Insights From Encore Fiduciary on Fiduciary Liability & Other Risk Exposures of Employee Benefit Plans


Insights From Encore Fiduciary on Fiduciary Liability & Other Risk Exposures of Employee Benefit Plans

A Deep Dive into the Hy-Vee Excessive Fee Case

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By Daniel Aronowitz

Iowa Court in the Hy-Vee Case Calls Out Credibility of Defense “Playbook” of Filing Indiscriminate Motions to Dismiss in Every Excessive Fee Case

Plan sponsors have had good recent success in excessive fee and performance lawsuits, with three federal circuit courts of appeal upholding motions to dismiss.  But before we start reaching any conclusions as to whether the tide has changed in the long war in excessive fee cases – and it has not – an Iowa court in Rodriguez v. Hy-Vee, Inc. (S.D. Iowa October 21, 2022) has applied the recent appellate case law and come to mixed conclusions on familiar claims of excessive investment and recordkeeping fees.  The federal court in the Eighth Circuit rejected comparisons of active investments against ICI Brightscope median averages for investment categories, but allowed excessive fee claims based on Form 5500 unreliable data compared to the typical Capozzi Adler chart of eight random large plans and misleading testimony in the Fidelity excessive fee case.  The Hy-Vee decision is a classic example of result-oriented jurisprudence that continues to plague excessive fee decisions notwithstanding some recent appellate success.

The case is worth a deep dive to learn how some courts will still give credence to claims that recordkeeping fees are too high based on weak circumstantial evidence and comparisons to random plans.  More importantly, the case is instructive because the court admonishes the defense bar for following a repetitive and indiscriminate “playbook” of filing motions to dismiss in every excessive fee case, regardless of the quality of the case.  Plaintiff law firms have already started to cite the court’s language in response to motions to dismiss in the BlackRock Lifepath investment performance cases.  The court’s admonishment is a reminder that the plan sponsor community loses credibility when we treat high-fee cases the same as low-fee cases and file amicus briefs in routine cases.  

To the extent that courts continue to reach disparate results on the same exact weak comparison benchmarks, we nevertheless understand that plan sponsors have no choice but to keep filing motions to dismiss in most cases.  But we should realize that the ultimate result in any dismissal motion continues to be a crapshoot and not based on any logic or coherent plausibility test.  Winning or losing appears more to do with what judge you draw or in what appellate circuit court the case is filed, and not based on whether your fees are actually excessive, or even whether the complaint has accurately depicted plan fees.  The judicial results fail to provide a consistent or coherent set of rules that plan sponsors deserve in managing retirement plans.

The Hy-Vee Excessive Fee Case

Capozzi Adler filed a lawsuit against Hy-Vee, Inc. on March 1, 2022 alleging that the $2.2 billion defined contribution plan for the grocery-store chain contained (1) unreasonable investment fees; (2) high total plan costs; and (3) excessive recordkeeping fees.  Notably, the complaint did not allege any claims of investment underperformance or that any investments were in the wrong or more expensive share class.  In fact, most of the investments were in low-fee collective investment trust vehicles, and, according to the defense, many of the actively managed investments appear to have performed very well against legitimate market benchmarks.

The first claim alleging unreasonable plan fees singled out seven of the thirty plan investment options and compared them to the ICI Brightscope median and average for each investment category.  For example, plaintiffs argue that the Vaughn Nelson/LA Capital/H&W Small Cap Value II Separate Account had an expense ratio of .68% in 2020, in contrast to the ICI median of .31% for small-cap value funds [including passive and active small-cap value funds].  

The second claim of excessive total plan costs compared the .56% total plan cost of the Hy-Vee plan as purportedly 154% higher than the .22% ICI average for plans with assets over $1 billion.  

Finally, plaintiffs allege a third claim of the “devastating effect of unchecked recordkeeping” fees of approximately $3.4 million from the Form 5500, which they divide by the number of participants to equal $64.98 per participant in 2020.  Plaintiffs allege that this should have been between $14 and $20, and certainly no higher than $35.  To support this excessive fee claim, plaintiffs cite the discovery stipulation in the Fidelity excessive recordkeeping fee case that its plan had a $14-21 value for recordkeeping fees, and a chart of seven random large plans with lower recordkeeping fees, including the Rite Aid and Deseret plans.

