Circuit Courts of Appeal Uphold Dismissal of 401(k) Fee Challenges Post-Hughes
- Following the U.S. Supreme Court's decision in Hughes v. Northwestern University, the U.S. Court of Appeals for the Seventh Circuit recently upheld the dismissal of a complaint challenging a 401(k) plan's purportedly excessive recordkeeping, investment management and investment advisor fees under the Employee Retirement Income Security Act of 1974.
- The U.S. Court of Appeals for the Sixth Circuit has also upheld the dismissal of complaints challenging 401(k) fees post-Hughes.
- These decisions have highlighted that plaintiffs challenging recordkeeping fees must allege how such fees were excessive in comparison to the services rendered.
Following the U.S. Supreme Court's decision in Hughes v. Northwestern University, courts around the country continue to articulate the pleading requirements for a breach of duty of prudence claim under the Employee Retirement Income Security Act of 1974 (ERISA) in regard to retirement plan fees and expenses. The U.S. Court of Appeals for the Sixth Circuit addressed these standards in the pair of decisions Smith v. CommonSpirit Health and Forman v. TriHealth, Inc. Most recently, the U.S. Court of Appeals for the Seventh Circuit had the opportunity to further clarify these standards in the case of Albert v. Oshkosh.
In Hughes v. Northwestern University, the Supreme Court vacated the Seventh Circuit's dismissal of an ERISA complaint alleging mismanagement of a defined contribution plan. The plaintiffs had alleged that the defendants breached their fiduciary duties by providing overly expensive investment options and by paying excessive recordkeeping fees. The Seventh Circuit had held in Divane v. Northwestern University that this claim failed as a matter of law because the plan included low-cost investment options that plaintiffs had the freedom to choose. Plaintiffs and any other participants could avoid the too-expensive investment products by simply not investing in them.
The Supreme Court rejected the Seventh Circuit's approach because "[s]uch a categorical rule is inconsistent with the context-specific inquiry that ERISA requires and fails to take into account respondents' duty to monitor all plan investments and remove any imprudent ones." Hughes, 142 S. Ct. at 740. The Supreme Court vacated and remanded to the Seventh Circuit for it to reconsider whether the plaintiffs had plausibly alleged a violation of the duty of prudence.
Seventh Circuit: Albert v. Oshkosh Corporation
In Andrew Albert v. Oshkosh Corporation, the Seventh Circuit had the opportunity to address the pleading requirements of an ERISA breach of fiduciary duty claim post-Hughes. (As of the publication of this alert, Hughes is still pending on remand with the Seventh Circuit.)
The plaintiff in Albert brought a number of claims against his former employer, a subsidiary of Oshkosh Corp., and other plan fiduciaries alleging that they had violated ERISA by mismanaging its retirement plan (Plan). The plaintiff alleged, among other things, that the defendants breached their fiduciary duties by authorizing the Plan to pay unreasonably high fees for recordkeeping and administration, failing to adequately review the Plan's investment portfolio to ensure that each investment option was prudent, and unreasonably maintaining investment advisors and consultants for the Plan despite the availability of similar service providers with lower costs or better performance histories.
The district court granted Oshkosh's motion to dismiss the complaint. The Seventh Circuit reviewed the lower court's opinion in light of the recent Hughes decision and determined that each of the claims in the plaintiff's amended complaint still failed to state a claim, even with the context of the pleading standard articulated in Hughes.
Recordkeeping Fees: In addressing the prudence claim relating to recordkeeping fees, the Seventh Circuit rejected the plaintiff's assertion that failure to regularly solicit quotes or competitive bids constituted a breach of duty. In doing so, the Court reinforced its conclusion in Divane that a failure to regularly solicit quotes or bids was not a breach of the duty of prudence. The Seventh Circuit found that Albert had overstated the significance of the Supreme Court's decision in Hughes on this point. The Court reasoned that Hughes did not hold that fiduciaries are required to regularly solicit bids from service providers; instead, Hughes merely rejected the assumption that the availability of both high-cost and low-cost investment options in a plan insulated the fiduciaries from liability.
Of particular significance, the Court also rejected the notion that the reasoning in Hughes affected the applicability of the Seventh Circuit's prior precedent on pleading a duty of prudence claim.
