Another excessive fee suit with participant-plaintiffs represented by two active ERISA litigants — has been dismissed on a number of grounds.
The defendants in this case — DISH Network Corporation, the board of directors of that firm, and the retirement plan fiduciaries of the $841 million DISH Networks 401(k) — were charged in a suit brought by four former participants (Laquita Jones, Lateesha Proctor, Patrick Smith and Ben McColllum) of the nearly 19,000 participants in the plan.
The plaintiffs here[1] had challenged two of the investment options offered by the Plan: the Fidelity Freedom fund target date suite (“Active Suite”) and the Royce Total Return Fund Institutional Class (“Royce Fund”). As is the typical claim in such suits, the plaintiffs here alleged that “Defendants breached their fiduciary duties by allowing unreasonable expenses to be charged to participants and by selecting, retaining, and/or otherwise ratifying high-cost and poorly performing investments, such as the Active Suite and the Royce Fund, instead of offering more prudent alternative investments.”
Case History
The suit was initially filed on Jan. 20, 2022, followed by a motion to dismiss filed by the defendants on April 18, 2022 — stating both a lack of standing by the plaintiffs to bring suit, and a failure to state a claim that required redress. At that point, the court referred the Motion to Judge Varholak for consideration — and he issued a recommendation that called for a dismissal of charges on Jan. 31, 2023. That brings us to U.S. District Judge Christine M. Arguello’s review of that recommendation, and her conclusions.
After a brief recitation of the rules of procedure regarding this type review (including the citation from other cases such as “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice,” and “Nor does the complaint suffice if it tenders naked assertions devoid of further factual enhancement,” she then cited the plaintiffs’ objections to the recommendations of Judge Varholak, and turned to each in kind (Jones et al. v. Dish Network Corp. et al., case number 1:22-cv-00167, in the U.S. District Court for the District of Colorado).
Standing to Challenge the Royce Fund
Arguello noted that the majority of courts have held that Article III “does not prevent named plaintiffs in a class action suit ‘from representing parties who invested in funds that were allegedly imprudent due to the same decisions or courses of conduct,’ even if the named plaintiffs did not invest in those funds.” That said, Judge Arguello noted that, “Having carefully reviewed de novo the Complaint and applicable case law, the Court is satisfied that it would reach the same conclusion as Judge Varholak that Plaintiffs have not adequately alleged an injury in fact with respect to the Royce Fund.”
Basically, it seemed to come down to a lack of specificity with regard to this fund.[2] “Plaintiffs did not invest in the Royce Fund and have not shown that they suffered a cognizable injury traceable to Defendants’ allegedly imprudent conduct of retaining that fund,” she wrote, overruling the objection and backing Judge Varholak’s conclusion that Plaintiffs lack constitutional standing to challenge the Royce Fund.
Excessive Recordkeeping and Administrative Fees
The plaintiffs here had charged (pun acknowledged) that Dish charged participants between $19 and $29 more per year than allegedly comparably sized plans for recordkeeping and administration. With regard to the objection regarding excessive recordkeeping and administration fees, Judge Arguello noted that Judge Varholak “found that the Complaint failed to provide an apt comparison showing that the Plan’s RK&A fees were higher than other plans because Plaintiffs ‘compare the average fee paid by the Plan over a five-year span to the fees paid by the comparator plans[3] for just one selected year.’”
And therefore, since “the only provided comparison for RK&A fees is an inapt ‘apples-to oranges’ comparison, Judge Varholak concluded that the allegations were insufficient to create a plausible inference that Defendants’ decision-making process was flawed.” And, again applying the de novo standard of review, Judge Arguello concluded “that Plaintiffs’ provided comparison of the Plan’s average fee over five years with the fees of other plans from a single year is inapt and insufficient for the Court to plausibly infer that the Plan’s RK&A fees were excessive.”
Investment Monitoring & the Active Fund Suite
The plaintiffs had claimed that the fund selection cost the plan more than $2 million than it would have for better performing investments. That said, and as for the retention of the actively managed target-date fund suite, Judge Arguello noted that, “to establish a claim for breach of the duty of prudence and failure to monitor, a plaintiff must allege facts plausibly establishing that no reasonable fiduciary would have maintained the investment. It is insufficient to simply allege that an investment did poorly, and therefore a plaintiff was harmed.” Rather, she wrote, “a plaintiff ‘must allege facts to support the conclusion that the Defendants would have acted differently had they engaged in proper monitoring—and that an alternative course of action could have prevented the Plan’s losses.’” She also — citing precedents from other cases — noted that the “test of prudence ... is one of conduct, and not a test of the result of the performance of the investment.”
