Plaintiff Finds an Open Ear—and Gets a Trial Date—in Excessive Fee Suit

Despite “uncertain” claims regarding alleged fiduciary breaches, “thin” methodology, and opinions that bordered on “conclusory,” a federal judge has denied the plan fiduciaries’ motion to dismiss—and set a trial date in an excessive fee suit.   

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.

Case History

Back in February 2021, 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 at the time.

“After two rounds of motions to dismiss, the only one of Plaintiff’s claims to survive were his claim for a violation of duty of prudence for excessive RK&A fees, and the derivative claim for failure to monitor,” wrote Chief United States District Judge Richard Seeborg. “The parties stipulated to class certification, which was approved on November 22, 2022,” he continued.   

That said, in outlining his analysis of the situation (Wehner v. Genentech, Inc., N.D. Cal., No. 3:20-cv-06894, 8/11/23), Judge Seeborg commented that “Defendants have moved to exclude the testimony of Plaintiff’s expert Michael Geist on the basis that they are unsupported and speculative, as well as moved for summary judgment. Plaintiff opposes, arguing that Geist’s testimony is supported by his experience, and there remain genuine disputes over facts material to the case.” For the reasons that follow, defendants’ motion to exclude and its motion for summary judgment are both denied.

What Happened

Judge Seeborg noted that, “pursuant to authorization provided by its Charter, the Committee delegated specific responsibilities to the Roche/Genentech Funds Management Department (overseen by David McDede, Genentech Vice President and Treasurer, and member of the Committee).” During the period in question that delegation included regular monitoring of the plan’s investments and associated fees (including RK&A fees), and how they compared against what other defined contribution plans paid to their service providers and recordkeepers. Apparently, they did so primarily by a regular review of publications in the market, notably a yearly survey conducted by the Committee on Investment of Employee Benefit Assets Inc. (CIEBA), which “compiles various fees and information from over 100 of the country’s largest pension and defined contribution plans to inform CIEBA members about how their respective fees compare to other CIEBA members.”

That said, and also during this period, Judge Seeborg noted that there were two recordkeeping RFPs undertaken; once in 2014 and again in 2020, with the help of Callan LLC (a retirement plan advisory firm). And then, after surveying “several dozen” potential recordkeeping companies, the 2014 RFP solicited bids from five recordkeeper candidates and received responses from four firms, which were narrowed to two with which the committee conducted onsite visits and due diligence interviews with other plans that had retained the finalists for recordkeeping services on both. Following that they chose to retain Fidelity “due to a combination of its unique servicing abilities and competitive price”—and saw a decline in the per participant fee from $42/participant to $38/participant. 

That contract had a term of five years, set to expire on Dec. 31, 2019—but because the committee was still in the midst of its RFP as the expiration of this contract was approaching, it signed a one-year extension with Fidelity for the same rate ($38). 

Then for its 2020 RFP, the committee followed a similar process—two finalists emerged (as the other three candidates declined to bid on the RFP); and the committee held virtual final interviews with, and conducted due diligence on, both finalists—ultimately choosing Fidelity again—but with the fee declining again (from $38 to $36/participant).

The Review

Judge Seeborg reviewed the standards for review of a motion to dismiss a suit; that “The moving party ‘always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact.’” To prevail then, the non-moving party must bring forth material facts—that is, “facts that might affect the outcome of the suit under the governing law.” However, Judge Seeborg recalled that “The trial court must ‘draw all justifiable inferences in favor of the nonmoving party, including questions of credibility and of the weight to be accorded particular evidence.’”

Expert ‘Opinions’

In this particular case, it all seemed to revolve around the testimony of the plaintiff’s recordkeeping expert (Michael Geist)—who had opined that the plan fiduciaries had a “multitude of significant errors” and represented “an imprudent process.” In particular, Judge Seeborg said he pointed to “two critical errors” as “the primary drivers” of the unreasonable RK&A fees: (1) the failure to solicit competitive bids effectively; and (2) the failure to solicit proprietary discount bids.” That wasn’t the end of his criticism, of course. According to Seeborg, Geist also took issue with the fact that the plan fiduciaries acted on behalf of multiple plans (for at least four 401(k) plans and exercised decision-making authority for at least two other plans sponsored by the Company or its affiliates)—which he claimed did not enable them to act in the best interests of plan participants—all of which added up to losses in account value for the plan participants. He offered a “conservative estimate” that the Plan’s RK&A services should have been no more than $32/participant.

Now, Judge Seeborg noted that while the fiduciary defendants had moved to exclude that testimony, “Defendants do not present arguments that Geist lacks either the requisite credentials or experience to qualify as an expert,” that Geist “is currently an owner of the retirement plan consulting firm ClearSage Advisory Group, and previously spent 10 years in various ‘senior-level’ roles at T. Rowe Price, where he had experience in pricing proposals for retirement plans, including recordkeeping and administrative fees.”

