Fiduciaries of 401(k) and other retirement plans continue to be targeted by class action lawsuits brought under the Employee Retirement Income Security Act (ERISA) challenging fiduciary decisions regarding investment options and administrative fees. Given the cost of defending against these suits in discovery and the potential damages available at trial, the pleading stage is a key turning point for defendants where the law is still developing. Although the Supreme Court in Hughes v. Northwestern University, 142 S. Ct. 737 (2022) failed to firmly clarify the pleading standard, many circuit courts have since weighed in to apply its limited guidance. A recent decision from a federal court in Michigan demonstrates the types of arguments fiduciaries can develop to obtain dismissal under this developing standard.

In England v. Denso International America, Inc. the Plaintiffs sued Denso International, its Board of Directors, its Retirement Committee, and the members of that Committee (the “Defendants”). They claimed Defendants breached fiduciary duties imposed by ERISA with respect to Denso’s 401(k) Plan (the “Denso Plan”) by (1) paying excessive recordkeeping fees; (2) offering expensive share classes to participants; (3) including overly expensive investment funds in its investment lineup; and (4) retaining underperforming investment funds. They also alleged a derivative failure-to-monitor claim.

Defendants responded with a motion to dismiss all of Plaintiffs’ claims, which was granted in full on July 28, 2023.

Plaintiffs’ Recordkeeping Fee Allegation

To support their recordkeeping fee allegation, Plaintiffs alleged that all “mega” retirement plans—meaning plans with over $500 million dollars in assets, like the Denso plan—require the same standard package of recordkeeping services, meaning that deviations in the quality or specific services provided do not affect cost. They then asserted that Defendants’ average yearly recordkeeping fee of $71 per participant was imprudent when compared to 15 other “mega” retirement plans that allegedly paid an average annual recordkeeping fee of just $32 per participant.

In their motion to dismiss, Defendants argued the complaint was deficient because Plaintiffs failed to account for the specific services provided to the Denso Plan in return for the recordkeeping fees as compared to the alleged comparators, pointing out that the Form 5500s for the referenced plans showed many varying “service codes” that plainly contradicted Plaintiffs’ conclusory allegations regarding the services received.

The court accepted Defendants’ argument, reiterating that recordkeeping fees must be prudent in light of the specific services provided. It reasoned that Plaintiffs had not alleged any specific facts to support their conclusory assertion that all services for “mega plans” were interchangeable and noted that Form 5500s from comparator plans suggested their recordkeepers provided different services than the Denso Plan received. Still further, the court identified internal inconsistencies in Plaintiffs’ allegation that the comparator plans were “similarly sized” “mega” plans, as the Denso Plan averaged 12,272 participants and $1.4 billion in assets from 2016-2020, but the purported comparators ranged from 8,902 to 19,420 in participants and from $107,652,510 to $1.3 billion in assets. The court therefore held Plaintiffs failed to allege adequate facts to establish a plausible inference of imprudence concerning the recordkeeping fee.

Plaintiffs’ Share Class Allegation

To support their share class claim, Plaintiffs alleged it was imprudent for the Denso Plan’s fiduciaries to select the R6 share class of a Small Cap Value Fund for the Denso Plan’s investment lineup despite its lower advertised expense ratio because the Investor share class of the same fund had a lower net expense ratio when considering revenue sharing.  

The court soundly rejected Plaintiffs’ net expense theory and dismissed the claim. It relied heavily on Albert v. Oshkosh Corp., 47 F.4th 570 (7th Cir. 2022), which we discussed here, and decisions of other district courts within the Sixth and Seventh Circuits, to reject this “net expense” twist on imprudent share class allegations. In dismissing, the court reasoned the allegation was improbable because “a prudent ERISA fiduciary might choose an investment option based on revenue sharing but is not required to do so [since] there is not necessarily a one-to-one correlation such that revenue sharing always rebounds to investors’ benefit[.]”

Plaintiffs’ Investment Expense Allegation

Similar to the share class allegation, Plaintiffs support the investment expense claim by alleging Defendants acted imprudently in selecting and retaining two particular funds they claimed charged excessive investment expense fees, suggesting that other alternative fund with lower fees should have been offered instead.

The court found plaintiffs’ allegations insufficient because the complaint failed to allege specific facts demonstrating that the distinct goals and strategies of the proposed alternative funds were similar enough to the challenged funds to support an inference of imprudence. In short, the existence of a cheaper fund with the same investment style, standing alone, could not raise the inference that Defendants were imprudent by selecting or retaining the two allegedly higher-cost funds.

Plaintiffs’ Investment Performance Allegation

To support their investment performance claim, Plaintiffs claimed Defendants’ selection of the Denso Stable Value Fund (the “Denso Fund”) as a replacement for another fund in 2020 was imprudent because the original fund outperformed its benchmark from 2017-19 and the replacement Denso Fund underperformed its benchmark from 2020-21.

The court likewise held that this allegation failed to support an inference of imprudent fiduciary process, finding that Plaintiffs could not establish fiduciary imprudence through hindsight consideration of the Denso Fund’s performance or by citing only two years of performance data, highlighting the long-term nature of 401(k) investing. In other words, the narrow performance snapshot Plaintiffs provided was not enough to indicate Defendants were imprudent in selecting or retaining the Denso fund. 

Takeaways

The plaintiffs’ bar continues to target retirement plan fiduciaries with ERISA class actions, but precise arguments at the pleading stage that closely track the developing standard and engage not only with the specific facts alleged but also those that are publicly available about alleged comparator funds can successfully defeat imprecise allegations of imprudence. Fiduciaries accused of breaching ERISA’s duty of prudence or duty to monitor should review the allegations carefully and involve defense counsel as early as possible. A thorough review of the alleged facts and the purported comparators may reveal distinguishing factors that, if developed correctly, could provide traction for efforts to dismiss a class action before it progresses beyond the pleading stage.