The Hy-Vee Decision

Hy-Vee is the first case to follow the heels of the Eighth Circuit’s ruling in Matousek v. MidAmerican Energy Company in which the federal appellate court upheld the dismissal of an excessive fee lawsuit filed by the same Capozzi law firm alleging very similar excessive investment, total plan, and recordkeeper fees against Hy-Vee.  In fact, the recordkeeping fees in Matousek v. MidAmerican Energy Co. were alleged to be even higher than the Hy-Vee plan:  $3.0m in total per year, or $525 per participant in that case, for a plan with significantly less participants (5,977) and less assets ($1.1b).  The Hy-Vee district court dismissed the investment total plan excessive fees claims for failure to provide a meaningful benchmark, but granted the excessive recordkeeping fee claims on the grounds that plaintiffs had provided meaningful benchmarks from the Fidelity case and the chart of random large plans.  

As a threshold matter, the court held that the Eighth Circuit has held that benchmark analysis may be performed at the motion to dismiss stage before discovery.  The court’s ruling breaks down into five key principles.  The investment fee principles make sense to us, but the recordkeeping principles do not, mainly because they do not follow how the Eighth Circuit ruled in the MidAmerican case notwithstanding very similar claims.

 1. To Evaluate Context-Specific Plausibility Under Hughes v. Northwestern, Courts Must Go Outside the Pleadings to Place Excessive Fee Claims in Proper Context.  

To start its analysis, the court held that district courts in the Eighth Circuit can look at matters outside the pleadings “if those matters are necessarily embraced by the pleadings.”  It is appropriate in ERISA cases “because it ensures the plaintiff’s factual allegations – which are accepted as true – are being considered in the proper context to determine whether they state a plausible claim for relief.”  (emphasis added by Euclid). 

This is a key issue, because as we will show below with respect to the alleged excessive recordkeeping fees in the Hy-Vee plan, plaintiffs used inflated and misleading data from the Form 5500 – a tactic used in nearly every excessive fee lawsuit.  Specifically, plaintiffs are alleging that the Form 5500 fee amount is an accurate recordkeeping fee, but it is not.  The court’s ruling to evaluate evidence outside the complaint is critical, because it should inform all defense counsel that they must ask for judicial notice of the actual recordkeeping contract and fee disclosures in order to rebut the false and misleading recordkeeping claims being filed in nearly every case.  It makes the difference between losing and wining the motion to dismiss with respect to excessive recordkeeping fee claims.  That is how the defense won the MidAmerican case, and caused the court to look past the fabricated $525 per participant recordkeeping fee and rely on the fee disclosures that showed a more reasonable $34-37 recordkeeping fee – a dramatic 95% difference from the distorted claims in the complaint.  Not to belabor the point, but the key takeaway from the MidAmerican decision in the Eighth Circuit is that courts can ignore the Form 5500 recordkeeping fees alleged in excessive fee lawsuits and use the accurate and truthful fee disclosures mandated by the Department of Labor.

Judicial notice of accurate fee data also applies to instances when total plan or investment fees are misstated.  Leading ERISA law firms are doing an excellent job of highlighting the recent victories for plan sponsors, but the full context of the recent results is lost when cases in which plan sponsors are losing are ignored.  One such case pending in the Ninth Circuit is Klawonn v. Board of Directors for the Motion Picture Industry Pension Plans, CV-20-9194-DMG in which the plan lost its motion to dismiss the second amended complaint on September 27, 2022, after previously prevailing in an earlier motion to dismiss a prior complaint.  In support for her argument that the investment pool over-relied on investments with excessive fees, plaintiff in the Motion Picture case asserts that in 2017, the average plan with over $1 billion in assets had a total plan cost of 0.26% annually, yet alleged that the Motion Picture Plan with approximately $5 billion in assets charged average fees of 1.18% annually (or, $60 million annually)— alleging that it is one of the five most expensive large plans in the country.  That sounds really bad, until you learn that the claim is false.  The defense asked the California court to take judicial notice of the plan financials providing that the all-in plan fees, including plan administration and investment fees, were less than one-half of the 1.18% alleged in the complaint.  The actual plan fees in the publicly-available financials are approximately .55% – the same total plan fees as the CommonSpirit case in which the Sixth Circuit upheld a motion to dismiss the excessive fee complaint.  In other words, the complaint is alleging a fabricated level of fees, but the court accepted what the plaintiffs alleged in the complaint as true, and declined to look at the publicly available plan financials – the most rudimentary evidence of actual plan fees.  The plan was prejudiced by the false fees alleged in the complaint and lost its motion to dismiss because the court refused to look beyond the complaint.  Plan sponsors are denied justice when courts allow false claims that violate the basic duty of candor owed by all lawyers to the judicial system.