Her analysis began by noting that Judge Varholak “found that Plaintiffs make no direct factual allegations regarding Defendants’ process for monitoring the Active Suite,” and while the plaintiffs criticized his approach (they commented that he “discredited or misread the Complaint’s allegations and rejected reasonable inferences that should have been drawn in Plaintiffs’ favor”), Judge Arguello disagreed with them. “Although Plaintiffs allege that the Active Suite charged higher expense ratios than the Index Suite, Plaintiffs also acknowledge that more actively managed target date funds generally incur higher expense ratios because of the active management needed to manage those funds,” she wrote. “[A]lthough Plaintiffs allege that the ‘level of risk’ incurred by the Active Suite is higher than the Index Suite, there is no requirement in ERISA that a fiduciary select only the least risky investment options. Rather, courts have held that ‘it is prudent to offer a range of reasonable investment options, including passive and active funds,’” she continued.
The plaintiffs had referenced published reports by Morningstar and Reuters (that chronicled big fund flows from the active suite), but Judge Arguello disagreed with their argument that Judge Varholak “ignored” statements in those reports that they argued would create an inference of imprudence. Rather, she concluded that “when the Reports are considered as a whole, rather than cherrypicked for statements supporting Plaintiffs’ position, the Reports simply do not create a plausible inference that the Active Suite’s reputation was so poor that no reasonable fiduciary would have retained it.” Essentially, not only was there some question as to whether the benchmarks put forth by the plaintiffs were correct, their arguments seemed to depend on inferences of imprudence based on external factors (what the plaintiffs called a “holistic” view), rather than any assertion regarding the process employed to select and/or review those funds.
“In sum, Plaintiffs argue that the Recommendation improperly parsed individual allegations rather than engaging in a ‘holistic review’ of the Complaint. (Doc. # 73 at 11.) The Court disagrees and finds that Judge Varholak carefully and thoroughly evaluated Plaintiffs’ allegations while considering the Complaint as a whole. Moreover, on de novo review, this Court has considered the Complaint as a whole and finds that the allegations do not give rise to an inference of breach of fiduciary duty with respect to Defendants’ retention of the Active Suite. See Meiners, 898 F.3d at 824. The claim must therefore be dismissed.”
Breach of Loyalty
“Plaintiffs object to Judge Varholak’s determination that the Complaint does not state a claim for breach of the duty of loyalty because there are no factual allegations that Defendants’ actions were for the purpose of benefitting themselves or Fidelity,” Judge Arguello noted. But, she goes on to comment that the plaintiffs “identify no error; they simply cite to the Complaint and argue that the allegations plausibly show that Defendants’ process failings ‘improperly benefitted’ Fidelity.” But after carefully reviewing those assertions, she agreed with Judge Varholak that “there are simply no factual allegations that Defendants’ ‘operative motive was to further [their] own interest[s],’ as required to show a breach of the fiduciary duty of loyalty.”
All that said, Judge Arguello left the door open for the plaintiffs to lodge an amended complaint in 14 days.
What This Means
As has been the case in other, similar litigation, the allegations here were largely of the “cookie cutter” variety, a copy and paste from any number of other excessive fee suits filed by these firms (the Fidelity Freedom funds a previous “target” by them as well). While there was none of the “plausible” threshold language that has emerged in other, recent suit dismissals, the judicial sentiment was decidedly skeptical.
There might not be much precedential value in this result (certainly not until we see if there is an attempt to redress these shortcomings in the 14-day window), but — for the moment, at least — it’s another in the “win” column for fiduciaries.
Footnotes
[1] They were represented by attorneys from Miller Shah LLP and Capozzi Adler PC – both of which have been active litigants in the ERISA field, both individually and in combination.
[2] “Plaintiffs allege that the Royce Fund was an imprudent offering alongside the Active Suite, but Plaintiffs provide no non-conclusory allegations as to any practices that injured both them and the Royce Fund investors. In the absence of plausible allegations that Plaintiffs suffered ‘concrete injuries traceable to ... the same decisions or courses of conduct’ with respect to Defendants’ decision to retain the Royce Fund, Plaintiffs have not met the requirements for Article III standing,” she concluded.
[3] Perhaps more to the point, Judge Varholak found the comparators “utterly inapt. Plaintiffs compare the average fee paid by the plan over a five-year span to the fees paid by the comparator plans for just one selected year. This is not the 'apples-to-apples' comparison that plaintiffs allege it is, and that suffices for a court to infer that a fee is excessive."
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