How Circumstantial Evidence Is Used in “Excess” Fee Case to Mislead Federal Courts – The Case with Three Actively-Managed Funds in an Investment Lineup Dominated by Low-Cost Index Funds
The key element in an ERISA breach of fiduciary duty case is the decision-making process of the plan fiduciaries. But most purported excess fee cases contain no allegation of the actual fiduciary process. Instead, plaintiffs in most cases allege, based on hindsight, that the fiduciaries failed to select the cheapest or best performing fund, often using inapt comparators that distort the true result. Then the plaintiffs ask the court to infer from these circumstantial allegations that the plan fiduciaries committed malpractice and are liable for millions of dollars in damages.
The business model of inferring fiduciary imprudence based on circumstantial evidence has netted plaintiff firms with close to $1B in excess fee settlements, and they claim credit for lower fees in the retirement industry. But many of the cases are based on misleading circumstantial allegations. And in nearly every case, there is no need to rely on circumstantial evidence or improper inferences of malpractice, because plaintiffs have access to fee and financial disclosures mandated by the Department of Labor. These fee disclosures demonstrate in most cases that the “excess” fee and performance allegations are patently false, and should be disclosed to courts at the pleading stage to allow courts to see through faulty imprudence claims.
A prime example is the case against DaVita, Inc. filed on March 23, 2022 by the prolific Capozzi Adler law firm in Lourdes M. Teodosio v. DaVita, Inc. The Complaint alleges mismanagement of the plan by purportedly allowing plan providers to charge excess investment and recordkeeping fees. Plaintiffs cite to the Audit Report attached to the publicly available 2020 Form 5500, which shows that the plan as of December 31, 2020 had assets of $2,684,769,000 with 67,104 participants with account balances. After 64 paragraphs of the same excess fee lecture that is contained in every Capozzi Adler copy-cat lawsuit – virtually word-for-word from previous lawsuits – paragraph 65 alleges that “[h]ere, Defendants could not have engaged in a prudent process as it relates to evaluating investment management fees.” To support this bold malpractice claim, paragraph 66 alleges that “[t]hree of the Plan’s funds, having more than $120 million dollars in assets under management in 2020 will be analyzed below as an example of imprudently selected funds.” Plaintiffs then compare the purported “high cost” of the three investment choices to the ICI median .31% average and .37% average:
ICI Median and Average Charts*
| Current Fund | 2021 Exp Ratio | Investment Style | ICI Median | ICI Average |
| T. Rowe Price Large-Cap Growth Trust CL B | 0.56% | Domestic Equity | 0.31% | 0.37% |
| Voya Small Cap Opportunities | 0.77% | Domestic Equity | 0.31% | 0.37% |
| Dodge & Cox Stock Fund | 0.52% | Domestic Equity | 0.31% | 0.37% |
*In the complaint, Plaintiffs use two charts – one for the ICI Median and the other for the ICI Average, but we have combined the two charts.
Plaintiffs next conclude in paragraph 68 that “[i]t is unlikely the Defendants engaged in a prudent process from 2016 through 2020 since the Plan contained at least three funds that had excessive expense ratios when compared to their peers from 2016 to 2020.”
That is it: just the expense ratios for three of the plan investments compared to the ICI median and average for the total of plan investments. Plaintiffs do not disclose the overall, total investment fee average for this specific plan against the ICI median or average, so it is not an apples-to-apples comparison. Nor do they disclose how many investments the plan has, what other investments are in the plan, or the fees for any other investment options. They also do not disclose what the plan’s qualified default investment option is, nor whether the plan has any low-cost index funds. Instead, plaintiffs expect the court to infer fiduciary imprudence based on the fees of three isolated investments in the plan compared to the average total fees for large plans.
If you read plaintiffs’ allegations, you would expect that the $2.6B plan is filled with really bad investments – investments that have super-high fees and have performed poorly. At least that is what plaintiffs’ lawyers want you to believe. But that is false. How do we know? Because there is no mystery as to the remaining investments of the plan. Nor is there any mystery as to the overall expense ratio of the plan investments compared to the ICI median and average expense ratio provided by plaintiffs. Every single plan investment is listed in the exact same Form 5500 and attached financials that Plaintiffs have cited in the Complaint. Plaintiff lawyers had this document and selectively picked the three highest-expense investments of the funds. They also had the quarterly fee disclosure that gives the fees for every plan investment. Instead of giving the court a fair and balanced perspective in proper context, they intentionally attempted to deceive the court by omitting the entire list of the plan investments.