2. The ICI Brightscope Study is Not a Meaningful Benchmark to Evaluate Excessive Investment Fees of Specific Investments

As noted above, the ICI Study was the only benchmark plaintiffs cited to support their claims that Hy-Vee fiduciaries breached their fiduciary duties by allowing the plan to include investment options with excessive investment management fees.  Some courts have allowed excessive fee complaints based on the ICI Study (see Davis v. Magna Int’l of Am., Inc. and Pinnell v. Teva Pharms. USA, Inc.), whereas other courts have held that the ICI Study median expense ratios are not  meaningful benchmarks (see Parmer v. Land O’Lakes, Inc. and Rosenkranz v. Altru Health Sys.).  Following the MidAmerican decision, however, the court held that the Eighth Circuit precedent requires an investment-by-investment analysis of whether the ICI Study is an appropriate benchmark, as opposed to a categorical conclusion.  According to the Hy-Vee court, the ICI Study is not reliable for evaluating fees for at least two reasons.  First, the ICI Study calculates the median expense ratios without differentiating between active and passively managed mutual funds even though active funds are more expensive.  Second, the ICI Study does not have data on investment management fees for collective investment trusts and pooled separate accounts used in the Hy-Vee plan.  These points are obvious, but unfortunately not obvious to all federal courts.    

3. Excessive Investment Fee Claims for Active Funds Must Be Counter-Balanced by the Context of Performance.

The Hy-Vee complaint focused entirely on fees without any mention of performance.  The court noted that the reason was because most of the seven funds “performed at a high enough level relative to benchmarks to more than counterbalance the allegedly excessive fees.”  This means that plan participants were “better off by having those funds as options than they would have been with a benchmark fund that charged investment management fees at the ICI Study median.”  The court does not explain where it gets the performance data, but it was not in the complaint.  This is thus another example of where a court needs to take judicial notice of evidence outside the complaint in order to conduct the Hughes v. Northwestern context scrutiny to determine whether a complaint is plausible.  The context of performance was valuable, as the AB Small Cap Fund, for example, had a 22.01% three-year annual return – almost four percentage points higher than a benchmark fund even though it has a .65% management fee.  Similarly, a participant would have been “worse off” to switch out of the Capital Research New World Fund at .60%, which had a three-year annual return of 11.99% – five-and-one-half percentage points higher than the 6.48% annual returns for its comparable-fund benchmark.  As the court states, “[a]fter all, a reasonable investor presumably would pay higher fees in exchange for even higher returns.”  The excellent performance undermined any purported claim of fiduciary imprudence in choosing active funds.  While many active funds do not beat their benchmarks, this court demonstrates how to evaluate fiduciary imprudence claims with context-specific scrutiny as required by the Supreme Court’s plausibility standard.  

4. In Direct Contrast to the Eighth Circuit in MidAmerican That Used the More Accurate Fee Disclosures, the Hy-Vee Court Accepts the Form 5500 Recordkeeping Fee Number Even Though it is Inflated by Irrelevant and Misleading Transaction Fees.

While the analysis of the investment imprudence claims rejected the weak comparisons to ICI median averages, the court’s analysis of the recordkeeping claims was disappointing.  The complaint is the standard Capozzi claim of the “devastating effect of unchecked recordkeeping fees,” using the Form 5500 number attributed to Principal of $63.46 and $67.20 per participant after dividing by the number of participants.  The only real difference from the typical Capozzi template is they did not provide a comparison to the 401k Averages Book for small plans in which Capozzi lawyers attempt to mislead courts by intentionally omitting the significant amounts of indirect revenue sharing used by the vast majority of small plans.  Instead, Capozzi attempts to benchmark the purportedly high fees by comparing to the Fidelity $14-21 discovery stipulation in a prior case, and their typical chart of seven large plans with recordkeeping and administration costs that compute to between $21 and $34.  The plans in the chart range from the smallest $2.6B plan (the Rite Aid 401k plan = $30/participant) to the largest $10.9B Dow Chemical Plan ($25/participant).  

