The First Circuit Denies Motions to Dismiss in CommonSpirit, Oshkosh-Like Cases

By Daniel Aronowitz

Key Points

The First Circuit has denied motions to dismiss in three cases with very similar excess recordkeeping and investment claims that were rejected as implausible in the Sixth Circuit’s CommonSpirit case.  Two of the cases – Mitre and Boston Children’s Hospital – challenge the same fees and performance of Fidelity Freedom K share target-date funds rejected by both the Sixth and Seventh Circuits.  These cases cannot be reconciled except to recognize that the First Circuit is applying a lower “possibility” – rather than plausibility – pleading standard that tolerates weak circumstantial excess fee claims. 

In March 2023, the District Court of Massachusetts denied motions to dismiss in three ERISA excessive fee cases involving MITRE Corporation, Boston Children’s Hospital and Massachusetts General Brigham Incorporated.  The plan fiduciaries in all three cases had asserted that the complaints must be dismissed because they fail to meet the high plausibility pleading standard articulated by recent appellate court decisions in Smith v. CommonSpirit (Sixth Circuit), Albert v. Oshkosh (Seventh Circuit), and Matousek v. MidAmerican (Eighth Circuit), but the Massachusetts District Court found curious ways to distinguish these cases in allowing all three excess fee complaints to proceed.

Distinguishing the trio of appellate cases has become the new litmus test for whether a court will allow an excess fee case to proceed to discovery.  About 50-55% of courts are now applying the CommonSpirit plausibility standard and dismissing complaints, whereas the remaining 45-50% of courts, like the three Massachusetts cases, are distinguishing the CommonSpirit appellate cases or otherwise applying a lower “possibility” pleading standard.

The cases are hard to reconcile, particularly because the excess fee complaints across the country involve similar excess recordkeeping and investment fee claims.  To this point, the three Massachusetts cases involve similar investments and fee structures to the plans in the appellate cases.  For example, the plans in CommonSpirit and Oshkosh offered the identical Fidelity Freedom target-date funds in the revenue sharing K share class that were offered by the Children’s Hospital plan.  In fact, the CommonSpirit and Children’s Hospital Corporation complaints are advanced by the same plaintiffs’ law firm and are nearly verbatim in content with respect to the investment fee and performance claims involving Fidelity Freedom Funds.  But the Massachusetts court ignored the similarities entirely.

These decisions demonstrate that winning or losing ERISA excess fee cases continues to hinge on whether the court properly applies the plausibility pleading standard, and the results continue to be a crapshoot.  The reason is that the CommonSpirit appellate cases are too easy for a results-oriented judge to distinguish or ignore.  We thus cannot rely exclusively on seeking a heightened pleadings standard.  Instead, plan sponsors need – and deserve – a liability standard that is uniform and fair.  We conclude our blogpost with our suggestions for the proper fiduciary liability standard based on the business judgment rule that would eliminate many of these ERISA junk lawsuits.

Brown v. The Mitre Corporation, Case No. 22-cv-10976-DJC (D. Mass. Filed 08/23/2022)

After the initial excess fee complaint was dismissed because the sole plaintiff lacked standing, the Capozzi Adler law firm filed a second purported excess fee case against the MITRE Corporation in the District Court of Massachusetts on June 22, 2022.  The complaint is largely the same, but the previous participant was joined by five other former employees.  The complaint is similar to the approximately two-dozen excess fee cases filed against universities that involve both TIAA and Fidelity investments.  MITRE sponsored both a Tax-Sheltered Annuity Plan (TSA Plan) and a Qualified Retirement Plan (QRP Plan).  The TSA plan had over $4.5 billion in assets and 14,190 participants in the most recent time period; and the QRP Plan had $2.4 billion in assets and 12,366 participants.

