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Sixth Circuit creates positive ERISA precedent

Confirming total victory for excessive fee defendant CommonSpirit Health

Financial, Executive and Professional Risks (FINEX)
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By Lawrence Fine | July 7, 2022

U.S. Court of Appeals for the Sixth Circuit upholds dismissal in Smith v. CommonSpirit Health.

Overview

On June 21, 2022, the U.S. Court of Appeals for the Sixth Circuit decided Smith v. CommonSpirit Health, becoming the first court of appeals to issue a published opinion since Hughes v. Northwestern University1. This decision is excellent news for plan sponsors (and insurers) who have been disappointed by the U.S. Supreme Court’s unanimous decision for the plaintiff and the continued filing of cookie-cutter excessive fee class actions, particularly due to the similarity of the dismissed allegations to large numbers of currently pending cases.

The decision

In reversing judgment for Northwestern University, the U.S. Supreme Court in Hughes had cautioned courts that "the 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. "Hughes v. Northwestern Univ142 S.Ct. 737, 742 (2022). Although subsequent to the Hughes decision several district courts have declined to grant motions to dismiss, the Sixth Circuit focused on this particular sentence (the only one it quoted) in deciding to affirm the previous dismissal of the case against CommonSpirit Health based on perceived pleading deficiencies.

The complaint in this suit contained allegations common to the majority of the excessive fee class actions filed in the last couple of years, including excessive recordkeeping fees, excessive administrative expenses and a small number of underperforming investment options. Also in common with many other complaints, the CommonSpirit Health allegations singled out actively managed Fidelity Freedom “target date” Funds as being allegedly imprudent underperforming investments. Although Fidelity was not a defendant, it was allowed to file an amicus brief with the Sixth Circuit.

The CommonSpirit 401k plan had approximately $3 billion in assets. For the purposes of deciding the motion to dismiss, the Sixth Circuit accepted as true allegations that the per participant recordkeeping fees were between $30 and $34 and that average administrative expenses were a higher than average 0.55%. Nonetheless, the Court dismissed all of the allegations after finding pleading inadequacies on every count.

Specifically, the Sixth Circuit stated that it’s not imprudent to offer actively managed funds in a defined contribution plan, although they inherently charge higher fees than passively managed investments such as Index Funds. The Court went as far as to suggest: “[i]t is possible indeed that denying employees the option of actively managed funds, especially for those eager to undertake more or less risk, would itself be imprudent.” Plaintiffs alleged that the imprudence of the actively managed Fidelity Freedom Funds was demonstrated by the lower price and superior performance of the Freedom Index Funds during many of the prior years. The Court stated that successful under-performance claims require more than pointing to funds which wound up having better performance; plaintiffs have to demonstrate inadequate processes in selecting and maintaining investments as well as signs that an investment is seriously distressed. The Court also commented that the removal of one of the challenged investments was not proof of prior imprudence but rather might be evidence of prudent management.

The Court went on to say that plaintiffs can’t excuse lack of pleading specificity by saying that they lack sufficient information pre-suit. The Sixth Circuit pointed out that ERISA has “extensive disclosure requirements” concerning “costs and performance” which can “ease the burdens” of pleading a viable case. Finding that the plans whose recordkeeping fees plaintiffs cited did not seem like appropriate comparisons, the Court held that such allegations must be put into appropriate context. In considering the plan’s allegedly substantial 0.55% average expense ratio, the Court found it to be justifiable based on the variety of investment options and characterized the plaintiff’s attack on the fees as a replay of its unsupported attack on actively managed funds generally.

Key takeaways

This appellate decision contradicts several recent district court decisions which denied motions to dismiss primarily on the basis that they were premature. To the extent it is followed, this decision is likely to result in the dismissal of many similar suits (particularly ones which feature allegations targeting actively managed Fidelity Freedom Funds and/or recordkeeping fees below $34 and/or average administrative fees below 0.55%).

District courts in the 6th circuit (Michigan, Ohio, Kentucky and Tennessee) will follow this precedent, and courts in other jurisdictions may find it persuasive. Note that the CommonSpirit decision has been provided as supplemental authority to the 7th Circuit which has an appeal of the case against Oshkosh before it.

In light of substantial precedent in favor of enforcing choice of venue in plans, plan sponsors with relevant connections to the four states in the 6th Circuit may want to consider adopting such provisions.

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).

Footnote

1 There have been two recent decisions from the 9th Circuit, each reversing a dismissal as having prematurely considered factual disputes on a motion to dismiss, one involving Salesforce.com and one against Trader Joe’s, but they were both unpublished and so not considered to be precedential.

Author

Management Liability Coverage Leader
FINEX North America
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