The Plan defendants argued that the actual amount of the recordkeeping fees is actually $43.27 per participant because the plan fee disclosures show that Principal charged  .10% asset-based fee [down from .11%].  The defendants took the $2.3B assets in the plan, multiplied it by 10 bps [equal to .001], and then divided by the 52,543 number of participants.  Curiously, the court accuses the defense of a mathematical error in computing the average per participant recordkeeping fee, asserting that the defense lawyers improperly multiplied by .01 instead of .001.  But we did the same math as the defense, and came to the same number as defense counsel.  The court takes the position that there is a dispute as to the amount of the recordkeeping fee, but this is a manufactured dispute, which has been worsened by the court’s own math errors.  

The court also appears to misunderstand the purpose of the participant fee disclosures mandated by the Department of Labor.  The recordkeeping fee is .10%, and there is nothing that plaintiffs have to dispute this.  It is what it is.  What the court misapprehends is that the Form 5500 amount cited by the Capozzi lawyers of $3.4B contains transaction costs that inflates the actual amount of fees collected that relate just to recordkeeping fees [.001 times $3.4B = $2.27m – not the higher $3.4 million].  The $1.13m differential equals transaction costs that do not constitute recordkeeping fees.  The Eighth Circuit in MidAmerican, with little fanfare, breezed past the $525 per participant calculation by Capozzi lawyers from the Form 5500 and used the fee disclosures that showed the actual recordkeeping fees.  Why the Hy-Vee ignores the fee disclosures is mystifying.  

The court refuses to accept the defense’s position on the amount of recordkeeping fees because of purported math errors, and that this type of math would require calculations and assumptions that are not appropriate on a motion to dismiss.  But the only reason math is required is because the recordkeeping fee is on a percentage of asset basis, and not on a flat, per-participant basis.  The court misses this obvious point, and thus “accepts as true” that the recordkeeping fees are the inflated $63 to $67 per participant alleged by plaintiffs from the Form 5500 that includes extraneous fees.  

The court then exacerbates its misunderstanding of the Form 5500 and fee disclosures by next deciding that the Capozzi chart of seven random plans is somehow persuasive as a benchmark.  The court reasons that it is not seven random plans out of the entire 600,000+ universe of plans, but rather seven plans out of the much smaller universe of .1% of all retirement plans – the 600-750 mega-sized plans – and is thus relevant data.  The court rejected the defense argument that the seven plans are different in size, because it is “inconsistent for Defendants, on the one hand, to criticize Plaintiffs for not picking the right comparators from the limited universe (0.1%) of large 401k plans with more than $1 billion in assets and 10,000 participants, yet also criticize them for not picking enough comparators based on the entire universe of 401(k) plans, the overwhelming majority (99.9%+) of which are fall smaller than the Hy-Vee Plan.”  Based on this reasoning, the court ruled that plaintiffs had done enough to “nudge their pleading across the plausibility line” comparing $64-67 to the $21-35 in the comparator plans.  But again, we must emphasize that unlike the MidAmerican court, the Hy-Vee court misunderstands that the Form 5500 is not an accurate depiction of recordkeeping fees because it includes extraneous transaction costs, and thus any comparison to the seven random plans without transaction costs is not a fair apples-to-apples comparison.  This is the argument the plan sponsors need to make in every excessive fee case based on inflated Form 5500 data.

5. The Hy-Vee Court Rejects the Typical Argument that Plaintiffs Failed to Compare Services of Comparison Plans to the Hy-Vee Plan, accepting the premise that recordkeepers offer the same set of services to all large plans.

