SANTOMENNO et al v. TRANSAMERICA LIFE INSURANCE COMPANY et al

Filing 319

ORDER DEFERRING DECISION ON CLASS CERTIFICATION AND REQUESTING CLARIFICATION FROM PARTIES by Judge Dean D. Pregerson. The Court has reviewed the parties voluminous briefing papers on the Motion for Class Certification and heard lengthy oral argument s. Nonetheless, the Court finds that certain issues remainunclear. Therefore, the Court finds it appropriate to postpone a decision on the question of class certification in order to request that the parties clarify the legal issues at the heart of t his lawsuit. The Court therefore requests additional briefing on the primary theory under which it will be argued that TLIC has breached its fiduciary duty as to fees. The Court therefore orders the following: Plaintiffs shall file an additional brie fing, not longer than 15 pages, addressing the above analysis or otherwise stating its primary theory of breach of fiduciary duty, given the issue of apparent expense sharing between the investment level and the plan level. The briefing may also ad dress, if useful, the question of what proportion of overall fees the IM/Admin fee comprises. Declarations, exhibits, and other matter accompanying the memorandum shall not exceed 150 pages. This additional briefing shall be filed not later than 1 4 days from the date of this order. Not later than 21 days after the date of this order, Defendants shall file a brief in response, limited to the same issues and the same page restriction. Further guidance: Plaintiffs should spell out, step-by-ste p, in logical sequence, what their primary theory of liability is, and upon what assumptions, legal and factual, it is based. Defendants should do the same, but from the defense perspective. The Courts sense is that this matter turns on the reso lution of a limited number of questions. Tell the Court what you think they are. Be blunt. Be concise. The Motion for Class Certification remains under submission. The Court emphasizes that it makes no holdings or findings of any kind in this order. The SCHEDULING CONFERENCE set for January 29, 2015 is VACATED. (shb)

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UNITED STATES DISTRICT COURT

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CENTRAL DISTRICT OF CALIFORNIA

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JACLYN SANTOMENNO; KAREN
POLEY; BARBARA POLEY,

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Plaintiffs,
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v.
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TRANSAMERICA LIFE INSURANCE
COMPANY; TRANSAMERICA
INVESTMENT MANAGEMENT, LLC;
TRANSAMERICA ASSET
MANAGEMENT INC.,

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Defendants.
___________________________

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Case No. CV 12-02782 DDP (MANx)
ORDER DEFERRING DECISION ON CLASS
CERTIFICATION AND REQUESTING
CLARIFICATION FROM PARTIES

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The Court has reviewed the parties’ voluminous briefing papers

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on the Motion for Class Certification and heard lengthy oral

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arguments.

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unclear.

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decision on the question of class certification in order to request

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that the parties clarify the legal issues at the heart of this

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lawsuit.

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Nonetheless, the Court finds that certain issues remain

Therefore, the Court finds it appropriate to postpone a

In a nutshell, Plaintiffs’ primary allegation is that
Defendant Transamerica Life Insurance Company (“TLIC”) charges an

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investment-level fee (the “investment management/administration” or

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“IM/Admin” fee) that is excessive for the services provided.

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they allege, is unlawful under the Employee Retirement Income

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Security Act (“ERISA”), which Plaintiffs say imposes a fiduciary

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duty on retirement plan service providers to “act solely in the

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interest of the participants and beneficiaries and for the

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exclusive purpose of: (i) providing benefits to participants and

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their beneficiaries; and (ii) defraying reasonable expenses of

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administering the plan.”

This,

29 U.S.C. § 1104(a)(1) (emphasis added).

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Because a fiduciary may only charge fees to defray reasonable

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expenses, a fiduciary who charges something more than that violates

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ERISA.

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TLIC’s primary defense boils down to an argument that its

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individual fees cannot be considered in isolation; one must

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consider the total packages of fees that retirement plans paid, and

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whether those fees covered total reasonable expenses for all the

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services they received.

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certain “plan-level” fees and certain “investment-level” fees, in

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reality, the fees collected at the investment level often go to pay

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for certain plan-level expenses.

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This is because, although TLIC charges

Thus, for example, one of TLIC’s exhibits is a sample

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disclosure form, sent to one of its plan customers, that provides a

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“reasonable good faith estimate of the cost to the Plan for the

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services provided to the Plan.”

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disclosure form shows that the plan was billed $20,155 in “plan-

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level” fees.

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plan assets as an “investment-level” fee.

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investment-level expenses – “investment platform services” (0.08%)

(Defs.’ Ex. Q at 616.)

