A recent appellate court decision warrants a rethink of an excessive fee suit decision—at least that’s the argument being made by the plan fiduciaries.
The suit in question was filed by a group of participant-plaintiffs in the $5.354 billion Humana Retirement Savings Plan (represented by the law firm of Capozzi Adler). The plan in question may have been large, but the suit filed back in May 2021 was a mere 27 pages long, relying on all-too-familiar claims, specifically that the plan fiduciaries “breached the duties they owed to the Plan, to Plaintiffs, and to the other participants of the Plan by, inter alia, (1) failing to objectively and adequately review the Plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; and (2) maintaining certain funds in the Plan despite the availability of identical or similar investment options with lower costs and/or better performance histories; and (3) failing to control the Plan’s administrative and recordkeeping costs.”
The case was one of several that had drawn the attention of the U.S. Chamber of Commerce, which filed a “friend of the court” brief on behalf of the fiduciary defendants—though Judge Rebecca Grady Jennings had rejected that filing, stating that since the amicus brief “presents nothing that is “useful, or otherwise necessary to the administration of justice”—and that it “…will not aid the Court in deciding the issues before it.”
‘Enough’ Said?
As for that decision, in March Judge Jennings concluded that the allegations made by the plaintiffs were “…enough to survive a motion to dismiss because, if true, they could establish that the Committee failed to act as a prudent fiduciary,” citing decisions in Hughes v. Northwestern, Cassell v. Vanderbilt University, Davis v. Magna Int’l of Am., Inc., and Marshall v. Northrop Grumman Corp. At that same time, while the Humana Board and Humana had argued that Plaintiffs’ failure to adequately monitor other fiduciaries claim should be dismissed as derivative of their breach of fiduciary duty claim—well, having concluded that the allegations were sufficient to support the former, she kept those claims alive as well.
But then came the Sixth Circuit’s decision in Smith v. CommonSpirit Health that the Humana defendants argued (Moore v. Humana Inc., W.D. Ky., No. 3:21-cv-00232, motion for reconsideration 7/20/22) in the U.S. District Court for the Western District of Kentucky constitutes “precisely the type of intervening change in controlling law” that allows courts to reconsider prior rulings. Under that standard, the Humana defendants asserted that the plaintiffs’ allegations “do not state a plausible claim for breach of fiduciary duty.”
‘Like’ Circumstances
The defendants explained that, “like the plaintiffs in CommonSpirit, Plaintiffs here have not alleged facts establishing that any of the plans they cite as comparators paid less for the same recordkeeping services secured by the Plan. Nor do Plaintiffs supply any other factual allegations showing that the Plan’s recordkeeping fees were unreasonable relative to the specific services the Plan received in exchange. Plaintiffs simply assert that a few plans of roughly similar size paid lower recordkeeping fees than the plan at one point in the relevant period.” Citing CommonSpirit, they note that those “are lacking “the kind of context that could move [Plaintiffs’] claim from possibility to plausibility,” and “respectfully request that the Court reconsider its Dismissal Order and dismiss the First Amended Complaint (FAC) in its entirety.”
Shifting Stance(s)
Adding a little flavor to their petition, the defendants explain that the plaintiffs had initially alleged that $40 per participant per year (PPPY) would have been a reasonable recordkeeping fee for the Plan—but that once Humana provided them with information showing that the Plan in fact had paid between $23 and $37 PPPY for recordkeeping services in the relevant period, “Plaintiffs filed an amended complaint that abandoned their previous $40 benchmark for reasonableness,” shifting their position to claim that the Plan’s fiduciaries “should have been able to negotiate a recordkeeping cost in the low $20 range from the beginning of the Class Period to the present.” The plaintiffs identified four other plans with “over 34,000 participants and over $2.5 billion in assets under management” that purportedly paid recordkeeping fees between $25 and $28 PPPY in 2018, and also “cited anecdotal information drawn from other litigation about the recordkeeping fees paid by unrelated plans”—but did not provide “any context about how the services provided to any of these other plans compare to the specific package of services the Plan received.”