The Hy-Vee next deviates from the Eighth Circuit’s decision in MidAmerican, as well as the Sixth Circuit in CommonSpirit and the Seventh Circuit in OshKosh by ruling that plaintiffs do not have to plead that the actual recordkeeping services in the Hy-Vee plan are comparable to the services in the seven comparator plans.  Instead, the court held that it “must accept as true the Complaint’s allegation that all recordkeepers in large plans provide the same range of services.”  We believe this is the next frontier of excessive recordkeeping claims in which plaintiffs assert that all recordkeeping services for large plans are essentially the same.  Plan sponsors have won on this services issues in multiple cases recently, but plaintiff firms are essentially calling the bluff of plan sponsors on this issue.  It will be interesting to see how this plays out, because we have rarely seen a persuasive argument that the recordkeeping services for mega plans are actually different.    

The court states that its decision not to require a comparison of recordkeeping services is not “contrary” to the recent Eighth Circuit’s decision in MidAmerican.  We do not understand the difference between the two cases, but will summarize the court’s reasoning:

According to the Hy-Vee Court, “[i]n Matousek, the defendants gave the Court enough information to allow it to identity the types of services provided by the recordkeeper and calculate the approximate fees for each type.”  The court summarized the Eighth Circuit evidence from the defendants as “using participant-disclosure forms to calculate fees of $32 to $48 per participant for ‘basic recordkeeping services.’”  The court then compared the fees for those services to the “industry-wide benchmarks proffered by the plaintiffs, concluding the plan in question ‘compares favorably’ to the benchmarks once an apples-to-apples comparison was performed.”  The court continues:   

“Unlike Matousek, Defendants here have not given the Court enough information to understand the difference (if there is one) in the scope of recordkeeping services provided in connection with the Hy-Vee Plan versus those provided in the proffered benchmarks.  In other words, Defendants have given the Court no reason to doubt the plausibility of Plaintiff’s allegation that ‘all’ recordkeepers in large 401(k) plans provide the same suite of recordkeeping services, and thus the Hy-Vee Plan paid too much . . . Moreover, Plaintiffs here filled a gap identified by the Eighth Circuit in Matousek by offering evidence of ‘the fees paid by other specific, comparably sized plans.’”  

The analysis of the Hy-Vee court with respect to recordkeeping fees is troubling.  The Hy-Vee goes to great length to distinguish the two cases, but they are virtually the same.  If anything, the distortion of the Form 5500 data in MidAmerican was more obvious because the Fidelity fee disclosures in MidAmerican gave exact per-participant fees that were actually paid by each participant.  By contrast, the Hy-Vee plan had a percentage of asset (.10%) fees, which means that each participant pays something different.  We note that Hy-Vee is a grocery store, which means that most employees likely stay at the company for a short period of time, and most employees have low balances.  And a percentage of asset fee often makes sense for plans with a high participant count and low average balances.  We calculate the average account balance at approximately $43,000 – hence the approximate $43 per participant charge that the defense proffered to the court [.10%] and which the court erroneously derided as inconsistent and mathematically incorrect.  The Hy-Vee court was either just plain wrong, or it was going to great lengths to justify its result-oriented decision to allow the complaint to proceed.  

We want to show the comparison of the MidAmerican Complaint in a chart to prove our analysis more clearly that the cases are very similar, and that it makes no sense for the Iowa court to rule differently than the Eighth Circuit:

Number of Participants Asset Size Recordkeeping Fees on the Form 5500 Fee Disclosure Amount Benchmarks Used by Capozzi Adler
MidAmerican 5,977 $1.1B $3,139,139 (from 2018 Form 5500) Merrill Lynch Fee Disclosure of $32 to $48 = $191,264 to $286,896 – Form 5500 overstated by approximately $2.8M in transaction fees 401k Averages Book; NEPC Survey; and citations to plaintiff experts in the Boeing case and settlement in the Mass Mutual Case requiring RK fees no higher than $35
Hy-Vee 52,543 $2.2B $3,412,679 [from Form 5500] = $64.95 per participant .10% = $43.00 per participant [from recordkeeper’s DOL-mandated fee disclosure]/Total RK fees = $2,200,000/Form 5500 number includes $1.2m+ of transaction fees Fidelity Discovery Stipulation of $14-21;