This

In addition, the form shows, TLIC retained 0.74% of

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(Id.)

After paying for

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and “advisor compensation” (0.30%) – the leftover 0.36% that TLIC

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retained was used to pay for plan-level “Record-Keeping and

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Administrative Costs.”

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(Id.)

Thus, the plan’s total fees were $20,155 plus 0.74% of plan

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assets.

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expenses, TLIC argues, then it has met its fiduciary duty.

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Conversely, Plaintiffs argue that if TLIC is charging 0.74% at the

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investment level, but not providing 0.74% worth of services at the

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investment level, then TLIC is violating its fiduciary duty,

If that total amount is reasonable in comparison to total

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regardless of whether the total fees charged are congruent with

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TLIC’s total expenses.1

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At this time, the Court reaches no conclusion as to the merits

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of either of these arguments.

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that the total fees the plans have paid to TLIC are unreasonable,2

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the theory of fiduciary duty under which they sue becomes unclear.

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To put it another way, it is not clear what harm has been done to

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Plaintiffs or other putative class members.

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But because Plaintiffs do not allege

One theory of breach of fiduciary duty might be that

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Defendants simply failed in their duty of truthfulness and honest

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dealing with their clients.

A fiduciary entity owes a duty of

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The Court is aware that this is a simplified model, and it is
only presented by way of example. Naturally, other issues may
arise, such as whether 0.38% is a reasonable estimate of
investment-level expenses, or whether there are other fees included
in the total fee package that are not reflected on this disclosure
form. Moreover, there may be revenue-sharing that partially
offsets the fees collected. (See, e.g., Mot. Class Cert. at 4:716.)
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More precisely, Plaintiffs do not challenge “certain ‘planlevel’ fees, such as commissions, recordkeeping fees and a Contract
Asset Charge.” (Mot. Class Cert. at 4:18-19.) But this in effect
precludes a challenge of the reasonableness of the total fee
package.
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rigorous truthfulness to its beneficiaries.

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but the punctilio of an honor the most sensitive, is then the

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standard” of fiduciary duty.

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(2000) (quoting Meinhard v. Salmon, 249 N.Y. 458, 464 (1928)

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(Cardozo, J.)).

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to a separate account, investors would be presumably entitled to

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know whether TLIC had actually, reasonably incurred $2 million in

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photocopying expenses.

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“Not honesty alone,

Pegram v. Herdrich, 530 U.S. 211, 225

If TLIC charged, say, a $2 million “copying fee”

Thus, one way TLIC could have breached its fiduciary duty is

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by actual misrepresentation.

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the fee with the investment rather than the plan, TLIC gave a false

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impression that fee would only be used to cover plan expenses, or

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that plan expenses were less than they actually are.

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with proceeding to a class action on that theory is that it would

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seem to open up a Pandora’s box of individualized inquiries.

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Perhaps the idea is that by aligning

The trouble

Unlike the term “copying,” “investment management” and

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“administration” seem to be vague terms, susceptible to a number of

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reasonable interpretations.

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contribution to TLIC’s general overhead?

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subsidies of other expenses, including plan-level expenses?

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determine whether such a use of the terms “investment management”

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and “administration” was a misrepresentation, the Court might well

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have to attempt to ascertain what plan administrators actually

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understood these terms to mean – an inquiry only complicated by the

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fact that Defendants have presented credible evidence that they

Do they, for example, include a

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Could they include
To

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made disclosures to at least some plans explaining that the

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investment-level fees might be used to cover plan-level expenses.3

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To avoid such individualized questions, it could also be

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argued that ERISA fiduciaries simply have a per se duty not to

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share expenses between the investment level and the plan level –

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either because other courts have already held that such a duty

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exists, because some regulation imposes such a duty, or for public

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policy reasons (perhaps because such expense-sharing is inherently

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confusing to consumers).

Plaintiffs point to TLIC’s filing of Form

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5500 with the Department of Labor and suggest that TLIC was under

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penalty of perjury to accurately describe its fees as “investment

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advisory” expenses.

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But this only shifts the question to what kinds of services are

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“investment advisory” expenses and whether some expenses from the

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plan level can be defrayed as expenses in that category.

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even if TLIC was under a legal obligation to distinguish

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investment-level expenses from plan-level expenses on the Form

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5500, it is not clear that that obligation translates to a

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fiduciary duty under ERISA.

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any authority to that effect.4

(Reply at 13 & n.48; see also Opp’n at 22.)