More specifically, however, Judge Seeborg said that the defendants instead generally took issue with: (1) Geist’s failure to cite any sources to support his opinions about flaws in defendants’ RFP process; and (2) Geist’s failure to consider the specific services other recordkeepers provided to their plans and how those services compared to what Fidelity provided to the plan.

‘Speculation and Subjective Beliefs’

Judge Seeborg noted that the fiduciary defendants here argued that Geist’s opinions are “based solely on his own speculation and subjective beliefs,” and therefore “entirely unsupported and merely conclusory”—but then Seeborg noted that “an expert witness is one ‘who is qualified . . . by knowledge, skill, experience, training, or education may testify’ if, among other requirements, the expert’s testimony is ‘based on sufficient facts or data,’ ‘the testimony is the product of reliable principles and methods,’ and ‘the expert has reliably applied the principles and methods to the facts of the case.’”  While Judge Seeborg concurred with the defendant here that Geist did not actually cite sources in his report to support his opinions regarding flaws in the RFP process, Geist argued that “you don’t have to cite certain things because they’re well-known and understood in the industry.”

Judge Seeborg acknowledged that Geist’s “generalized references to experience certainly prompt questions about the persuasiveness of his testimony, in light of the thin ‘methodology’ he advances,” and he noted that “the specific facts on which Geist’s opinions regarding process flaws are based do seem rather ‘opaque,’ leaving the Court ‘without any independent knowledge of what the evidence supporting Mr. Geist’s opinions actually consists.’” 

And Judge Seeborg acknowledged that “skepticism may also be warranted regarding Geist’s claims about what Fidelity would have done had Geist’s recommended best practices been followed,” especially since he had neither “worked at Fidelity, nor spoke with Fidelity representatives, nor sought discovery from Fidelity or other recordkeepers, including those who bid on the Plan RFPs.” And he characterized the defendants’ concern that his conjectures on what would have occurred are “unsupported speculation packaged as expert opinion” as “understandable.”

‘Not Tantamount to Junk Science’

That said, Judge Seeborg said that “Geist’s proposed testimony is not tantamount to the junk science from which juries need to be shielded. Geist has reviewed the facts of the case, and his opinions are at least plausibly tied to his experience in the industry, from whence he may have observed the industry standards on which he opines.” And, finding that the standard contemplated a “broad conception of expert qualifications”—and noting that “the rejection of expert testimony is the exception rather than the rule,” he denied the fiduciary defendants’ motion to dismiss.

As for his alleged failure to cite/compare the services provided, Judge Seeborh noted that Geist did identify a set of “similarly-sized” plans (based on Form 5500 data). “Though it borders on conclusory, Geist’s opinion that bundled RK&A services are subject to commodity pricing and that certain differences in services are immaterial to the RK&A fees for plans beyond a certain size or complexity are, at least at this stage, sufficient to hurdle the gatekeeping function.”

Acknowledging that there were other court cases that required more to overcome the motion for summary judgement, Judge Seeborg held that it was “…more appropriate to probe the relative merits of Plaintiff’s expert’s testimony through cross examination”—and denied the motion to exclude Geist’s testimony.

Summary ‘Judgment’

Regarding the defendants’ motion for summary judgment, Judge Seeborg noted that while the defendants alleged they had a prudent process in place, and pointed to the details of their RFP process/decisions as proof, he outlined some lingering concerns, citing:

• Genuine disputes over whether defendants’ conduct in connection with the RFPs was sufficiently prudent (including whether it should have been conducted more regularly) because it had not been done in six years.
• Defendants had no reliable basis for benchmarking the RK&A fees they were paying to Fidelity.
• Whether what defendants’ actions did demonstrate sufficient prudence.
• Geist’s opinions regarding other aspects of the RFP—such as the number of finalists or the types of bids already discussed above—will need to be examined.
• The timing of the second RFP, in 2020, presents further questions, including the extension of a year contract, with no reduction in fees.

“To be clear,” Judge Seeborg commented, “this oversight, if indeed it was one, may not ultimately be sufficient to demonstrate imprudence, but at this stage, there is sufficient dispute on the issue to foreclose summary judgment for Defendants.”

“Though Plaintiff’s claims for breach of fiduciary duty appear uncertain, the availability of Geist’s testimony leads to disputes of material fact that caution against summary judgment,” Judge Seeborg concluded. “Accordingly, the motion for summary judgment is denied, and the case will proceed to a bench trial, to begin on October 30, 2023.”

Stay tuned.

What This Means

Add this to the list of cases where the judge finds just enough “meat” on the allegations (and credibility on the part of an expert witness) to carry the matter to trial for a full “vetting” of the issues. This is yet another case where the judge found that an acknowledgement of what were deemed to be similar (based on size, but also this time based on the experience of the expert witness) was sufficient to establish a plausible case on the part of the individual bringing suit. 

Not that you’ll (yet) find a black letter line to know the requirements in every situation—or every jurisdiction.