Seven Random Large Plans over $1b with fees between $21-34 using Form 5500 data

The Hy-Vee Court worked hard to distinguish the MidAmerican case, but the only real difference in the cases is that Capozzi Adler in MidAmerican did not use its typical chart of seven random large plans as a purported benchmark.  Missed by the Hy-Vee court, the other difference is that the MidAmerican plan had a fee disclosure that revealed a low $34 flat, per-participant recordkeeping fee, whereas the Hy-Vee plan had a percentage of asset fee, but which was also low.  There are no other material differences.  But when you compare the cases closely, the key point missed by the Hy-Vee court (and from what we can tell, not argued in the motion to dismiss by defense counsel) is that the Form 5500 recordkeeping fee amount contains transaction costs that must be deducted in order to compare recordkeeping fees fairly.  The MidAmerican court got this crucial difference, but the Hy-Vee court did not.  This is the key point that must be argued by defense counsel in every case, and their clients risk losing without it.  

Here is the Capozzi recordkeeping chart from the MidAmerican complaint:

Participants Direct Indirect Total $PP
2014 5791 $1,820,464.00 $68,382.00 $1,888,846.00 $326.17
2015 5829 $2,006,540.00 $177,001.00 $2,183,541.00 $374.60
2016 5811 $2,340,578.00 $162,990.00 $2,503,568.00 $430.83
2017 5787 $2,557,363.00 $211,674.00 $2,769,037.00 $478.49
2018 5977 $3,028,860.00 $110,279.00 $3,139,139.00 $525.20


Using 2018 as the data point, the MidAmerican court did not use the $525.20 per participant charge alleged by Capozzi.  They ignored it completely.  Instead, they used the $37 per participant number from the fee disclosure.  What is the difference between Capozzi’s exaggerated $525.20 per participant and the $37 correct number used by the court?  The difference is transaction costs.  The MidAmerican court summarized it this way:

“So what about those larger numbers in the complaint? A portion are indirect “revenue-sharing payments,” which account for no more than $37 per participant per year. The remainder appears to come from what Merrill Lynch received from its other, non-recordkeeping services: investment advice for those with self-directed brokerage accounts; commissions for individual trades; and trading, loan-origination, returned-payment, and check-service fees. Each is ‘charged against the account of [individual] participant[s] . . . rather than on a [p]lan-wide basis.’”  [emphasis added by Euclid].

The MidAmerican Court used the proper fee disclosure number for recordkeeping fees and did not use the Form 5500 because the Form 5500 number is inflated by transaction costs.  The Hy-Vee Court ignored this crucial analysis in reaching a results-oriented conclusion that the complaint plausibly alleged high recordkeeping fees.    

The Euclid Perspective

The primary take-away from the Hy-Vee decision is that the judicial results of excessive fee lawsuits are still a crapshoot.  Plan sponsors win some motions to dismiss and lose others with no coherent rationale from case to case.  Most concerning from our perspective, is that there is no predictive explanation as to when a plan sponsor will win or lose any individual case.  For example, MidAmerican was alleged to have higher fees than the Hy-Vee plan, but MidAmerican won in both the district court and appellate court.  By contrast, Hy-Vee, with recordkeeping fees less than one-half of the MidAmerican plan, lost its recordkeeping fee case.  

The results-oriented decision in the Hy-Vee case is disappointing because the district court was supposed to follow the Eighth Circuit’s MidAmerican decision.  But now Hy-Vee fiduciaries will have to spend millions of dollars in defense costs before they can appeal to the Eighth Circuit and right this wrong.  Given the cost of a defense, they likely will never get to an appeal and will be forced to settle to eliminate litigation risk.  That is why a fair and consistent plausibility standard is so critical.  

Before we end, we want to address the issue of credibility.  The Hy-Vee court took the effort to address the arguments of the defense and the Chamber of Commerce in its amicus brief that plaintiff law firms file too many illegitimate class action lawsuits:

“Defendants inconsistency is troubling.  Defendants and Amicus Curiae argue that there are too many ERISA breach of fiduciary duty lawsuits being filed across the country, most or all of which are simply cut-and-paste jobs in which plaintiffs’ counsel cherry pick a few data points from a particular plan but otherwise rely heavily on boilerplate allegations.  As Amicus Curiae puts it, the ‘complaints typically follow a familiar playbook, often loaded with legal conclusions but few factual allegations specific to the plan at issue.’  These are legitimate concerns!  But they are undermined by the fact that defense counsel are obviously following a “playbook,” too, in which, as far as the Court can tell, they indiscriminately file motions to dismiss in every case and have no qualms (at least her) about raising internally inconsistent arguments in the process.  Defendants are, in effect, asking courts on a one-by-one basis to adopt a categorical approach to ERISA breach of fiduciary duty lawsuits despite the Supreme Court’s conclusion that such categorical approaches are inappropriate.”  (citation of Hughes v. Northwestern) [emphasis added by Euclid].

