “[p]oor performance, standing alone, is not sufficient to create a reasonable inference that the [fiduciaries] failed to conduct an adequate investigation” because holding investments during a period of underperformance is simply part of a long-term investment strategy.

Chevron continues. After the court’s ruling, the plaintiffs filed an Amended Complaint, and the defendants filed a Motion to Dismiss. Defendants urge that the Amended Complaint fails to “articulate cognizable breaches of any fiduciary duties.” The motion is pending in the court.

Employers that are concerned about potential ERISA fee litigation should carefully examine their fiduciary decision-making procedures. Those procedures should include the appointment of an effective decision-making committee that meets periodically to make informed decisions in the interests of participants. Fiduciaries should keep minutes to record their decision-making process, which should include consideration of appropriate alternatives. Committees should consider using requests for proposals and outside experts as necessary to improve the quality of their decision-making.

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