This case is the latest volley in a nationwide barrage of lawsuits—many brought by interim lead class counsel in this case—targeting retirement plan fiduciaries for allegedly paying too much to plan service providers.
This time, the target is the Pentegra Defined Contribution Plan for Financial Institutions, a multiple employer plan, or MEP (or, as the defendants characterize them “large pooled plans with lots of assets at stake”). Plaintiffs (represented by Schlichter Bogard & Denton LLP, who got the nod from Judge Philip M. Halpern of the U.S. District Court for the Southern District of New York over Capozzi Adler PC) allege that Defendants—the Plan’s Board, along with Pentegra Services, Inc. (PSI), a service provider to the Plan—violated the Employee Retirement Income Security Act of 1974 (a.k.a. ERISA).
The allegations here are similar to those in other excessive fee suits: that rather than “using the Plan’s bargaining power to benefit participants and beneficiaries, Defendants acted to enrich themselves, including Pentegra, by allowing exorbitantly unreasonable expenses to be charged to participants for administration of the Plan.” The suit also alleges that the defendants “profit from collecting additional fees directly from employers who participate in the Plan—putatively to pay for ‘outsourced’ fiduciary responsibility—but act directly contrary to that assumed fiduciary responsibility by draining the retirement assets of Plan participants to enrich themselves.” There are also some attributes cited unique to the MEP program (27,000 participants, $2.1 billion in assets) that involved statements related to the marketed advantages of the MEP structure.
Dismiss ‘Sieve’
That said, the response wastes no time stating that the suit “lacks the factual allegations necessary to sustain this claim and must be dismissed for four reasons,” to wit:
- That PSI was not a Plan fiduciary with respect to negotiation of its own retention and compensation[1]—and thus, since “Counts I, II, and III all depend on an allegation of fiduciary status, and therefore all three fail as to PSI.”
- Second, “prudence claims focus on how fiduciaries make decisions,” and that the suit fails to “plausibly allege either that fiduciaries employed a flawed process or that the process produced an outcome so striking that a court can reasonably infer a defective process.” Moreover, that the plaintiffs “do not plausibly allege that Defendants intended to benefit anyone other than Plan participants.”
- That “reasonable payments for necessary services” are exempted from prohibited transaction claims (which, they argue the fees paid by the plan to PSI are)—and that “plaintiffs also have not adequately pleaded the elements of any variety of prohibited transaction encompassed by § 406’s subsections.”
- And—finally—that the plaintiffs’ duty-to-monitor allegations are “boilerplate recitations that courts routinely dismiss as ‘conclusory’.” Not only do the defendants state that the suit fails to “allege any specific factual basis to support Plaintiffs’ conclusory allegation of a lack of legally sufficient monitoring by Defendants”—but, as PSI is not a fiduciary, there could be no fiduciary breach.
Doors of ‘Discovery’
Were that not sufficient, the response concludes that “despite misrepresenting facts, misreading Plan-related documents, and misunderstanding ERISA, Plaintiffs cannot articulate a viable claim”—and that, “rather than ‘unlock the doors of discovery’… the Court should dismiss the Amended Consolidated Complaint for all these reasons…”
Other refutations include that while:
- Plaintiffs allege that PSI is a fiduciary because it is the Plan administrator, and, by definition, plan administrators are fiduciaries—but the defendants respond that “even if true—and it is not—this allegation is irrelevant. Again, the question is not whether PSI is a fiduciary for any purpose, but whether it is a fiduciary with respect to its own retention and compensation. By itself, being Plan administrator says nothing about whether PSI had “control over factors that determine the actual amount of its compensation.”
- The defendants argue that references drawn from the MEPs marketing materials don’t apply here because they relate to the ability to serve as a 3(16) plan administrator—which they state they are not in this case. “Stripping away the selective quotations and blatant distortions, Plaintiffs’ allegation that PSI is the Plan administrator says nothing about who decided to engage PSI and on what terms. It thus does not warrant departure from the bedrock principle that service providers are not fiduciaries with respect to their own retention and compensation,” they write.
- The defendants say they are puzzled by the notion that PSI is a functional fiduciary with regard to its function as an investment manager to the plan. “Like all service providers, investment advisers and managers are fiduciaries with respect to their own compensation only if they control the ‘factors that determine the actual amount of [their] compensation.’ Plaintiffs have not alleged that PSI controlled the decision to engage it in either role, or that, once engaged, PSI had any control over the amount of its compensation. Whether PSI is an investment adviser or manager is thus irrelevant.”