Citing the Sixth Circuit's recent decision in Smith v. CommonSpirit Health, 37 F.4th 1160, 1169 (6th Cir. 2022), the Seventh Circuit held that the plaintiff failed to state a claim on the recordkeeping fees because the complaint did not allege that the recordkeeping fees were excessive relative to the services rendered. The Court emphasized that in the future, recordkeeping claims could survive the "context-sensitive scrutiny of a complaint's allegations," but Albert's complaint did not provide the requisite context that could move the claim from possible to plausible.
Investment Management Fees: With respect to investment management fees, the Seventh Circuit reiterated that merely charging higher fees for actively managed funds than for passively managed funds is ordinarily not enough to state a claim. The Court again referred to the Sixth Circuit's decision in CommonSpirit Health, which reinforced that Hughes does not require a significantly different approach to claims alleging investment management fees. The Seventh Circuit found that Albert's allegations were threadbare. Simply stating "Defendants failed to consider materially similar and less expensive alternatives to the Plan's investment options" without more detailed allegations providing a "sound basis for comparison" was not sufficient to state a claim.
Investment Advisor Fees: The Seventh Circuit also found that Albert's claim regarding excessive investment advisor fees was particularly insufficient because the plaintiff did not provide any basis for the comparison between the fees paid to the Plan's investment advisor and fees paid to other service providers. Without that comparison, the Seventh Circuit held that the plaintiff failed to state a duty of prudence claim as to the fees paid to the Plan's investment advisor.
Sixth Circuit: Forman v. TriHealth, Inc. and Smith v. CommonSpirit Health
The Sixth Circuit has also addressed what must be pled to state a prudence claim post-Hughes. In both Smith v. CommonSpirit Health and Forman v. TriHealth, Inc., the Sixth Circuit addressed the pleading requirements of an ERISA breach of fiduciary duty claim post-Hughes.
In Smith, the Sixth Circuit affirmed the decision of the U.S. District Court for the Eastern District of Kentucky, dismissing a putative class representative's ERISA fiduciary breach claims based on the investment options and administrative fees of CommonSpirit's 401(k) plan. The Court affirmed the dismissal of the plaintiff's claims regarding recordkeeping fees, finding that the plaintiff failed to allege that the fees were excessive relative to the services rendered. The Court also noted that the plaintiff failed to provide facts regarding other factors that may be relevant to determining whether a fee was excessive under the circumstances. The Sixth Circuit additionally affirmed dismissal of the plaintiff's excessive management fee claims. The Court noted that actively managed funds need to charge higher fees because they employ management teams to buy and sell, whereas index funds require less management and upkeep. Thus, the plaintiff's allegations that the fees were too high simply reflected the fact that CommonSpirit offered a number of actively managed funds.
Forman v. TriHealth followed CommonSpirit and largely relied on the prior decision in dismissing the plaintiffs' excessive fee claims. Although the Court in TriHealth reversed dismissal of a claim relating to different share classes of mutual funds, the Sixth Circuit found that the plaintiffs' allegations that TriHealth's average plan expenses were higher than comparator plans failed to state a claim, because the employees did not allege that the fees were high in relation to the services that the plan received. The Forman court stressed that allowing those types of bare allegations to proceed would create liability whenever a plan chose actively managed funds over passively managed funds, an approach rejected in CommonSpirit. The Sixth Circuit also found the plaintiffs' claims to be deficient because they failed to allege that the higher fees could not be justified by the plan's strategic goals relative to the comparators.
On the other hand, a recent U.S. Court of Appeals for the Ninth Circuit decision reversed the lower court's dismissal of an amended complaint for failure to state a claim, finding that the plaintiffs plausibly alleged a failure to provide cost-effective investments with reasonable fees. However, this brief opinion provided very little reasoning in reaching this conclusion and also predated the analysis from the Sixth Circuit's more recent decisions in TriHealth and CommonSpirit.
Conclusion and Considerations
The Hughes decision has not yet been addressed by all Circuit Courts of Appeal reviewing a motion to dismiss, and its ultimate impact on excessive fee litigation is unsettled. In any case, having a fulsome governance process for monitoring 401(k) fees and expenses can be an important defense to plan sponsors and other fiduciaries faced with such litigation.
If you would like assistance in evaluating your plan's governance practices, ensuring that your plan complies with ERISA or determining how these lawsuits might impact your plan, contact the authors or another member of Holland & Knight's ERISA Litigation Team or Executive Compensation and Benefits Team.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.