Compliance October 7, 2021

TriHealth ERISA Dispute Dismissed

While the size and structure of retirement plans are relevant to the reasonableness of the administrative fees they pay, similarly relevant is the scope of the services offered in exchange for those fees.

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The U.S. District Court for the Southern District of Ohio, Western Division, has issued an order granting dismissal of an amended class action Employee Retirement Income Security Act (ERISA) lawsuit filed against TriHealth Inc in August of 2019.

The underling complaint in the case alleged that, for every year between 2013 and 2017, the administrative fees charged to TriHealth retirement plan participants were greater than 90% of those charged to comparable plans. Case documents suggest that, as a total of plan assets, in 2017, TriHealth’s plan cost 86 bps, compared with an alleged peer mean of 41 bps. The lawsuit also claimed the TriHealth plan’s investment fees were excessive when held up against other comparable mutual funds not offered by the plan.

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The new ruling stretches to just 22 pages and sides firmly against these claims by granting the defense’s motion to dismiss under the Federal Rule of Civil Procedure 12(b)(6), which requires that a claim for relief must be “plausible on its face.” That is, the complaint must lay out enough facts for a court to reasonably infer that the defendant wronged the plaintiff. A complaint that lacks such plausibility, the court explains, warrants dismissal.

In pursuing their dismissal motion, the defendants present two main arguments. First, that the plaintiffs’ claims are barred by the applicable statute of limitations, and second, that plaintiffs failed to adequately plead their breach of the duty of prudence and loyalty claims such that dismissal is required.

The court’s analysis of the statute of limitations arguments is technical, and it reflects other courts’ consideration of the matter, including the U.S. Supreme Court and its critical analysis of “actual” versus “constructive” knowledge and how these two types of knowledge impact the length of time an ERISA complainant can wait to file a lawsuit. As the district court here summarizes, the Supreme Court has determined that the mere provision of disclosure documents to a complainant does not necessarily establish their awareness of potential fiduciary wrongdoing. Practically speaking, this distinction matters because of the special (and much shorter) three-year statute of limitations period which begins when plaintiffs can be shown to have gained “actual knowledge” of an alleged fiduciary breach.

“Because [citing the] statute of limitations is an affirmative defense, thus placing the burden of proof and persuasion on a defendant, award of judgment on this basis is generally inappropriate at the motion to dismiss stage,” the court concludes. “Here, defendants have not argued, nor do the pleadings show, that plaintiffs were actually aware of the information allegedly disclosed to them. Accordingly, at this preliminary juncture, the court cannot conclude that plaintiffs’ claims are [time barred].”

According to this legal logic, the defendants’ time-based dismissal claim fails. From here, the defendants have far more success with their general argument that the plaintiffs’ have failed to plausibly state a claim for relief.

“Plaintiffs have failed to assert sufficient allegations to support their claim that defendants breached their fiduciary duty of prudence by permitting the plan to incur allegedly excessive administrative fees,” the ruling states. “They have simply not provided the court with sufficient factual allegations to permit an inference of imprudence. … At its core the amended complaint alleges only that the administrative fees were high—not that they were unjustifiably or imprudently high.”

The court observes that the plaintiffs did not describe what services the “comparative 401(k) plans” received in exchange for their allegedly less costly fees. As the court says, merely pointing out that the 401(k) plans are “comparable” or “peer plans” is not sufficient.

“While the size and structure of the plans are relevant to the reasonableness of the administrative fees, similarly relevant is the scope of the services offered in exchange for those administrative fees and whether those services are sufficiently similar such that the higher administrative fee amount is unjustified and imprudent,” the ruling explains.

A very similar conclusion is reached with respect to the plaintiffs’ arguments about investment fees, leading to overall dismissal of the complaint. 

