By Daniel Aronowitz
Key Points
(1) Plaintiffs are seeking a pleading standard that allows them to state a share-class excess fee case even when the claim is objectively false. Why? Because they know that any case that proceeds to discovery has a 95%+ chance of a settlement.
(2) The key question in the case is whether a court in ruling on a motion to dismiss can consider documentary evidence referenced in the complaint, like the actual recordkeeping contract, to rebut inaccurate fees alleged in the complaint.
The Tenth Circuit Court of Appeals held oral argument on May 17, 2023 in Matney v. Barrick Gold of North America, Inc., an excess fee case filed by the Capozzi Adler law firm. The case alleges that the fiduciaries of the Barrick Gold plan committed fiduciary malpractice by choosing a higher fee retail share class when a 10 bps lower fee share class was available. But the claim is false. The contract with JP Morgan negotiated by Barrick Gold fiduciaries required a 15 bps revenue-sharing credit to participants, making the chosen share class 5 bps cheaper than the share class plaintiffs claim would have been more prudent to select.
As we have described in two different Fid Guru Blog Posts [see ICI Defends Revenue Sharing and Higher-Fee Share Classes in the Tenth Circuit Barrick Gold Case and CentraCare and Barrick Gold – When Identical Investments and Fees Yield Different Judicial Results ], the key significance of the Barrick Gold excessive fee case is that the district court used evidence outside the misleading complaint to dismiss the case – namely the recordkeeping contract that required a 15 bps revenue sharing credit back to participants. The revenue-share credit demonstrated that the recordkeeping and investment fees in the complaint were inflated and inaccurate. At least three pending cases have this exact fact pattern.
There is no real factual dispute in the case. As Barrick Gold’s defense counsel described, there is “concrete evidence” that the share class chosen by the plan was cheaper because of a documented discount. Even plaintiffs admit that discovery may show that their claims are invalid. Then why do plaintiffs assert a claim that may turn out [and is] false? Because this is a litigation tactic used in most excess fee cases. The plaintiffs’ bar knows that discovery costs millions of dollars, and 95%+ of all excess fee lawsuits – even when the plan did not pay excess fees – will settle for significant sums and will not be resolved on the merits. Plaintiffs just have to get past the motion to dismiss and send the case into discovery so that they can leverage a settlement.
The Barrick Gold case is critical because it presents a chance for the Tenth Circuit to draw a line in the sand. Are plaintiffs allowed to manufacture a factual dispute to survive the pleading stage, or can defendants use Department of Labor required fee disclosures or the actual recordkeeping contract to disprove the excess recordkeeping claims? This is one of the most pivotal questions in excess fee cases.
The Chamber of Commerce and the Investment Company Institute have predicted in amicus briefs that this unfairness will cause companies to stop offering discretionary retirement plans, and will otherwise stop offering diverse investment menus with active funds. The Tenth Circuit dismissed this as “speculative.” But what is not speculative is that unless the Tenth Circuit stops this charade, the injustice to plan fiduciaries will continue. The following shows how plaintiffs play the game in asserting claims that are factually incorrect, and then back them up with deceptive evidence from small plans on the pretense that somehow small plans pay less fees – an assertion that is categorically false.
The Barrick Gold Excess Fee Case
The excessive fee lawsuit against Barrick Gold was originally filed in 2020 by the prolific Capozzi Adler law firm, who filed over forty of the over 100 excessive fee cases filed in that year. The Barrick Gold 401k plan had 4,858 participants in 2018 with $560m in assets, down from $619m in 2017 because of the 2018 market losses. After the defense filed a motion to dismiss demonstrating that the Barrick Gold lawsuit was a “cut and paste copy of a complaint filed a week earlier” in the Eastern District of North Carolina against Pharmaceutical Product Development, LLC, the Capozzi firm quickly filed an amended complaint. The amended complaint alleged five excessive fee claims that are common parts of the Capozzi excessive fee lawsuit template, including that plan fiduciaries failed to utilize lower-fee share classes. For example, the JP Morgan Smart Retirement R5 target-date funds ranged in fees from .55-.57%, whereas the R6 share class had a lower .44-.47% fee. The difference between the R5 and R6 share classes was ten basis points in most instances.
On April 21, 2022, the Utah District Court granted the motion to dismiss the First Amended Complaint with prejudice, primarily because plaintiffs ignored the 15-basis point revenue sharing credit back to participants. The court rejected plaintiffs’ comparison of the retail-class R5 share class of the JP Morgan TDFs with the lower-fee, but allegedly “identical counterparts” R6 share class. The court held that the comparison to the lower-fee R6 share class was “problematic” because it “relies on incorrect information about actual fees paid by the Plan’s participants.” After the court accounted for the 15-basis-point revenue credit that the plan fiduciaries negotiated for the JPMorgan funds’ R5 share class, the Plan’s expense ratio for each JPMorgan R5 fund was actually less than the R6 funds’ expense ratios upon which Plaintiffs rely. Importantly, the court cites in footnote 11 of the opinion to the Trust Agreement and the 2018 Form 5500 in order to validate that the plan implemented a revenue credit that was not alleged properly in the amended complaint.
