Disselkamp et al v. Norton Healthcare, Inc. et al
Filing
66
MEMORANDUM OPINION AND ORDER by Chief Judge Greg N. Stivers on 8/2/2019 - Defendants' Motion to Dismiss (DN 19) is DENIED AS MOOT. Defendants' Motions to Dismiss (DN 31 , 32 ) are GRANTED IN PART and DENIED IN PART. Plaintiffs' Motion for Leave to File Sur-Reply (DN 54 ) is DENIED. cc: Counsel of Record (KD)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
CIVIL ACTION NO. 3:18-CV-00048-GNS
DONNA DISSELKAMP, et al.
PLAINTIFFS
v.
NORTON HEALTHCARE, INC., et al.
DEFENDANTS
MEMORANDUM OPINION AND ORDER
This matter is before the Court on Defendants’ Motions to Dismiss (DN 19, 31, 32), and
Plaintiffs’ Motion for Leave to File Sur-Reply (DN 54). The motions are ripe for adjudication.
For the reasons outlined below, Defendants’ Motions to Dismiss (DN 31, 32) are GRANTED IN
PART and DENIED IN PART, and the other motions are DENIED.
I.
STATEMENT OF CLAIMS
This is an action brought under the Employee Retirement Income and Security Act of 1974
(“ERISA”), 29 U.S.C. § 1001 et seq., concerning the administration of Defendant Norton
Healthcare, Inc.’s (“Norton”) 403(b) Retirement Savings Plan (“the Plan”). (Am. Compl. ¶ 14,
DN 20). The Plan is a defined contribution, individual account, pension benefit plan as defined
under 29 U.S.C. §§ 1002(2)(A) and 1002(34). (Am. Compl. ¶ 14). Named Plaintiffs Donna
Disselkamp, Erica Hunter, Sey Momodou Bah, Kathy Reed, and Curtis Cornett (“Plaintiffs”) were
participants in the Plan during the alleged class period. (Am. Compl. ¶¶ 18-22).
Norton is the Plan Administrator and a named fiduciary. (Am. Compl. ¶ 25). Plaintiffs
allege Defendants Richard Wolf, G. Hunt Rounsavall, Stephen A. Williams, and Donald H.
Robinson were members of Norton’s Board of Directors from 2012-2017. (Am. Compl. ¶¶ 2629). These named individual Defendants were also members of the Norton Healthcare Retirement
Plan Investment Committee (“Retirement Committee”) and as such were ERISA fiduciaries
responsible for ensuring that plan expenses were reasonable and that plan funds were invested
prudently and loyally. (Am. Compl. ¶¶ 26-29). There are presently twenty-five additional
unnamed Defendants whom Plaintiffs believe comprise the remainder of the Retirement
Committee. (Am. Compl. ¶ 30). When appropriate, the Court will refer to Norton, the Retirement
Committee and the individually named Defendants collectively as “Norton Defendants.”
Defendant Lockton Investment Advisors, LLC is affiliated with Lockton Financial
Advisors, LLC and Lockton Companies, LLC (jointly “Lockton Defendants”).
Lockton
Defendants offer licensed broker-dealers and insurance agents to sell securities, insurance
products, and insurance consulting services. (Am. Compl. ¶ 31).
After the lawsuit was filed, Norton Defendants moved to dismiss the claims asserted
against them. (Defs.’ Mot. Dismiss, DN 19). Subsequently, Plaintiffs amended the Complaint.
In the Amended Complaint, Plaintiffs assert seven counts against Defendants alleging various
breaches of fiduciary duty. (Am. Compl. ¶¶ 204-82). Norton Defendants have moved to dismiss
Counts I, II, III, IV, VI, and VII, and Lockton Defendants have joined in this motion. (Defs.’ Mot.
Dismiss Am. Compl., DN 32). Lockton Defendants have separately moved to dismiss Count V.
(Lockton Defs.’ Mot. Dismiss, DN 31 [hereinafter Lockton’s Mot.]).
II.
JURISDICTION
This case presents a federal question, and jurisdiction is therefore proper under 28 U.S.C.
§ 1331.
III.
STANDARD OF REVIEW
A complaint must contain “a short and plain statement of the claim showing that the pleader
is entitled to relief,” and is subject to dismissal if it “fail[s] to state a claim upon which relief can
2
be granted.” Fed. R. Civ. P. 8(a)(2); Fed. R. