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Excessive Fee Suit Wiped Out by Federal Judge

Practice Management

A lawsuit filed against a (relatively) small plan has been dismissed—essentially for failing to state sufficient specific allegations to warrant going to trial.

This suit, filed in February, targeted the 401(k) plan of Vail Resorts, which as of 12/31/18 had 8,276 participants with account balances and $309,822,304 in assets. The issue raised here (by plaintiff Debra Kurtz) involves the 27 different investment options in that plan, more specifically that, “for at least 18 of the 27 mutual fund share classes available within the Plan, the same issuer offered a different share class from that selected by the Plan that charged lower fees, and consistently achieved higher returns; the Plan, however, inexplicably failed to select these lower fee-charging and better-return producing share classes.”

However, in rejecting the claims—or, more specifically, granting the defendants motion to dismiss them, Judge R. Brooke Jackson of the U.S. District Court for the District of Colorado concluded that there wasn’t a lot of “there there” in the claim, commenting that it “does not address at all” Vail Corp.’s process for selecting plan investments and monitoring expenses—and that was just for starters.

“Nowhere in the complaint does plaintiff allege anything imprudent about defendant’s process,” Judge Jackson wrote. “In fact, it does not address at all Vail’s process for selecting or retaining fund options, monitoring expenses, or managing the overall Plan. Nor does it provide any factual allegations regarding whether defendant employed the appropriate methods to investigate and determine the merits of any investments. The allegations related to three-year investment returns depend on hindsight and say nothing about the information defendant had available to it at the time it was making decisions regarding the Plan.”

In essence, she commented that the plaintiff here was asking the court “to infer that defendant acted imprudently as a fiduciary based on circumstantial allegations that the Plan did not offer the lowest-share class for certain funds, and that certain funds were more expensive than alternatives”—but she commented that she could not. 

‘Half’ Way?

“Plaintiff points to fifteen funds that she alleges are more expensive than possible alternatives, but there are an additional twelve she takes no issue with at all. She does not claim that all of the funds offered were too expensive or poorly-performing,” she wrote. “A Plan fiduciary is tasked with a “whole-portfolio, investment strategy that properly balances risk and reward, as well as short-term and long-term performance,” a charge that she noted would “naturally involve selecting funds with a range of return and expense profiles.” Judge Jackson cited the comment from the Hecker v. Deere & Co. case that a fiduciary is not required to “scour the market to find and offer the cheapest possible fund,” as there are “other factors for which a fiduciary—and a participant—might want to optimize besides cost.” 

Moreover, and this seemed to be a factor in where Judge Jackson placed the threshold for consideration—she noted that “plaintiff puts forth no allegations of self-interested dealing, kickbacks or inappropriate influence, from which the Court could more readily derive an inference of fiduciary breach.” Thus, “while circumstantial allegations are sometimes enough to survive a motion to dismiss, here they are not.

“Plaintiff puts forth no facts suggesting that any of defendant’s actions were for the purpose of benefiting itself,” Judge Jackson wrote. “Defendant raises this in its motion to dismiss, and plaintiff’s response is a short two sentences: “'The burden of Kurtz’s claims is that Vail oversaw a deeply flawed decision-making process tainted by lack of diligence and effort.'” This the plaintiff seemed to consider “enough” to establish a plausible, prima facie case. But Judge Jackson didn’t see it that way. 

Judge Jackson was dismissive of the allegations made, noting that “much of plaintiff’s complaint is taken up by statements explaining what ERISA requires, or providing generic background about performance of different types of investment funds,” before going on to state that the “deceptively long complaint” could be “boiled down to a few factual allegations.”

‘Close’ Quarters

Though she claimed the decision was a “close” call, Judge Jackson distinguished other cases as either decided on lower thresholds than presented here, or where she felt that “the plaintiffs pled more than just excessive fees and imprudent investment options.” In contrast, she found that the plaintiff’s allegations “…related to process are all inferences about defendant Vail’s failure to adequately investigate alternative Plan options, and these allegations are not enough to support the inference she asks this Court to make.”

Drawing on instruction from the case of White v. Chevron, Judge Jackson noted that “merely alleging that a Plan offers retail-class rather than institutional-class funds is insufficient to state a claim for the breach of duty of prudence.” She went on to note that “alleging only the inclusion of more expensive share classes is not enough, and plaintiff does not allege more.”

As for the allegations regarding passive investments, she noted that “first, and most importantly, plaintiff fails to mention that defendant did offer passively managed funds among its Plan options.” Moreover, she explained that “plaintiff’s complaint reads as suggesting that actively managed funds can never be a prudent choice, which cannot be true. Many courts have concluded that choosing actively managed funds per se over actively managed funds is not a breach of fiduciary duty.” Indeed, Judge Jackson noted that the “Plaintiff characterizes the court’s decision as holding that to favor largely actively managed funds over passively managed funds establishes a prima facie breach of prudence case.

“There is no doubt that this case is a close call,” she acknowledged. “Ultimately, however, I conclude that even when taken together plaintiff’s allegations fall short of a valid claim for breach of the duty of prudence. While it is true that many of the funds defendant offered in its Plan were more expensive and underperformed alternatives, this was not true of all the Plan’s offerings. The complaint includes no direct allegations of imprudence in Vail’s fund selection, retention, or management process. Nor can I infer from what is alleged that the process was flawed and that Vail was an imprudent fiduciary.”

Rather, Judge Jackson concluded, “Defendant’s Plan offered a range of fund options with various costs, fee structures, and rates of return, as it is expected to do so as a fiduciary.” Moreover, having dismissed the claim for breach of fiduciary duty of prudence under Rule 12(b)(6), she noted that “Plaintiff has already had an opportunity to amend her complaint once, and the Court does not believe that further opportunity to amend would address the current deficiencies. Nor has plaintiff urged the Court to dismiss without prejudice or provided a newly amended complaint like in Birse. The dismissal is therefore with prejudice.”

What This Means

There’s little (no?) precedential value in a dismissal for what amounts to a failure to state a sufficient wrong. It is, of course, encouraging to see a court demand more than conclusory allegations to allow a case to proceed to trial. 
That said, there is a problematic trend both is the targeting of a smaller plan (one with less than $1 billion in assets) and the filing by a law firm[1] relatively new to the space. Their initial entry may have been rebuffed… but they may well learn from this experience. 

Footnote

[1] Representing this litigant were Greg Coleman Law, Jordan Lewis PA, and Crueger Dickinson LLC—firms that in recent months have targeted “smaller” plans, but in less than a year they have filed suit against the 401(k) plans of Adidas America Inc., telecommunications provider West Corp., a subsidiary of Greystar Real Estate Partners LLC, and Cincinnati’s TriHealth Inc.