Court Split on Motion to Dismiss Claims in Excessive Fee Suit

A federal judge has granted in part and denied in part defendants’ motion to dismiss a lawsuit accusing fiduciaries of B. Braun Medical’s defined contribution (DC) retirement plan of failing in their duties to ensure investment fees were reasonable and not excessive.

Judge Edward G. Smith of the U.S. District Court for the Eastern District of Pennsylvania denied dismissal of the claims for breach of duty of prudence under the Employee Retirement Income Security Act (ERISA), but granted dismissal for the claims of breach of duty of loyalty.

In an extensive footnote to his order, Smith explains that the plaintiffs have plausibly alleged that the defendants failed to manage and select investments with the level of care, skill, prudence and diligence required under ERISA. According to the court document, first, the plaintiffs point out that half of the funds in the plan had expense ratios that exceeded the median expense ratios for funds in the same category.

“Although the defendants challenge the accuracy and propriety of the plaintiffs’ comparisons, ‘these arguments are factual disputes that will not be considered at the motion to dismiss stage,’” Smith wrote in his order, citing prior case law.

Second, the plaintiffs allege that the defendants failed to investigate lower-fee share classes, and they included tables in their complaint demonstrating the excess expenses associated with the funds compared with lower-cost alternatives. The defendants argued that the underlying fee disclosure materials show that the plan regularly moved to lower-cost shares during the class period. They also argued that higher-fee share classes may come with some benefits, such as the option to pay plan expenses through revenue sharing.

Smith found that while changing an investment may be evidence that plan fiduciaries were prudently monitoring fees, the transition to lower-cost shares for several of the mutual funds in 2019 (approximately five years into the class period) “equally supports an inference that the defendants did not prudently monitor the plan’s investments during the initial years of the class period.” He added that this argument and the defendants’ claim that the plan’s retention of higher-cost shares was appropriate to take advantage of revenue sharing “would benefit from further development of the factual record.”

In addition, Smith noted that the plaintiffs have presented a table listing investments for which the defendants could have switched to lower class shares. The plaintiffs also allege that lower class shares were available during the class period and that the plan “did not receive any additional services or benefits based on its use of more expensive share classes.” Further, they allege that the defendants knew or should have known about the availability of cheaper shares. Smith found these allegations sufficient to withstand dismissal of the duty of prudence claims.

In support of their prudence claims, the plaintiffs also allege that the defendants failed to investigate the availability of lower-cost collective trusts, which caused the defendants to incur excess fees. Smith ruled that at the motion to dismiss stage in the court proceedings, it is not appropriate to resolve the impact, if any, of the alleged replacement of target-date funds (TDFs) with collective trusts.

Finally, the plaintiffs allege that the defendants failed to include lower-cost passive and actively managed funds in the plan, and they presented in their complaint a chart comparing funds currently offered in the plan to lower-cost passive and actively managed funds, the alternative funds’ expected returns, and a comparison of the fees charged by the funds. Smith noted that courts in the 3rd U.S. Circuit Court of Appeals—the circuit in which the Pennsylvania courts fall—have found allegations that plans failed to consider materially similar alternatives, including passive and actively managed funds, sufficient to state a claim for breach of the duty of prudence.

Smith also found that the plaintiffs plausibly alleged a breach of fiduciary duty with respect to the defendants’ monitoring and control of recordkeeping fees. The plaintiffs have made “specific factual allegations that a competitive bidding process would have benefitted the plan,” and although the parties dispute the accuracy of the plaintiffs’ recordkeeping calculations, this factual dispute is not enough to defeat the plaintiffs’ recordkeeping claim on a motion to dismiss, the judge said.

Turning to claims regarding breaches of the duty of loyalty under ERISA, Smith noted that to state such a claim, a plaintiff must “allege plausible facts supporting an inference that a fiduciary acted for the purpose of providing benefits to itself or some third party,” citing the case of Cassell v. Vanderbilt University. He added that “an act which has the effect of furthering the interests of a third party is fundamentally different from an act taken with that as a goal. The former may well not be a violation of the duty of loyalty, but the latter may well be.”

In support of their duty of loyalty claim, the plaintiffs point out that T. Rowe Price was the plan’s trustee and a T. Rowe Price affiliate was the plan’s recordkeeper. They contend that this structure is “rife with potential conflicts of interest.”

Citing prior case law, Smith said, “But the potential for a conflict, without more, is not synonymous with a plausible claim of fiduciary disloyalty.” In addition, he agreed with the defendants’ point that the Department of Labor (DOL) has stated that plans “may use an arrangement that combines a single provider for certain services, such as administrative services.”

Second, the plaintiffs contend that the defendants selected higher-cost T. Rowe Price collective trusts and mutual funds for inclusion in the plan even though lower-cost ones were available “because the higher-cost funds returned more value to T. Rowe Price.” However, Smith found that the plaintiffs did not plead any facts in the complaint to “support an inference that the defendants’ actions were for the purpose of providing benefits to themselves or someone else and did not simply have that incidental effect.”

Finally, the plaintiffs argue that the defendants breached their duty of loyalty “by failing to adequately supervise T. Rowe Price and its affiliates and ensure that the fees charged by T. Rowe Price and its affiliates were reasonable and in the best interests of the plan and its participants.” Citing the case of Sacerdote v. New York University, Smith said that to state a claim for breach of the duty of loyalty, a plaintiff must “allege facts that permit a plausible inference that the defendant ‘engaged in transactions involving self-dealing or otherwise involve or create a conflict between the trustee’s fiduciary duties and personal interests.’” He added that a plaintiff may not “simply recast purported breaches of the duty of prudence as disloyal acts.”

Regarding claims for failure to monitor fiduciaries, Smith concluded, “The complaint merely recites the various ways in which the defendants allegedly failed to fulfill their duty to monitor without any additional supporting allegations regarding the monitoring process or how the defendants were deficient in carrying out their duties.”

In their motion to dismiss, the defendants also argued that the plaintiffs lack standing to seek injunctive relief because they are former plan participants and no longer work at B. Braun. Smith agreed, because, as former plan participants, they are not “realistically threatened by [the defendants’] future breaches of fiduciary duties,” citing a decision in the case Marks v. Trader Joe’s Co. Citing the case of Mueller v. CBS, Inc., he added that it is well-established that “under Article III of the Constitution, the plaintiff seeking injunctive relief must demonstrate that he faces some ‘immediate danger of direct injury.’”

Smith said the plaintiffs fail to explain how, as former plan participants, they will be harmed by any future breaches of fiduciary duty by the defendants. In addition, they do not explain how the prospective relief sought—such as the “appointment of an independent fiduciary or fiduciaries to run the plan and removal of plan fiduciaries deemed to have breached their fiduciary duties”—would benefit them as former plan participants. They do not allege, for example, that they are entitled to additional benefits under the plan even as former employees. Therefore, Smith concluded, “the plaintiffs lack standing to seek prospective relief.”