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‘Astronomical’ Claims Come Up Short — Again

Fiduciary Rules and Practices

Another suit filed by Capozzi Adler has failed to get past a plan fiduciaries’ motion to dismiss.

The suit — filed in October 2021 by Rupinder Singh, Jeffrey S. Popkin, Joni Walker and Jenny Mark on behalf of the Deloitte 401(k) Plan, and the Deloitte Profit Sharing Plan with the 401(K) Plan and the PSP Plan — was a mere 29 pages long (there’s some irony here—but we’ll get to that in a minute[1]), in contrast to the jumbo plans it targeted — some $7.3 billion (the 401(k) plan) and $7.2 billion (the PSP plan) in assets at the end of 2020. The plaintiffs’ allegations — brief though they were — were familiar: that they failed to control the Plans’ administrative and recordkeeping costs, and that the resulting mismanagement of the Plans, “to the detriment of participants and beneficiaries, constitutes a breach of the fiduciary duty of prudence, in violation of 29 U.S.C. § 1104” — and that it “cost the Plans and its participants millions of dollars.”

Motion(s) to Dismiss

In considering the fiduciary defendants’ motion to dismiss, U.S. District Judge John G. Koeltl outlined their several bases for doing so — that (a) they lacked standing to bring claims relating to the PSP and to four of six funds in the 401(k) Plan because the plaintiffs had not alleged participation in either the PSP or those four funds in 401(k) Plan. Now, while commenting that “the Court generally must accept the material factual allegations in the complaint as true,” Judge Koeltl noted (Singh et al. v. Deloitte LLP et al., case number 1:21-cv-08458, in the U.S. District Court for the Southern District of New York) that “the Court does not draw all reasonable inferences in the plaintiff's favor. Indeed, where jurisdictional facts are disputed, the Court has the power and the obligation to consider matters outside the pleadings to determine whether jurisdiction exists.”

And, in fact, Judge Koeltl found that the plaintiffs lacked standing “with respect to the PSP because none of the plaintiffs have alleged participation in that Plan,” and with respect to their claims “involving four of the six funds in the 401(k) because the plaintiffs only invested in two of those six challenged funds.”   
He went on to note that a “plan participant who does not invest their plan assets into a particular fund offered in a defined-contribution plan will not have their individual plan benefit affected in any way by that fund's performance or associated fees. Because the plaintiffs here did not invest in four of the six challenged funds, the "allegedly poor performance of those specific products" could not have affected the "individual account of any of the named plaintiffs." And since “none of the plaintiffs have shown that the four challenged funds in which they did not invest caused them any particularized injury, and therefore lack standing to bring their claims against those four funds.”

Plausibility Pause?

As for the two funds they WERE invested in, Judge Koeltl noted again that, “in deciding a motion to dismiss pursuant to Rule 12(b)(6), the allegations in the complaint are accepted as true, and all reasonable inferences must be drawn in the plaintiffs' favor.” Moreover, he reiterated that “a claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged, and that “While the Court should construe the factual allegations in the light most favorable to the plaintiff, ‘the tenet that a court must accept as true all of the allegations contained in the complaint is inapplicable to legal conclusions.’" He also explained that in considering such a motion to dismiss, the court “may consider documents that are referenced in the complaint, documents that the plaintiff relied on in bringing suit and that are either in the plaintiff's possession or that the plaintiff knew of when bringing suit, or matters of which judicial notice may be taken.”

Turning to the issues raised, Judge Koeltl noted that the plaintiffs alleged that “the recordkeeping fees charged by the 401(k) Plan were unreasonably excessive, indicating that the Plan was managed imprudently. From 2015 to 2019, the 401(k) Plan charged recordkeeping fees per-participant in the range of $59.58 to $70.31,” and that “two comparable plans administered by the same recordkeeper, Vanguard, allegedly charged $27 and $33 in recordkeeping fees per participant.” He then referenced the plaintiffs’ comparison of those ranges to assert that the Deloitte 401(k) Plan fees were "astronomical[2]" and that the Plan "should have been able to negotiate a recordkeeping cost in the low $20 range." Beyond that, “because the 401(k) Plan's recordkeeping fees were higher than these comparable plans, the plaintiffs argue that the defendants' ‘lack of a prudent process to monitor the Plans' fees is evident.’”

