Defendants in another excessive fee suit got some good news this week, as a federal judge ruled that the plaintiff’s “apples-to-oranges comparisons” regarding the plan’s fees and funds “do not raise a plausible inference that defendants breached their fiduciary duties of prudence and loyalty.”
The defendants are the fiduciaries of Genentech’s $7.6 billion (33,693 participant) 401(k) plan, and the plaintiff is one Matthew Wehner (represented by Shepherd, Finkelman, Miller & Shah, LLP), who alleged that they breached their fiduciary duties by imposing recordkeeping, administrative and investment management fees that were too high and retaining investment funds that allegedly underperformed and had high fees.
Plausible Inferences?
Judge William H. Orrick of the U.S. District Court for the Northern District of California made quick work of the arguments presented here (Wehner v. Genentech, Inc., N.D. Cal., No. 3:20-cv-06894, 2/9/21). “The facts as alleged do not raise a plausible inference that defendants breached their fiduciary duties of prudence and loyalty. Imprudence cannot be reasonably inferred from Wehner’s apples-to-oranges comparisons regarding the Plan’s fees and funds. And he does not allege any additional facts to support his duty of loyalty claim outside of those alleged to support his duty of prudence claim,” Judge Orrick wrote.
And, “because Wehner fails to plead a duty of prudence or loyalty claim, his second claim for relief, which is a derivative failure to monitor claim, also fails,” Orrick noted. “His alternative non-fiduciary liability claim is not plausible because he does not allege that defendants participated in a ‘prohibited transaction’ nor explain why his requested form of equitable relief is within the scope of ‘appropriate equitable relief’ allowed for this type of claim.”
Having stated his conclusions, Judge Orrick goes on to dismantle the arguments put forth by the plaintiff. He criticizes the support of excessive administrative fee claims with “one industry publication” (the 401k Averages Book, 20th Ed.), and the citation from it that says that the “average cost for recordkeeping and administration in 2017 for plans much smaller than the Plan (plans with 100 participants and $5 million in assets) was $35 per participant”—and the contention that this plan’s fees should have been “significantly lower” than $35 per participant “given the Plan’s bigger size and resulting negotiating power.”
Standard of Review
We’ve noted previously from other jurisdictions that under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted, and that in order to survive a Rule 12(b)(6) motion to dismiss, the plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” That said, and as Judge Orrick notes here, in deciding whether the plaintiff has stated a claim upon which relief can be granted, the court accepts the plaintiff’s allegations as true and draws all reasonable inferences in favor of the plaintiff—though it is not required to accept as true “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.”
Moreover, Judge Orrick was persuaded that the definitions of services for which fees comparisons were provided did not match up with the services being provided to Genentech, specifically that it did not include charges for auditing the Plan and investment consulting. Judge Orrick also challenged the comparative use of a recordkeeping fee of $14-21 from another case regarding what Fidelity charged its own plan for recordkeeping services. “Wehner does not explain how the services that Fidelity provided to its own plans are equivalent in value to the services Fidelity provided to the Plan at issue in this case. Without more, the $14–21 figure cannot serve as an adequate market comparator,” Judge Orrick commented, drawing in comparisons from several other recent decisions in the circuit, including those against Trader Joe’s, Salesforce and Intel.
He seemed puzzled by plaintiff Wehner’s focus on explaining that a portion of a fund’s investment management fees can sometimes be kicked back to a recordkeeper to pay for administrative services (revenue sharing), “but at no point in his Complaint does he allege that the Plan engages in revenue sharing. There are no plausible allegations that any portion of the 0.31%–0.32% in investment management fees is paid for administrative or recordkeeping services.” All in all, he concluded that “as pleaded, Wehner’s allegations regarding the Plan’s investment management fees are insufficient to show imprudence.”
Target ‘Ed’
With regard to the target-date funds in the plan, plaintiff Wehner alleged that the Roche TDFs were “significantly more expensive and poorer performing than many of the alternatives offered by other TDF providers, including the Vanguard TDFs and the Fidelity TDFs.” The Genentech defendants countered that the Vanguard and Fidelity TDFs, “which are retail funds available to the public, are improper ‘apples-to-oranges’ comparisons to the Roche TDFs, which are custom funds designed specifically for the Plan.” To that, Judge Orrick noted that Wehner’s response was that “all three products (Roche TDFs and the Vanguard and Fidelity TDFs) are TDFs, so they must be comparable, is insufficient to make this an ‘apples-to-apples’ comparison.” Moreover, Judge Orrick noted that “Wehner’s conclusory allegations regarding the Roche TDF’s performance and fees suffer from the same flaw. He cannot dodge the requirement for a meaningful benchmark by merely finding a less expensive alternative fund or two with some similarity.”
Wehner had also challenged inclusion of the Roche Small and Mid-Cap Equity Fund (an actively managed fund), claiming it was imprudent “because it underperformed its benchmark based on five-year annual returns, and had higher fees than a passively-managed fund, the BlackRock index fund, in its asset class.” Now, Judge Orrick noted that, “unlike his allegations regarding the Roche TDFs, he does not suggest that the Plan should have invested in an alternative less expensive, better-performing option. Rather, he alleges that “there was and is no reason to include an actively managed fund in the U.S. small/mid-cap space in the Plan at all because the Plan also offered a BlackRock index fund in that same asset class.”
To that, Judge Orrick concluded, “even assuming that a passively-managed fund can be used for purposes of comparison, the Complaint contains no factual allegations to support a finding that the passively-managed fund identified provides a ‘meaningful benchmark,’ and that the allegations regarding ‘high fees’ were ‘similarly insufficient.’” Once again, Orrick held that the plaintiff “cannot rely on ‘apples-to-oranges’ comparisons of an actively-managed fund’s fees to a passively-managed index fund’s fees due to the differences in the way the funds are managed.”
And with that, Judge Orrick granted the Genentech defendants’ motion to dismiss the case—but left the plaintiff with the opportunity to amend his suit within 20 days.
What This Means
This being one of several cases in recent days to be dismissed due to a lack of sufficiency in the specificity of their claims should be comforting to plan fiduciaries—the courts do seem, at least, to be asking the right questions.
That said, considerable time, energy and expense has (already) been expended to get to the point of dismissal. And that is of comfort to no one.
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