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Compliance December 3, 2021
Adidas Excessive Fee Complaint Fails
The unsuccessful complaint relied heavily on tabular depictions of the Adidas plan’s fees calculated as cost per 401(k) plan participant/beneficiary and as a percentage of the total plan’s assets when compared with a representative group of plans.
Reported by John Manganaro
The U.S. District Court for the District of Oregon has ruled in favor of the defendants in an Employee Retirement Income Security Act (ERISA) lawsuit involving the Adidas Group 401(k) Savings and Retirement Plan.
Technically, the District Court accepted a magistrate judge’s recommendation and dismissed the case, which had claimed the Adidas plan fiduciaries paid excessive administrative and investment fees, to the alleged detriment of the plan’s participants.
According to the complaint, for every year between 2013 and 2017, the administrative fees charged to plan participants were greater than a minimum of approximately 75% of the plan’s comparator fees, when fees are calculated as a cost per participant. And for every year between 2013 and 2017 but two, according to the now-dismissed complaint, the administrative fees charged to plan participants were greater than 80% of the plan’s comparator fees when fees are calculated as a percent of total assets.
Similar to other ERISA excessive fee lawsuits, the complaint included—and relied on—tabular depictions of the Adidas plan’s fees calculated as cost per 401(k) plan participant/beneficiary and as a percentage of the total plan’s assets when compared with a representative group of plans with a participant count from 5,000 to 9,999 and with a total value of plan assets greater than $500 million. The complaint used the charts to allege the total difference from 2013 to 2017 between Adidas’ fees and the average of its comparators, based on the total number of participants, approximated to $6.2 million. Similarly, the complaint alleged the total difference from 2013 to 2017 between Adidas’ fees and the average of its comparators, based on plan asset size, was closer to $6 million.
In recommending the complaint’s dismissal, the presiding magistrate judge notes that the lead plaintiffs have invested in just two out of roughly 25 plan offerings in dispute, these being the T. Rowe Price Retirement 2030 target-date fund (TDF) and the Eaton Vance Parametric Structured Emerging Markets investment option. Despite this, the judge notes, the plaintiffs seek relief for “all losses resulting from Adidas’s breaches of fiduciary duty,” including losses for plans they did not personally invest in. As the recommendation recounts, the defendants in turn argued that the plaintiffs lack constitutional standing for any purported injuries to funds in which they held no investments.
“The Ninth Circuit has not directly addressed the question presented here—whether plaintiffs who have invested in some funds that allegedly charge excessive fees hold Article III standing to challenge, on behalf of a putative class, alleged issues with other funds the plaintiffs personally did not invest in,” the recommendation states. “However, a majority of other courts have found constitutional standing under similar circumstances; the crux within these cases is that the plaintiffs asserted plan-wide misconduct that reached beyond their individualized injury.”
The analysis continues: “In sum, the plaintiffs have adequately pleaded that they and the putative class suffered financial injuries from the defendant’s alleged misconduct. While this injury may come in different forms for individuals who possess different plans, they all stem from the plan-wide misconduct alleged by the plaintiff here. These injuries, as alleged, are traceable to the defendant’s conduct and can be redressed by damages that the plaintiffs seek from this court. Thus, the plaintiffs have met the elements for Article III standing.”
From this technical point, nominally concluded in favor of the plaintiffs, the magistrate judge’s recommendations turn soundly in favor of the defendants.
“It is true that district courts within the Ninth Circuit have denied motions to dismiss where the complaints have alleged facts suggesting widespread fiduciary misconduct,” the recommendation states. “However, the second amended complaint contains no factual allegations surrounding the defendant’s process for selecting and monitoring investments. Instead, it merely recites concerns on how certain investments either resulted in unreasonably high administrative expenses or produced suboptimal results when compared to non-plan investments. These bare allegations do not sufficiently raise any issues surrounding the procedure of selecting investments that would dislodge the application of [White v. Chevron]. … It is true that ERISA plaintiffs, no matter how clever or diligent, will generally lack the inside information necessary to plead their claims with specificity until discovery occurs. However, federal courts cannot unlock the doors of discovery for a plaintiff armed with nothing more than legal conclusions couched as a factual allegation.”
The recommendation goes on to state that, at best, the plaintiffs’ argument boils down to a claim that Adidas should have foreseen that the price of the challenged investment options would go up and accordingly renegotiated its fee arrangement or sought alternative options.
“But the plaintiffs have not raised allegations suggesting that the challenged decision was imprudent at the time the fiduciaries made the decision, nor have they adequately articulated why passively managed funds serve as an appropriate benchmark for measuring the success of an actively managed fund,” the recommendation states.
The full text of the magistrate judge’s recommendation, approved by the District Court on November 30, is available here.