The court went outside the complaint to evaluate the actual fees. It did not accept the faulty fee claims by the Capozzi law firm or allow any argument that there is a “factual dispute” that must be litigated in expensive discovery. The court also rejected plaintiffs’ excessive recordkeeping fee claims based on unsuitable comparisons and unsupported speculation that Fidelity did not credit the revenue sharing payments. The court rejected that assertion as implausible given that the amendment in 2017 to the trust agreement required Fidelity to allocate amounts collected from revenue sharing, including that $600,00 to eligible participant accounts. The court did not allow the rank speculation by the plaintiff lawyers to create a false issue of fact – it accepted the documentary evidence from the defense at the pleadings stage.
First Issue: Is it an automatic fact question when the prudence of revenue sharing is challenged in an excess fee complaint? At the oral argument on appeal, Plaintiffs argued that this is a case of first impression in the Tenth Circuit – the first time the court has considered a share-class claim in which the defense is based on revenue sharing. They assert that whether revenue sharing is a prudent model is an automatic fact question. Plaintiffs assert that “[defendants] may be correct in the end” that the revenue sharing model reduces the overall expense, but take the position that a court “cannot get into the reasoning at the pleading stage.” Plaintiffs only need to show a difference in share classes, the argument goes, and then the parties can “figure it out in discovery.”
The defense lawyer for Barrick Gold was more polished and effective in explaining his client’s position. The appellate court immediately asked the defense lawyer how this case is different from Hughes v. Northwestern or the excess fee case against Salesforce in which the Ninth Circuit held that the revenue sharing defense must be litigated. His response was that the Hughes and Salesforce cases lacked documentary evidence demonstrating how the revenue sharing reduced the fees. What is “unique about the [Barrick Gold] case” is the documentary evidence of a ”concrete discount” that reduced the investment fee by .15%. The claim that it was imprudent to choose the R5 share class when there is a 10 bps lower fee for the R6 share class is false, because the trust document requires a .15% fee reduction that make the R5 share class cheaper.
As this shows, the key issue then is whether, at the pleading stage, a court can consider the recordkeeping contract, which shows that the revenue sharing discount reduces the overall fee. Without reviewing the contract, plaintiffs have the license to misrepresent the fee arrangement.
Second Issue: Did Plaintiffs state a plausible case for excess recordkeeping fees? Plaintiffs make two arguments that the recordkeeping fees were excessive and thus imprudent. First, plaintiffs use the 401k Averages Book to argue that the recordkeeping fees were too high because the Barrick Gold plan supposedly paid more than small plans cited in the book. The complaint cites to a page in the 401k Averages Book that shows that one small plan only pays $5m in direct recordkeeping fees. But plaintiffs intentionally leave out that the same small plan pays over $160 in indirect recordkeeping fees. The overall fee is $165, not $5. With this deception, plaintiffs argue that larger plans should pay less than smaller plans. Plaintiffs also argue that Barrick Gold never conducted a request-for-proposal for recordkeeping fees. [Again, this is pure speculation, as plaintiffs have no clue who advised Barrick Gold and whether they did a RFP or benchmarking. But again, that is the whole point: plaintiffs do not care about the truth – it is all about getting past the motion to dismiss, triggering the 95%+ chance of a profitable settlement.]
In response, the defense lawyer for Barrick Gold argued that both the Sixth Circuit in the CommonSpirit Health case and the Eighth Circuit in the MidAmerican Energy case had rejected the facile and misleading comparison to the 401k Averages Book. Those courts held that, to make out an excess recordkeeping fee case, participants would need to contrast the recordkeeping services in two comparable plans. Specifically, plaintiffs need to show that the contested plan paid more for similar services. Barrick Gold argued that in this case, plaintiffs had merely “slapped on a label as ministerial,” but the biggest difference in services was the level of participant education. The defense lawyer argued that “sometimes bigger plans offer better services,” and that costs more, not less.
More importantly, the defense argued that plaintiffs were misrepresenting the 401k Averages Book by “looking at the wrong number.” The $5 fee for administrative services did not include the $160+ indirect fee paid by the small-plan participants. In other words, the 401k Averages Book shows that small-plan participants pay more, not less, than participants in the Barrick Gold plan. The defense lawyer was diplomatic, but what he demonstrated is that the Capozzi lawyer for the plaintiffs had intentionally mispresented the data in the 401k Averages Book to support an invalid argument that Barrick Gold paid more than the small-plan average.
The panel then asked the defense lawyer why this case is different from Hughes and Salesforce? The answer was that that those cases involved a “speculative general argument,” whereas the Barrick Gold case has a key difference in that the plan has documentary proof that revenue sharing reduced the fee. The defense argued that the plan documents “showed what occurred in fact” – that the .15% discount “made it cheaper.”