Excess Recordkeeping Fees:  The first claim in the complaint is that the MITRE plan fiduciaries failed to adequately monitor the plans’ administrative and recordkeeping expenses and paid “outrageous” and “astronomical” amounts by staying with the same two recordkeepers – TIAA and Fidelity – since 2006.  The Complaint alleges that national recordkeepers offer “two types” of essential recordkeeping services:  (1) an overall suite of recordkeeping services as part of a “bundled” fee for a “buffet style level of service” offered on an “all-you-can-eat” basis; or (2) an “A La Carte” services that offer separate, additional fees based on the conduct of individual participants and the usage of the services by individual participants.  MITRE is alleged to have used two recordkeepers.  TIAA provided recordkeeping services on a percentage of assets basis.  In 2015, the revenue requirement was .10% of total plan assets; in 2016, the percentage was .07%; and from 2018 to at least 2020, that percentage was lowered to .039 percent.  According to the chart in the complaint, the per-participant cost ranged from $158.19 in 2016 to $79.15 in 2020 for the smaller plan; and from $220.54 to $145.01 in the larger plan.  The chart does not state where the numbers come from, and there is nothing about the Fidelity recordkeeping fees, or whether they are included with the TIAA fees.

The purported recordkeeping fees of the plan are first compared to the discovery stipulation in the Moitoso excess fee filed against Fidelity’s own defined contribution plan in which it is asserted that the value of Fidelity’s services are $14 per participant.  Second, the complaint compares the MITRE Plans to the Form 5500 recordkeeping fees in two different charts listing twenty-one random companies ranging from 13,248 (Sutter Health) to 33,116 participants (Danaher Corporation); and $406,000,195 (Sutter Health) and $5.6b (Sanofi U.S.) in plan assets.  These purported comparator plans had five different recordkeepers:  Fidelity, Vanguard, Great-West, T. Rowe Price and Alight.   The per-participant fees of these comparator plans were alleged to be between $26.69 and $35.  Third, the complaint lists a chart from the NEPC consulting group 2020 Defined Contribution Progress Report, which found that the majority of plans with over 15,000 participants paid slightly over $40 per participant for recordkeeping, and no plan of this size paid over $60 per participant.

Excess Investment Fees:  The second claim for excess investment fees alleges that the plan fiduciaries acted imprudently by utilizing higher cost share classes that contained revenue sharing.  The primary example of this claim is that the plan offered Fidelity Freedom target-date funds for the 2020 and 2030 vintages in the K share class for .60-.68% published expense ratios, when the K6 shares of the identical funds were available for .44-.47%.  The complaint alleges at least 100 of the plan’s 400 investments were in the higher fee share class with revenue sharing, and refers to the attached Form 5500 list of plan investments.

In its Motion to Dismiss, MITRE relied heavily on the First Circuit’s 2018 decision in Barchock v. CVS Health Corp., 886 F.3d 43, 48-55 (1st Cir. 2018).  In Barchock, the First Circuit was faced with a fiduciary breach claim based on an allegation that the allocation of the challenged investment allegedly was a “severe outlier” “when compared to allocation averages for the stable value industry.”  The Barchock plaintiffs pointed to an industry survey of forty-three comparator investments and claimed that the challenged plan held above-average allocations to certain investments.  Based on that survey, plaintiffs alleged that the plan’s allocations exceeded the “maximum threshold” that would be prudent under the circumstances.  The First Circuit rejected the plaintiff’s theory in affirming a 12(b)(6) dismissal.  As a factual matter, the First Circuit held that “without [] distribution information” regarding the range of investment allocations resulting in the survey’s arithmetic mean, “it is unreasonable to infer solely from the complaint’s allegation . . . that [the CVS plan] was a ‘a severe outlier’ from all other such funds when it came to asset allocation decisions” given how many stable value fund investments are available in the market.

The MITRE defense cited the First Circuit’s opinion that plaintiffs “need to point to something more than merely” that the fund was a “severe outlier” when compared to industry averages “in order to state a claim of imprudence under ERISA.”  MITRE argued that the Barchock analysis applies in this case, because in any comparator data set, about half of all investments or fees will be above average and half below, even if all are reasonable and prudent.  In the MITRE complaint, plaintiffs compare the plan’s recordkeeping to just twenty other companies – even less than the survey used in Barchock.  MITRE argued that the two charts of twenty-one purported comparator data offers insufficient facts that the plans’ “fees were outside the range of fees other plans paid, or even that they were above average.”  Also, plaintiffs have a “laser-like focus on costs” without regard to the quality of services provided.

