ERISA Excessive Fee Claims Against Checksmart Time-Barred by District Court

The U.S. District Court for the Southern District of Ohio has ruled in favor of the defense in an Employee Retirement Income Security Act (ERISA) excessive fee lawsuit targeting Checksmart Financial’s defined contribution (DC) plan and Cetera Advisors.  

The original lawsuit was filed by a participant in the Checksmart Financial 401(k) Plan, contending in various ways that fees for funds offered in the plan are excessive. The plaintiff accused Checksmart, its plan committee, and the plan’s investment adviser, Cetera Advisor Network, of only offering expensive and unsuitable actively managed mutual funds, without an adequate or appropriate number of passively managed and less expensive mutual fund investment options. According to the complaint, most investment options in the plan had expense ratios of 88 bps to 111 bps, which the complaint says are four or more times greater than retail passively-managed funds—which were not made available to the plan and its participants during the class period. In addition, the average expense of all funds was 104 bps, according to the complaint.

As stated in the decision, the alleged actionable violation in all of this is a breach of fiduciary duty, because ERISA fiduciaries have specific duties of loyalty and prudence to plan participants. As a secondary matter, the plaintiff asserted a claim for “liability for knowing breach of trust,” which he argued could extend liability to defendants even if they weren’t found to be fiduciaries of the Checksmart plan.

Simply put, the decision states that the plaintiff’s claims “are foreclosed by ERISA’s statute of limitations.” The court explains that it has applied the shorter of ERISA’s statute of limitations period, based on the issue of when the plaintiff gained “actual knowledge” of the alleged breaches of fiduciary duty. Two issues orbit around this question, the decision explains. These are, one, the nature of the alleged breaches of fiduciary duty, and two, the definition of “actual knowledge.”

The text of the decision includes substantially detailed consideration of these matters, but the court boils its ruling down as follows. “Synthesizing the two important issues, here’s the question: did defendants disclose how much each investment option charged in fees before July 14, 2016, three years before [plaintiff] filed this lawsuit? Answering this question required facts, not just the pleadings. So, the court converted part of defendants’ motions to dismiss into motions for summary judgment by permitting limited discovery on one issue: whether the expense ratios for the various investment options offered by the Checksmart plan were disclosed to plaintiff before 2015. As it turns out, defendants did disclose the expense ratios for the various investment options offered by the Checksmart Plan in 2012. Several pieces of evidence support this conclusion.”

The decision points to mailings and various other disclosures sent by Checksmart to the defendant over the years leading up to this litigation. It also highlights that, as courts have applied the “actual knowledge” standard, “actual knowledge” really means “knowledge of the underlying conduct giving rise to the alleged violation,” rather than “knowledge that the underlying conduct violates ERISA.” A related and equally important distinction: “Actual knowledge does not require proof that the individual plaintiffs actually saw or read the documents that disclosed the allegedly harmful investments.”

“Here, the Checksmart plan disclosed to plaintiff the expense ratios for all the investment options by August 28, 2012,” the decision notes. “At that point, plaintiff had actual knowledge of the underlying conduct that gave rise to his alleged violations. That means that the three-year statute of limitations on any potential excessive-fee claims ran by August 28, 2015, but plaintiff didn’t file his claim until July 14, 2016. Plaintiff’s claim is late, and it’s foreclosed by the statute of limitations.”

According to the district court, the plaintiff “offers little resistance to this analysis, but he makes three arguments that his claim is not time barred.” First, the plaintiff argued this is a “process-based” claim, and since he had no actual knowledge of the process the Checksmart Plan used to select the investment options, his claim is not time barred. Second, he argued actual knowledge of the imprudence of an investment is impossible to have until after the investment underperforms. And finally, he argued, even if he did have actual knowledge of a breach of fiduciary duty in 2012, ERISA imposes an ongoing duty to monitor, “which means the Checksmart Plan was engaged in an ongoing breach of fiduciary duty until plaintiff filed the complaint.”

Ruling on the first argument, the court dives into some complex legal precedents that are fully detailed in the text of the decision, but it comes to the conclusion it “cannot recognize plaintiff’s claim as a process-based claim,” because doing so would “essentially erase the statute of limitations for all breach-of-fiduciary-duty plaintiffs.” This is so because “none would be likely to have insider knowledge of their plan’s decision-making process.”

On the second argument the court is also skeptical: “Second, plaintiff argues that even if his claim is not a ‘process-based claim,’ he could not have actual knowledge of defendants’ underlying conduct until 2016, when it became clear to him that certain funds had underperformed and overcharged. Put another way, plaintiff couldn’t predict the future in 2010, so he couldn’t have had actual knowledge that the funds would underperform and thus charge fees outpacing their performance. Plaintiff is right. He can’t be expected to predict the future. But the same goes for defendants, and that’s why this argument fails.”

The court’s consideration of the final argument points back to the crucial Supreme Court case of Tibble vs. Edison. The district court here points out that Tibble analyzed ERISA’s six-year statute of repose under Section 1113(1), not the three-year statute of limitation that applies in the current matter, under ERISA Section 1113(2).

“The distinction between the two matters,” the court concludes.

The full text of the lawsuit is available here.