A Critical Nuance: The court then asked how the revenue sharing was applied. This gets to the issue of whether plaintiffs have raised a fact issue as to whether the revenue sharing actually reduced the investment fees. This is where the defense might have an issue for earlier years, because the defense lawyer conceded a “nuance.” In 2017, Barrick Gold moved to a fixed, per-participant recordkeeping fee. That means that any revenue sharing after 2017 cannot change what participants pay for recordkeeping. Given the fixed fee, the .15% rebate was a direct discount to the plan, and the R5 share class was cheaper than the R6 share class. Prior to the fixed recordkeeping fee in 2017, however, the defense has a harder argument. For this, they rely on the argument that plaintiffs have not proven with meaningful benchmarks that the recordkeeping fees were excessive. But this pre-2017 nuance is problematic, because if plaintiffs have a potentially legitimate concern that it is not proven before 2017 that the revenue sharing was discounted to the plan.
In rebuttal, plaintiff’s lawyer argued that in 2017, the recordkeeping fee dropped from $100 to $68. Plaintiffs asked rhetorically “why the big drop?,” and answered his own question that this suggests a breach of fiduciary duty.
The Euclid Perspective
Why does the Barrick Gold case matter so much to plan sponsors? It matters because plaintiffs in cases of documented revenue-sharing rebates are pleading false facts that are contradicted by the plan contracts. They are alleging excessive fees based on a false claim that the retail share class is more expensive than the wholesale share class. That may be the situation for other plans, like the claims in Hughes v. Northwestern involving an obsolete investment arrangement, but it is not the case for the Barrick Gold plan. Similarly, it might have been the situation in the SalesForce plan, but it was not the case in the Traders Joe’s plan when defense counsel submitted an affidavit proving that the recordkeeping fee was fixed like the Barrick Gold plan. Plaintiffs are taking the categorical position that any revenue sharing defense cannot be asserted at the pleading stage. If plaintiffs are allowed to sue in this case notwithstanding the revenue-sharing rebate, then it opens the door for an excess fee case against every single plan that utilizes revenue sharing – even when the revenue sharing makes it cheaper for plan participants.
We know the argument that plan sponsors can defend their process in litigation. But this is not an effective answer for at least two reasons. First, it costs millions of dollars to defend these cases. The cost of ERISA defense lawyers is astronomical, and the few experts who specialize in these cases charge even higher. The Chubb infographic published this month highlights a case in which $5 million was spent in the pleadings stage for a case the defense won. In our experience, with the asymmetrical discovery burden on plan sponsors, it costs $8-13 million to try an ERISA excess fee case.
Second, we hear repeatedly from plan sponsor lawyers and advocates that the excess fee cases will end if plan sponsors litigate more cases to conclusion. The logic is that if we force plaintiff firms to litigate, then they will stop bringing cases. The best explication of this argument is the May 8, 2023 Boston ERISA & Insurance Litigation Blog authored by Wagner Law Group’s Stephen Rosenberg: There Is a Time-Tested Way to Reduce Excessive Fee Litigation Against Plan Sponsors But this argument misses the fact that it is very difficult to win summary judgment, and the few cases in which defendants have won summary judgment have prevailed not on the merits, but on causation [see the Home Depot case]. And then the few trials have demonstrated that it is very difficult to prove a prudent process. Judges in these case are demanding an impossible and unrealistic level of fiduciary diligence. Many of the employees who were involved in the plan administration have moved on to different jobs, and witnesses have a hard time answering complex investment questions in discovery. Even when the defense wins at trial, like in the New York University case, there is still the risk of an appeal to bring it all crashing down. And it still costs millions of dollars to try these cases.
In sum, it is not an answer that plan sponsors can vindicate themselves in the defense of meritless cases. There are dozens of examples of high settlements in cases without merit [see the Costco and Walgreens settlements as just two examples]. We must have a system that weeds out illegitimate cases before the plaintiffs’ bar can leverage settlements, as there is a real cost to defend these cases even when you are right. And the key to resolving many excess fee cases at the pleadings stage is to allow documentary evidence of the actual recordkeeping and investment fees, not the inaccurate fees alleged in cases like Barrick Gold.
Second, the Barrick Gold case matters because a prolific plaintiffs’ law firm continues to peddle and misrepresent deceptive “evidence” like the 401k Averages Book and the Fidelity $14 discovery stipulation. Plaintiffs want a fact question for any claim based on revenue sharing, and support their claim by leaving out the substantial revenue sharing in the 401k Averages Book paid by most small plans. The plaintiff law firm in Barrick Gold is intentionally deceiving the court by omitting the vast majority of indirect revenue sharing fees paid by participants in small plans.
All large plans pay less than the average small plan. It is a fact. Plaintiff lawyers may be able to deceive half of the courts with this false argument, but that doesn’t make it right. It is pure deception. A fair pleading standard allows the defense to rebut bogus evidence before having to spend millions of dollars to defend their fiduciary process under the threat of serious liability. That includes any claim that all recordkeeping is a commodity with no differentiation as to the type and quality of services. And it certainly includes a preposterous claim that small plans pay less than large plans in America. It is not an answer that plan sponsors can disprove false claims in the litigation. If that is the answer, then only the plaintiff and defense lawyers win. And that is why the Barrick Gold appeal is the most important pending excess fee case.