Here is the actual list of the plan investments from the plan financials cited in the complaint, with the index options highlighted in yellow and three allegedly imprudent investments in red:
Schedule H, Line 4i – Schedule of Assets (Held at End of Year) December 31, 2020 (dollars in thousands) Identity of issuer, borrower, lessor, or similar party Description of investment Current value Common Commingled Trust Funds:
T.Rowe Price Stable Value Common Trust Fund – Class N $118,846,000
Voya Small-Cap Opportunities Fund $18,301,000
T. Rowe Price Large-Cap Growth Trust (Class B) $84,325,000
JPMCB SmartRetirement Passive Blend Income Fund CF-B $44,960,000
JPMCB SmartRetirement Passive Blend 2020 Fund CF-B $119,965,000
JPMCB SmartRetirement Passive Blend 2025 Fund CF-B $179,288,000
JPMCB SmartRetirement Passive Blend 2030 Fund CF-B $202,848,000
JPMCB SmartRetirement Passive Blend 2035 Fund CF-B $242,191,000
JPMCB SmartRetirement Passive Blend 2040 Fund CF-B $207,094,000
JPMCB SmartRetirement Passive Blend 2045 Fund CF-B $162,139,000
JPMCB SmartRetirement Passive Blend 2050 Fund CF-B $140,134,000
JPMCB SmartRetirement Passive Blend 2055 Fund CF-B $100,385,000
JPMCB SmartRetirement Passive Blend 2060 Fund CF-B $20,895,000
Registered Investment Company Funds:
Vanguard Federal Money Market Fund $2,711,000
MetWest Total Return Bond Fund $26,043,000
Vanguard Total Bond Market Index Fund Institutional Plus $174,132,000
Vanguard Institutional Index Fund Institutional Plus $254,333,000
Vanguard Extended Market Index Institutional Fund $139,762,000
Dodge and Cox Dodge & Cox Stock Fund $17,848,000
American Funds American Funds EuroPacific Growth Fund $17,363,000
Vanguard Total International Stock Index Fund $185,952,000
Common Stock: *DaVita Inc. DaVita Stock Fund $49,648,000
*Participant loans 3.25% – 9.25% maturing through December 2038 95,868 Total $ 2,605,031
Euclid Note: Index Funds are in yellow; the challenged investments are in red.
The full investment lineup shows that the DaVita plan fiduciaries ensured that most of the plan investment options were in low-cost, high-performing index funds. The plan QDIA in which well more than one-half of the plan is invested is the JP Morgan SmartRetirement Passive Blend Index Fund in the CF-B Institutional share class that carry low investment fees of .14% [below the .19% retail share class]. This is well below the .37% large-plan average cited by Capozzi. Morningstar rates the JP Morgan funds in the top Gold-tier of their target-date fund rankings, and these funds have out-performed the S&P 500 target-date index. The next four largest plan investments are two Vanguard stock index funds, and Vanguard bond and international index funds. The institutional share class fees for these three funds are .04-05% — again, less than 15% of the average large-fund cost cited by plaintiffs, and below the average cost for index funds. All of these index funds have performed above the market average. They are low cost and high-performing.
If you count the target-date funds as one investment option, the plan offers 12 investment options: five of the twelve options are index-based, and over 75% of the plan is invested in these low-cost index funds. Plaintiffs purport to challenge less than 5% of the plan’s investment options without transparently disclosing the actual investment lineup. They attempt to mislead the court into somehow believing that the plan investments are high-cost, but the average investment cost in this plan are well below the .37% ICI average. In fact, the average is below .15% – less than one-half of the ICI average. Participants in this plan enjoy super low fees and high-performing investment choices. Yes, there are three funds over this average, but the average cost is super low. And the cost of the three actively-managed funds above the average are reasonable, and provide a good counter-balance and diversity of options in a plan dominated by index-based options.
The only possible inference is that the DaVita plan fiduciaries have exceeded their fiduciary responsibilities. They nevertheless now have to spend millions of dollars to defend a claim of malpractice that is based on intentionally misleading evidence. And given that over seventy-five percent of excess fee lawsuits survive a motion to dismiss – they also face litigation uncertainty and unfair liability risk. They are guilty until proven innocent, and plaintiffs know the deck is stacked against their ability to prove their innocence. This is not justice – it is a strike suit designed to exploit the low threshold to allege fiduciary malpractice.
The Euclid Perspective – Courts must demand that plaintiffs give the full investment lineup and fees from DOL-mandated disclosures in order to assert fiduciary imprudence.
The DaVita case shows the prejudicial effect of allowing circumstantial evidence to plead fiduciary malpractice by inference. The Department of Labor must step in and set fair rules to evaluate the prudence of plan fees and investments. But we all know that is not going to happen. Federal courts, therefore, must demand more transparency and honesty from the plaintiffs’ bar when pleading ERISA breach of fiduciary duty. The Supreme Court requires a “careful, context-based scrutiny” when evaluating a motion to dismiss a complaint based on circumstantial evidence that is missing the critical elements of fiduciary process. Most courts give lip service to this standard and allow excess fee cases to proceed, even when they are based on false and misleading circumstantial evidence.
But a larger point is missing. Plaintiffs are exploiting pleadings law under which courts accept factual allegations as “true.” The DaVita case demonstrates that Plaintiffs should not be allowed to estimate fees or selectively assert facts that are incomplete when the actual facts are readily available in Department of Labor mandated documents – either the Form 5500 with plan financials or the quarterly participant and plan fee disclosures. Participants allowing their names to be used in these cases have received rule 404a5 fee disclosures from the plan recordkeeper every three months. These fee disclosures have the exact recordkeeping fees and the full lineup of investments with investment performance and fees for every single investment option. These fee and financial disclosures clearly demonstrate that the DaVita “excess” fee case does not meet the plausibility standards of the federal courts. The complaint is misleading and deceptive.
The Supreme Court has ruled that every plan investment must be prudent. But the only way for a court to properly conduct the careful, context-based scrutiny of plausibility as to whether an individual investment is prudent is to review the entire investment lineup. Whether three active investments are prudent can only be determined in the context of the other plan investments. In the DaVita plan, the other investments are low-cost, high-performing investments. The fact that the plan had three active funds is prudent when combined with highly-rated index target-date funds, and four Vanguard low-cost index funds. Plaintiffs should not be able to hide the true investment lineup and fees by cherry-picking the highest three investments and claiming malpractice. It violates the duty of candor and is just plain wrong.
It is well past time for federal courts to cry foul on a business model of alleging malpractice based on circumstantial and misleading evidence.