The MITRE Court Denies the Motion to Dismiss:  The MITRE court began by holding that Barchock was distinguishable because plaintiffs in that case sought to infer imprudence “solely from their complaint’s charge that [a fiduciary’s] cash-equivalent allocation ‘departed radically’ from both industry averages and the underlying financial logic of stable value management.”  The MITRE Court assessed that the Barchock complaint did not “directly criticize the process by which the Fund’s investment allocation was selected” nor did they allege that the plan fiduciaries had something to gain from managing the fund conservatively.  By contrast, in this case, plaintiffs’ “directly criticize the process” by which the investment allocation was allocated.  And plaintiffs allege that defendants failed to leverage its substantial bargaining power due to the plans’ size in order to obtain the same recordkeeping services at a lower cost.  The Court held that this was sufficient to give rise to the inference that defendants’ “overall decision-making” was imprudent.

The MITRE Court next distinguished the three appellate court decisions.  The Court held that Matousek v. MidAmerican was different because there the plan defendants had provided the court with the participant-disclosure forms that showed that the recordkeeping fees were $32 to $48 per participant, which compared favorably to the industry-wide benchmarks proffered by the plaintiffs.  By contrast, the MITRE Court held that it had no basis from which to doubt the plausibility of plaintiffs’ allegations that there are two basic types of recordkeeping services, and the plan fiduciaries could have secured the services at a lower cost.  The Court backed this holding with a citation to Garnick v. Wake Forest Univ. Baptist Med. Ctr., No. 21-cv-454, 2022 U.S. Dist. LEXIS 170268 (M.D.N.C. Sept. 21, 2022) in which the court concluded that plaintiffs plausibly stated a claim of imprudence by alleging that the plan had the leverage to bargain for more reasonable fees without utilizing revenue sharing.

The Court next distinguished the CommonSpirit case, because in that case the plaintiff “failed to allege that the fees were excessive relative to the services rendered,” and had compared a large plan’s fees to “some of the smallest plans on the market.”  The Court held that “Plaintiffs here have compared the Plans’ fees to a sufficient number of sufficiently-sized plans.”  The Court backed this holding with a citation to Peck v. Munson Healthcare et al., 2022 U.S. Dist. LEXIS 217086 (W.D. Mich. Nov. 9, 2022) in which the court rejected the plan defendants’ reliance on CommonSpirit because plaintiff “compared sufficiently similar plans for the purpose of stating a claim under ERISA.”

Finally, the Court distinguished Albert v. Oshkosh because the plaintiff’s recordkeeping claim was based on the allegation that the fiduciary “fail[ed] to regularly solicit quotes and/or competitive bids.”  Further, the Court held that the plaintiff in Oshkosh did not allege like the MITRE complaint that “there are two types of recordkeeping services provided by all national recordkeepers for large plans and that the fiduciary failed to use its substantial bargaining power to obtain these same services at a lower cost.”  The Oshkosh court had warned that “recordkeeping claims in a future case could survive . . . a motion to dismiss should it provide the kind of context that could move this claim from possibility to plausibility.”

The Court next held that the claim that the fiduciary committee failed to a conduct a request for proposal was plausible given the context of the other factors raised in the complaint.  The basis of this finding is mostly on the fact that the plan had the same two recordkeepers since 2006.  The court cited Santiago v. Univ. of Miami for the supporting proposition that a fiduciary’s decision to retain multiple recordkeepers may give rise to an inference of imprudence.

Finally, without much discussion and a few case cites, the Court held that plaintiffs plausibly alleged that the Committee breached its duty of prudence by failing to investigate the availability of lower-cost share classes of certain mutual funds in the plans.

Norton v. Mass General Brigham Incorporated, No. 1:22-cv-10045-AK (D. Mass. Filed 01/13/2022)

The Mass General Brigham defined contribution plan is massive with 100,165 participants and $10.2B in assets.  In a relatively short complaint filed by Capozzi Adler, the core claim alleges that seven investments offered by TIAA-CREF “have an expense ratio that’s 10-basis points higher than required by the fund provider” due to revenue sharing.  The second claim is that participants allegedly paid excess recordkeeping fees in the amount ranging from $74.88 in 2016 to $54.08 in 2020.  The complaint has a chart of seven plans with over 30,000 participants that asserts a reasonable recordkeeping fee would be $22-34 per participant.