“Without sufficient factual allegations permitting the challenged funds’ characteristics and performance to be compared to a meaningful benchmark, a plaintiff fails to allege a plausible claim that a defendant breached its fiduciary duty,” the ruling states. “And, simply alleging that a fund underperformed is insufficient. While allegations of consistent, 10-year underperformance may support a duty of prudence claim, such underperformance must be substantial. Courts have previously held that less than 1% or just over 2% differences in performance between the challenged fund and the alleged benchmark was not sufficient to create a plausible inference of imprudence.”

In drawing its conclusions, the court emphasizes that it “declines the invitation to wholesale bless the plan or defendants’ processes.” The court says its ruling is “premised on plaintiffs’ failure to pled allegations that permit the court to plausibly infer that defendants have breached their fiduciary duty of prudence.”

The full text of the ruling is available here.

Investing October 6, 2021

New Report Shows Where Active Managers Struggle

The authors of a new report from S&P Dow Jones Indices say it is worth taking a moment to delve deeper into performance differences across actively managed market cap segments.

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S&P Dow Jones Indices, a division of S&P Global, has published an updated ‘SPIVA Scorecard’ report that takes into account the impacts of the COVID-19 pandemic, and other major events, on global equity markets during the last year. The report gets its SPIVA name from the fact that it comes S&P operated indices versus actively managed investments.

According to the latest SPIVA report, the S&P 500 had recovered all of its COVID-19-related losses by August 2020, and it posted a 40.8% gain over the 12 months ending on June 30, 2021. Of the 31 distinct benchmarks tracked by the report, 27 finished with a positive return over the year, and the exceptions were among longer-term fixed-income indices.

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As the report authors observe, the positive market performance broadly translated into good absolute returns for active fund managers, yet relative returns compared with passive managers continued to disappoint.

“In 15 out of 18 categories of domestic equity funds, the majority of actively managed funds underperformed their benchmarks,” the report says. “The performance was particularly underwhelming in the small-cap space, as 78% of all small-cap funds lagged the S&P SmallCap 600.”

Report authors Berlinda Liu and Gaurav Sinha, the former a director and the latter a managing director at S&P Dow Jones Indices, say it is worth taking a moment to delve deeper into differences across market cap segments.

“Over the 12-month period, 58% of large-cap funds, 76% of mid-cap funds and 78% of small-cap funds trailed the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600, respectively,” they write. “At first glance, this isn’t particularly new. SPIVA year-end reports have shown that more than 50% of large-cap funds have lagged the S&P 500 each year for 11 consecutive years. However, fund managers in the mid-cap and small-cap segments have often managed to do better than their large-cap counterparts when the large-cap benchmark had a higher return than the respective mid- or small-cap benchmark, in ways that are not consistent with the ‘greater skill’ premise. Instead, it is more likely that mid-cap and small-cap fund managers are quietly edging into the larger-cap space and benefiting from the higher returns available there.”

Liu and Sinha suggest the reopening gains of early 2021 add one more data-point to this hypothesis.

“As the rest of the market caught up to the large-cap rally of the initial pandemic phase, mid-cap and small-cap managers who tilted up the capitalization scale were caught leaning in the wrong direction,” the authors propose. “Many funds quickly fell short of the benchmark.”

The report also assesses returns of actively managed funds against their benchmarks on a risk-adjusted basis. The authors consider volatility in this analysis, calculated through the standard deviation of monthly returns, as a proxy for risk, and they use return/volatility ratios to evaluate performance.

“After adjusting for risk, the majority of actively managed domestic equity funds in all categories underperformed their benchmarks on a net-of-fees basis over long-term investment horizons,” the authors find. “The few bright spots in the mid-term investment periods were concentrated in mid- and small-cap growth funds and real estate funds.”

Other findings in the report show, in a period of mostly climbing yields, fixed-income funds posted better relative results than their benchmarks. In 12 of the 14 categories tracked, the majority of funds outperformed the relevant index benchmark.

“However, if we widen the lookback window to three years, the majority outperformed in just four categories,” Liu and Sinha warn. “For those with a long-term view, in no fixed income category did the majority of funds manage to surpass their benchmark over a 15-year window.”

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