“However,” Judge Koeltl continued, “the plaintiffs must allege more than just that the 401(k) Plan's recordkeeping fees were higher than those of other plans. Well-reasoned decisions in this Circuit have found that plaintiffs must plausibly allege that ‘the administrative fees were excessive relative to the services rendered.’” A sentence later, he concluded “Here, the plaintiffs have not done so.”

‘Excessive’ Questions

He went on to explain by noting that while “the plaintiffs allege that ‘[n]early all recordkeepers in the marketplace offer the same range of services,’ and that even accepting this as true, “the plaintiffs still do not allege, with specificity, what recordkeeping services the 401(k) Plan received from Vanguard. Even further, they have not alleged what recordkeeping services the comparator plans received from Vanguard. The plaintiffs' allegation that all recordkeepers offer the same range of services does not mean that all plans employing a particular recordkeeper receive an identical subset of services within that range. And ‘paying higher-fees alone does not allow the Court to conclude that the fees were excessive enough to prove [the defendants'] imprudence.’"

“The plaintiffs' argument that the funds' expense ratios were unreasonably high as compared to an arbitrary benchmark is duplicative of their recordkeeping fee argument and fails for similar reasons. The plaintiffs do not allege why the two funds they challenge are comparable to the ICI Medians and Averages, nor do they offer details for any other comparison.” Judge Koeltl noted that “plaintiffs' only metric of comparison is the ‘average fees of funds in similarly-sized plans’”—a metric that he noted “does not allow for comparison because the plaintiffs do not specify the details of the funds captured in the aggregate by the ICI Medians and Averages. In effect, the plaintiffs have only alleged that some funds in the world are more expensive than other funds. This allegation, alone, does not plead sufficiently that the 401(k) Plan fiduciaries imprudently managed the Plan.” Beyond that, he noted that “the mere fact that a fund charges an expense ratio higher than the mean or median, in and of itself, does not imply that the cost was excessive. Otherwise, by definition, half of all funds would charge excessive fees. Whether a fiduciary has breached its duty of prudence requires a ‘context specific’ inquiry.”

He concluded that “the plaintiffs here do not offer any additional context beyond their allegation that the two challenged funds had higher expense ratios as compared to arbitrary third-party median values.  The plaintiffs do not allege, for example, that the two funds underperformed relative to other comparable funds with similar or lower expense ratios, which would provide meaningful context from which to determine whether a fiduciary acted prudently.”

And — for good measure — as the other claims regarding a failure to monitor the actions of the plan fiduciaries was “derivative of the plaintiffs' claim of a breach of fiduciary duty” — well, those claims were dismissed as well.

In conclusion, Judge Koeltl noted that, having considered all the arguments of the parties, and “to the extent not specifically addressed above, the arguments are either moot or without merit. For the foregoing reasons, the defendant's motion to dismiss is granted.”

That said, he dismissed it “without prejudice to the ability of the plaintiffs to move to file an amended complaint,” but cautioned that any such motion must be filed within 30 days of the date of this Memorandum Opinion and Order — and at the same time “explain how any proposed amended complaint would resolve the defects in the current complaint.”

What This Means

You can add this case (and federal court district) to the list of suits dismissed for “merely” laying out direct fees (per the Form 5500) alongside plans that are alleged to be comparable based (solely) on size (participant and/or assets). 

Now, we all know that the determination of a “reasonable” fee requires an evaluation of the services rendered in exchange for that fee. What’s been less clear is whether an assertion that comparably sized plans ostensibly paid less for what were allegedly identical levels of service would get you your day in court. 
Thankfully, it seems increasingly less likely to be the case.


[1] The irony here is that the initial claim was 27 pages long—the opinion rejecting the claims was, at 20 pages, nearly as long.
[2] Not the first time the Capozzi Adler firm has affixed the “astronomical” label to 401(k) fees—having also previously done so in suits involving the $1.5 billion Baptist Health South Florida, Inc. 403(b) Employee Retirement Plan, the $1.2 billion 401(k) plan of the American Red Cross, the $700 million Pharmaceutical Product Development, LLC Retirement Savings Plan, and the $2 billion plan of Cerner Corp., though it’s not the only litigation firm to do so.