Miller Shah has already cited this language in its responses to motions to dismiss in the BlackRock LifePath cases. 

We have long warned that plan sponsors have a Northwestern credibility problem.  The problem is that the ERISA defense bar has filed motions to dismiss in nearly every excessive fee case, treating high-fee cases like the original university lawsuits from 2016 the same as low-fee cases.  Defense firms filed motions to dismiss, for example, in every university case even though most of the university defined contribution plans had problematic fact patterns of uncapped revenue sharing and retail share-class investments from an affinity recordkeeper.  The motion to dismiss tactic worked in a few university cases, but most of the cases were lost and we ended up with case law across the country developing a plausibility pleading standard based on poor fact patterns.  The Supreme Court’s decision in Hughes v. Northwestern is the poster-child for case law based on problematic plan fees.  

No plan sponsor lawyer will admit it, but the fees in the CommonSpirit [approximately 55 bps for a $3b+ plan] and Oshkosh cases [20 bps of investment revenue sharing and similar 55 bps all-in plan fees] are well above average of similar-sized large plans – even higher than an average $1B+ plan that includes active target-date funds as the QDIA [again, because of the use of retail share classes when the investment manager offered lower-fee share classes of the same investment].  Both cases appear to have included high-fee retail share classes, and the only reason that did not trip up the defense is that the plaintiffs mysteriously failed to allege the more viable retail-share class claim in those two cases.  The defense won the cases and established excellent precedent that will help all plan sponsors, but plaintiff law firms will not make these significant mistakes in future cases.  In other words, the motion to dismiss strategy worked in those two cases, but that does not mean it will work in future cases involving the same fact pattern of retail-share classes.  The TriHealth case, which allowed retail share class claims to survive a motion to dismiss, proves the point.  We further note that the Oshkosh case did not include a retail share class or investment underperformance claim, which will likely be relevant when the Northwestern case is argued on November 29 in the Seventh Circuit.

The problem is that many of the current wave of cases are challenging lower plan fees and plans that have made changes to lower investment fees.  The most concerning set of cases is the illegitimate challenges to the purported performance of BlackRock LifePath index target-date funds.  We need the motion to dismiss tool to work in the BlackRock cases.  But if the defense strategy has been diluted by the lack of credibility of filing a motion in every case, as the Hy-Vee court appears to suggest, that would be very disappointing.  

The same goes for amicus briefs.  We need to hold our powder dry and reserve our credibility for the low-fee and illegitimate cases like the BlackRock cases.  Plan sponsors should not be filing amicus briefs in cases with high fees or cases that are not critical to the big picture. 

In conclusion, plan sponsors now have excellent appellate court precedent in three different cases.  But the Hy-Vee decision demonstrates that some courts will still allow weak claims of excessive fees based on misleading circumstantial evidence.  Our work is not done until we have a coherent and fair plausibility pleading standard so that every plan fiduciary knows the fiduciary standard to which they will be judged.

Disclaimer:  The Fid Guru Blog is intended to provide fiduciary thought leadership and advocacy for the plan sponsor community in areas of complex fiduciary litigation.   The views expressed on The Fid Guru Blog are exclusively those of the author, and all of the content has been created solely in the author’s individual capacity.  It is not affiliated with any other company, and is not intended to represent the views or positions of any policyholder of Encore Fiduciary, or any insurance company to which Encore Fiduciary is affiliated.  Quotations from this site should credit The Fid Guru Blog.  However, this site may not be quoted in any legal brief or any other document to be filed with any Court unless the author has given his written consent in advance.  This blog does not intend to provide legal advice.  You should consult your own attorney in connection with matters affecting your legal interests.

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