Compare it ‘Shuns’
As for the claim that the fees paid were too high—remembering that the original suit drew unfavorable comparisons between the fees paid by large corporate plans like “Nike, Albertson’s, Chevron, and ConocoPhillips,” the defendants state that the “plaintiffs offer no basis for their assumption that these plans are ‘the same or similar’ to the Plan”…and they are not. Each of these is a single-employer plan. Although a key benefit of a MEP is the possibility of gaining some economy of scale as compared to that achieved by each individual employer, a MEP does not enjoy the same economy of scale as a single-employer plan with the same amount of assets.”
Beyond that—and a point often obscured with litigation references to average fees allegedly paid by comparable plans, the defendants note that “plaintiffs commit yet another error: they do not identify the services PSI provides the Plan and those offered by any alleged comparator. Simply put, it is impossible to know whether the Plan’s fees were excessive without knowing what the Plan got for those fees.”
The defendants go on to state that “according to Plaintiffs, all service providers should have the same fee structure, no matter what services they provide. Under this view, a Mercedes should cost no more than a Toyota, which should cost no more than a Kia—after all, they all have four wheels and an engine.”
And then the defendants argue that in making their case, the plaintiffs “compare the Plan’s total administrative fees to the partial administrative fees paid by other plans,” claiming that the plaintiffs derived their estimates (the “purported per-participant fee”) by dividing the “Contract administrator fees” on Form 5500 by the number of plan participants, whereas that line actually includes an array of services. Similarly, the reference point cited of Fidelity’s recordkeeping fees to its own plan was just that—for recordkeeping services only.
Discredit ‘Ed’
Nor was that the end of their refutations. Then we have “Plaintiffs prop up their prudence allegations with discredited theories,” specifically the notions that that asset-based fees were imprudent, and that “a prudent fiduciary always would conduct a competitive bidding process for the Plan’s recordkeeping and administrative services.
“Stripped of these discredited theories, Plaintiffs’ sole allegation about PSI’s administrative fees is that they must be excessive because they appear higher than the fees paid for different services by incomparable plans. Such an allegation cannot state a claim for a breach of the fiduciary duty of prudence, and Count I must therefore be dismissed.”
The response also challenged as unsourced a chart plaintiffs had included “comparing the Plan’s purported investment fees with the fees of allegedly similar funds,” took issue with the fee calculations presented for one of the collective trust funds (“they seem to have confused the investment option’s total expense ratio (the final column above) with its investment management fee”), and claim not only that “Plaintiffs have alleged no facts about what the Plan’s investment management fees were,” but that they “…have misleadingly alleged what the alternative fees should be.”
As for the claims about disloyalty, “Plaintiffs’ theory of disloyalty is that a few thousand dollars in hotel fees plus some unspecified amount of ‘expenses,’ motivated the Plan’s Board members—chief executives at reputable financial institutions unaffiliated with PSI—to sell out the Plan by directing tens of millions of dollars in excessive fees to PSI. That theory is implausible,” they continue, going on to question the timeline of alleged events. “The only payments Plaintiffs have identified occurred in 2010, well outside both ERISA’s six-year limitations period and the putative class period”—concluding “it is hard to fathom how such modest payments, made so long ago, could tempt Defendants to breach their duties so flagrantly.
“For these reasons,” the response notes, “the Court should dismiss Plaintiffs’ Amended Consolidated Complaint. Because Plaintiffs have already had a chance to cure the pleading defects identified above, including in response to issues raised in Defendants’ pre-motion-to-dismiss letters (Dkt. 59, 79 & 87), that dismissal should be with prejudice.”
Footnote
[1] Later in the response, the defendants state that the plaintiffs are “not within shouting distance of such an allegation here,” that while the plaintiffs allege that PSI’s “complete control over its compensation . . . is shown by [its] ever increasing asset- based compensation each year for Plan services even though the services [PSI] provided the Plan remained the same.” They go on to state that the claim “makes no sense” since the fees are asset-based, and the assets have, in fact, increased, so have the fees. Moreover, they respond that claiming that there is a fiduciary relationship here because PSI’s president was also a member of the Plan’s Board is “a red herring.” Ultimately noting “the question Plaintiffs must answer is not who controlled PSI’s decision to contract with the Plan, but who controlled the Plan’s decision to contract with PSI.”
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