The Massachusetts Court denied the plan’s motion to dismiss with a short docket order dated March 15, 2023.  The Court noted that the plan in its motion to dismiss had highlighted “cases from other circuits in which claims of a breach of prudence based on excessive recordkeeping fees required more precise factual allegations to demonstrate that the services of the comparator plans are like the plan at issue.”  But the Court held that “[i]n the absence of First Circuit authority that directly addresses the question, this Court is persuaded by the trend within the First Circuit’s district courts of allowing similar complaints to survive motions to dismiss and proceed to discovery.”  Specifically, the Court cited Brown v. Mitre Corp. [the same case discussed in the blogpost] in which the court distinguished the MidAmerican, CommonSpirit, and Oshkosh appellate cases “because they contained materially different allegations and conflicted with other District Courts in the First Circuit for pleading standards in an ERISA case.”

Monteiro v. The Children’s Hospital Corporation, No. 1:22-cv-10069 (filed January 18, 2022) – Motion to Dismiss denied March 15, 2023

The Miller Shah law firm filed a purported excess recordkeeping and investment fee lawsuit against the $1.1b Children’s Hospital Corporation that had 18,380 participants with three fiduciary imprudence claims.  The first claim is that recordkeeping fees from the Form 5500 range from $57 per participant in 2016 to $93 in 2020, and compares these fees to seven other plans in a chart that has plans with lower purported recordkeeping fees of $23-42.  The second claim alleges high fees and investment underperformance of the plan’s QDIA in the Fidelity Freedom active target-date funds in the K share class of .42-.65%.  This is the same fiduciary imprudence claim that the Miller Shah law firm asserted unsuccessfully in the CommonSpirit case.  The third claim alleged an excessively expensive investment menu with fees from .75-1.10%, including the Fidelity Contrafund K and the Goldman Sachs Small Cap Value Fund.  Although not prominent, the complaint has two paragraphs alleging that certain investments are not in the correct share class for a large plan.

On March 15, 2023, the Massachusetts District Court entered a docket order denying the plan defendants’ motion to dismiss.  The docket order states that the complaint, “viewed as a whole,” states a plausible claim of breach of fiduciary duty.  The five paragraphs give a cursory summary of the complaint, but little explanation as to how the complaint states plausible claims.  The docket order makes no effort to compare the cases to the recent appellate court decisions, including to the fact that the Children’s Hospital complaint asserts the same fiduciary imprudence claims for choosing Fidelity Freedom active target-date funds in the K share class.

How to Put the CommonSpirit Appellate Cases into the Proper Perspective

The three District of Massachusetts cases demonstrate that even though the CommonSpirit trio of appellate cases are good law, a results-oriented judge can easily find ways to distinguish the cases and allow cases with weak circumstantial claims of fiduciary imprudence to proceed.  The courts in the Childrens’ Hospital and Mass General Brigham cases made little effort to distinguish the CommonSpirit case.  But the MITRE decision went to great lengths to distinguish the CommonSpirit trio of appellate cases.

As this chart shows, all three appellate court cases have limitations based on the unique facts and claims of each case:

Put into proper perspective, we believe that plan sponsors can better utilize the key tenants of the appellate court cases.  The key perspective of these cases is that both CommonSpirit and Oshkosh involved fees that are significantly higher than the median for large plans.  The reason is that both plans involved higher-fee active target date funds.  For example, the CommonSpirit plan with over $3b in assets had an all-in fee of .55%.  We do not know the all-in fee for the Oshkosh plan, but it had to be over 45 bps.  The fees of these two plans are nearly double the all-in fees of other >$1b defined contribution plans.  This is a crucial fact that unlocks the value of these precedents.  Despite the above-average fees, both appellate courts held that the purported excess fee cases were not plausible because the evidence alleged in the complaints – the same evidence used in nearly every excess fee case, including the three Massachusetts cases – did not give the proper context from which a court could plausibility infer an imprudent fiduciary process.  The key point is that you cannot infer fiduciary malpractice just because a plan has higher than average fees, because otherwise one-half of all plans in America would be guilty of fiduciary malpractice.  That cannot be right, and even the most plaintiff-biased judges would have to acknowledge this key perspective.