Moreover,

At least, Plaintiff has not yet cited

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On the other hand, clear evidence that “investment
management” and “administration” are precise terms of art in the
industry would significantly lessen the need for such
individualized inquiry.
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In a similar vein, Plaintiffs allege that TLIC reported to
the IRS that the fee was an “investment advisory and management
fee.” (Mot. Class Cert. at 8 & n.4.) Although TLIC might be under
an independent duty not to misrepresent the purpose of the fee to
the IRS, this does not necessarily create a fiduciary duty under
ERISA.
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Finally, it might be that Plaintiffs’ theory is that even

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taking into account the expense-sharing between the investment

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level and the plan level, TLIC’s investment-level expense

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accounting is unreasonable.

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might be alleged that the 0.08% allocated to “investment platform

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services” and the 0.30% allocated to “advisor compensation” are

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unreasonable and unnecessary.

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individualized inquiries into what plan administrators knew would,

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again, not be necessary,5 which would tend to streamline the

To return to our example above, it

If this is Plaintiff’s theory,

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litigation to focus on common questions.

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is the one Plaintiffs are advancing, it is not entirely clear from

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a general allegation that “the IM/Admin fees TLIC charges . . . are

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excessive,” (Mot. Class Cert. at 5:7-8.), nor from the more

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specific allegation that “while TLIC charges 75 bps for its

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investment services, others would charge . . . between 1 and 4

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bps.” (Id. at 6:19-20.)

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However, if this theory

Finally, as a factual matter, it is not clear to the Court at

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this point what the ratio of the IM/Admin fee to other fees is.

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the IM/Admin fee the predominant portion of the total fee package?

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Are the other, plan-level fees insignificant?

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fees are minute, then the “total fees” and the “investment-level

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fees” collapse into more-or-less the same thing, and Defendants’

Is

If the plan-level

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There might (or might not) still be individualized inquiries
necessary as to the expenses incurred in administering each
investment. The Court cannot tell, at this point, whether the
investment-level expenses charged by TLIC would be fairly uniform,
or whether they would vary widely from investment to investment.
But even if the expenses do vary, the Court would likely not be
required to hear from each plan administrator individually, which
makes it less likely that individualized inquiries would
predominate over common questions.
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argument about the need to consider the reasonableness of the total

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fee package would seem to melt away.

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IM/Admin fee is typically only, say, 50% of total fees charged,

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then the total package of fees may matter much more in determining

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whether TLIC has met its alleged fiduciary duty to only charge fees

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“defraying reasonable expenses.”

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On the other hand, if the

For purposes of this order seeking clarification, then, the

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Court assumes that TLIC was a fiduciary under ERISA, that the basic

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prerequisites of a class action are satisfied, and that

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certification, if appropriate at all, is likely appropriate under

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Rule 23(b)(3).

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the primary theory under which it will be argued that TLIC has

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breached its fiduciary duty as to fees.

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in determining whether common questions are likely to predominate

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over individual questions, and whether this class action is

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superior to other available methods of adjudicating the

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controversy.

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titanic volume of the submissions so far, the Court also welcomes

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the parties’ correction of any omissions or misunderstandings in

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the above analysis.

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The Court therefore requests additional briefing on

This will assist the Court

Given the complexity of the issues and the truly

The Court therefore orders the following: Plaintiffs shall

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file an additional briefing, not longer than 15 pages, addressing

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the above analysis or otherwise stating its primary theory of

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breach of fiduciary duty, given the issue of apparent expense-

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sharing between the investment level and the plan level.

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briefing may also address, if useful, the question of what

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proportion of overall fees the IM/Admin fee comprises.

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Declarations, exhibits, and other matter accompanying the
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The

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memorandum shall not exceed 150 pages.

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shall be filed not later than 14 days from the date of this order.

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Not later than 21 days after the date of this order, Defendants

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shall file a brief in response, limited to the same issues and the

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same page restriction.

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Further guidance:

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•

This additional briefing

Plaintiffs should spell out, step-by-step, in logical

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sequence, what their primary theory of liability is, and

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upon what assumptions, legal and factual, it is based.

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Defendants should do the same, but from the defense

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perspective.

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The Court’s sense is that this matter turns on the

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resolution of a limited number of questions.

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Court what you think they are.

Be blunt.

Tell the

Be concise.

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The Motion for Class Certification remains under submission.

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The Court emphasizes that it makes no holdings or findings of any

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kind in this order.

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2015 is VACATED.

The SCHEDULING CONFERENCE set for January 29,

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IT IS SO ORDERED.

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Dated: January 16, 2015
DEAN D. PREGERSON
United States District Judge

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