Oh, and the defendants note that the amended complaint by the plaintiffs acknowledged that the defendants conducted competitive requests for proposals (RFPs) for plan recordkeeping services in 2014 and 2019, and that RFPs are a “best practice” for evaluating retirement plan recordkeeping fees and services, but nonetheless “allege that the RFP process must have been “deficient” because the Plan did not change recordkeepers in 2019 (instead securing lower fees from the incumbent provider, who Plaintiffs do not dispute was the lowest bidder), and because the 2014 RFP did not result in recordkeeping fees as low as those paid in 2018 by Plaintiffs’ proffered comparator plans.”
The defendants went on to note (citing CommonSpirit) that “[e]ven without an acknowledgment of regular competitive bidding, ‘courts regularly dismiss imprudence claims such as these for failing to allege an adequate market comparison.’”
CommonSpirit Grounds
The defendants note: “[N]early three months after the Court denied Defendants’ motion to dismiss, the Sixth Circuit issued its decision in CommonSpirit.” In that case, the Sixth Circuit endorsed for the first time a requirement adopted by other courts: that plaintiffs claiming imprudence based on allegedly excessive recordkeeping fees must show that the “fees were excessive relative to the services rendered”—and in view of this “change in controlling law under CommonSpirit, Defendants now move for reconsideration of the Court’s order denying their motion to dismiss.”
They comment that the CommonSpirit decision “broke new ground in the Sixth Circuit by holding that plaintiffs alleging imprudence based on purportedly excessive recordkeeping fees must plead facts indicating “that the fees were excessive relative to the services rendered” to the plan in question.” Before that decision, the defendants acknowledge that the district court in Magna International, for example, held that “Plaintiffs need not allege why the fees were not justified by the services provided”—a decision that, unsurprisingly, the plaintiffs here had encouraged the court to follow. “But the Sixth Circuit’s subsequent, controlling decision in CommonSpirit rejects the reasoning of Magna International and confirms that plaintiffs are required to allege facts plausibly showing that a plan’s recordkeeping fees were excessive relative to the specific services provided to the plan”—a standard the defendants note was not relaxed for excessive recordkeeping fee claims as articulated in the Northwestern case.
Although the amended complaint provides information about the “number of participants, amount of assets, and recordkeeping fees paid” by those proposed comparators, Plaintiffs offer no factual allegations establishing that any of those comparator plans obtained the same services as the Plan for a lower fee. Nor does the FAC provide any factual allegations otherwise demonstrating that the Plan’s recordkeeping fees were excessive in relation to the specific services rendered to this Plan.”
Acknowledge ‘Meants’
“To the contrary,” they write, the amended complaint “…acknowledges that the Plan’s recordkeeping services were regularly put out to competitive bidding (a practice Plaintiffs call a fiduciary ‘Best Practice’ for defined contribution plans), and does not allege that Defendants opted for any other provider than the lowest bidder in these periodic RFPs.” This, they claim “provides compelling confirmation that—for the specific package of services required by the Plan at issue here—the Plan was paying the market rate, and thus a reasonable rate. Plaintiffs’ failure to make these allegations about service comparisons, when they already know what services the recordkeeper offered in exchange for its recordkeeping fee, renders amendment futile and should not allow Plaintiffs to open the gates of discovery.”
The conclude that the “shortcomings of Plaintiffs’ recordkeeping-fee allegations require dismissal of the FAC in its entirety. Plaintiffs’ claim for the failure to monitor other fiduciaries in the second claim for relief is derivative of their primary breach of fiduciary duty claim in their first claim for relief and cannot survive on its own.”
Will the court be persuaded? Will the decision in CommonSpirit be sufficient to stem the tide of relatively superfluous allegations surviving motions to dismiss? Stay tuned.
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