The MidAmerican case was different.  The MidAmerican plan offered low-fee State Street index funds as the QDIA.  The Capozzi law firm never mentions that the plan was invested in low-fee index target-date funds.  They also never give the all-in fee for the plan.  Why not?  Because this is a low-fee plan well below the average or median of other large plans.  It would ruin their premise that above-average investment fees are sufficient to infer fiduciary imprudence.  Instead, the excess fee claim in MidAmerican was the false claim that each participant was paying $525 each year for recordkeeping fees.  This was based on the Form 5500 disclosure that included transaction costs unrelated to plan recordkeeping.  The false fee claim was easily disproven by the participant fee disclosures.

With this important perspective on the three appellate cases, now look at how the three Massachusetts district courts applied the CommonSpirit precedent.  Start with the facts, because, like CommonSpirit and Oshkosh, the fees in all three plans are well above the median for other large plans, but that should not be sufficient to infer fiduciary imprudence.

The MITRE complaint feels like a redux of the 20+ excess fee cases filed against university plans beginning in 2016.  The plans are very large, use two recordkeepers, offer hundreds of investment options, and appear to allow uncapped revenue sharing.  Like the Hughes v. Northwestern case, it is not the ideal fee structure to develop precedential case law.  The fact pattern is problematic and may present valid concerns that the plan fiduciaries failed to leverage their size to ensure that fees are reasonable.  It may be a legitimate excess fee case, but only if the complaint had presented legitimate comparisons to other similar plans.  The complaint nevertheless made no effort to compare the MITRE plans to other similar plans maintained by other non-profit companies with a similar revenue sharing fee structure.

The Massachusetts District Court’s attempts to distinguish CommonSpirit feel contrived.  For example, the Court distinguishes the MidAmerican case on the grounds that the defendants in that case presented the participant fee disclosure to show that the fees were actually reasonable.  But the key factor in the MidAmerican decision is that the complaint alleged a recordkeeping fee of $525 per participant – an amount that was totally false.  The court allowed the defense to present participant fee disclosures showing that the real fee was only $32-$48 per participant.  The recordkeeping fees were mispresented in the complaint, something that happens in many purported excess fee cases.  The difference in the MITRE case is that the recordkeeping fees were based on revenue sharing and different for every participant, and thus a fee disclosure will not be dispositive.  But that does not mean that the plan fees were automatically imprudent or excessive.  Surely plaintiffs need to do more than just list a chart of 21 plans that do not use revenue sharing to support a fiduciary malpractice lawsuit against a plan that uses revenue sharing to pay plan administrative fees.  In other words, the comparator charts of plans that use per-participant recordkeeping arrangements are not valid comparisons to a plan that uses revenue sharing.  The recordkeeping arrangements are completely different.  Unless you are claiming that revenue sharing is per se imprudent, then the plan in MidAmerican, or any of the twenty-one companies listed in the complaint, cannot be compared to the MITRE plan.

The attempt to distinguish CommonSpirit is more contrived with respect to the recordkeeping fee claim.  The CommonSpirit complaint was focused almost entirely on the claim that the Fidelity Freedom target-date funds carried high fees and had experienced poor performance.  The excess recordkeeping claim was only two pages of the complaint as essentially a throw-in claim with little attempt to provide evidentiary support.  The reason was that the recordkeeping fees for the CommonSpirit plan were approximately $30-34 per participant, an amount that is reasonable on its face.  Only in the fictional world of excess fee lawsuits is this amount too high.  Not surprisingly, plaintiffs made little attempt to prove that these fees were too high, and only threw out a pathetic comparison to the small plans in the 401k Averages Book.  It was a laughable claim given the low recordkeeping fees.  Given this backdrop, it is not meaningful when the Massachusetts Court says that the MITRE case is distinguishable because the complaint has more evidence than CommonSpirit, namely a chart of purported comparator plans.  The fact that plaintiffs in CommonSpirit did not submit a comparator chart on a weak throw-away claim does not somehow make the MITRE comparator chart persuasive evidence that the MITRE recordkeeping fees are too high.  Again, the comparator chart only shows that the MITRE plan has higher fees than twenty-one plans in the entire plan universe, especially considering that all twenty-one plans did not use revenue sharing.  The context and perspective that the CommonSpirit case requires to prove excessive fees is still missing.

Finally, the MITRE court held that the plaintiff in Oshkosh did not allege like the MITRE complaint that there are two types of recordkeeping services provided by all national recordkeepers for large plans, and that the fiduciary failed to use its substantial bargaining power to obtain these same services at a lower cost.  This is nonsense.  Capozzi Adler makes this claim in nearly every lawsuit, but it is a baseless claim without any evidentiary basis.  Just because Capozzi Adler says it doesn’t make it true.  We think there is some truth to the notion that most recordkeeping contracts have the same basic set of services, and we continue to warn plan sponsors in their defense of cases not to push too hard on an argument that you have to compare services to services for a valid comparison.  But surely plaintiffs need to provide more context than an unsubstantiated claim that there are two types of recordkeeping arrangements offered to large plans.  The Oshkosh court required context to allege excessive fees, and there is no context in the entire MITRE complaint.

The Euclid Perspective

Now that most ERISA excess fee cases are being decided on whether or not the case can be distinguished from the appellate court decisions in CommonSpirit, Oshkosh and MidAmerican, it is important to recognize that both CommonSpirit and Oshkosh involved plan fees that were well above the large-plan median.  This is a crucial perspective that has been lost in the case law, but should be pointed out to every court deciding a motion to dismiss:  like in CommonSpirit and Oshkosh, you cannot infer an imprudent fiduciary process simply because a plan has above-average fees – you need to prove your excess fee claims with legitimate context and perspective.

The key to winning the war on lawyer-driven excess fee cases is to seek a fiduciary liability standard that is broader than the CommonSpirit plausibility pleading standard.  The CommonSpirit decision was helpful in holding that (a) you cannot compare active to passive funds, (b) you cannot compare the returns of two funds and claim investment imprudence, and even then you need a long track-record of financial distress, and (c) you cannot compare recordkeeping fees from random plans without demonstrating context for the fees in terms of the type or quality of services.  But the cases are not the be-all-end-all because the cases did not involve critical issues.  For example, CommonSpirit did not have the typical chart of random plans to prove excess recordkeeping fees; and plaintiffs in CommonSpirit mysteriously failed to allege a share-class claim, and the share-class claim in Oshkosh incoherently alleged that plan fiduciaries should seek higher revenue sharing share classes.  These omissions and mistakes by plaintiff lawyers show the limitations of tying our entire wagon on comparing plans to the plans and claims in CommonSpirit and Oshkosh.  There are too many unique facts in these cases, which gives results-oriented judges the ammunition to deny motions to dismiss if they want.  That appears to be what happened in the three Massachusetts cases.

We need a broader defense playbook beyond the motion to dismiss pleadings wars.  First, we need a fiduciary standard that only allows plaintiffs to sue when the complaint proves that the plan fees are egregious – well outside the universe of 95-99% of comparable plans.  We cannot allow a liability scheme in which plaintiffs can terrorize plan sponsors with fees above the median, because that is allowing lawsuits against any plan with active target-date funds [because the fees in most active TDFs are automatically above the ICI median].  The liability standard must expressly recognize that is not proof of imprudence simply if your plan has fees above the industry average or median.

Second, the Supreme Court held in Hughes v. Northwestern that “circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”  As Judge Easterbrook suggested in the remanded Seventh Circuit oral argument in the same case, a “range of reasonable fiduciary judgments” is the business judgment rule.  The business judgment rule provides a director or officer of a corporation with immunity from liability if the director was acting in good faith, with the care that a reasonably prudent person would use, and with the reasonable belief that the director is acting in the best interests of the corporation.  Applied to plan fiduciaries, it would provide a presumption that plan fiduciaries are acting in good faith unless there is proof of gross negligence or other misconduct.  We will continue to advocate for a business judgment rule for plan fiduciaries, as we need a more fair and uniform standard of conduct under ERISA.

It is simply unacceptable for two hospitals – one based in Ohio, and one based in Massachusetts – to choose the same exact investment options for plan participants at the same fee levels, but the fiduciaries for the Massachusetts hospital face serious damages for the exact same conduct.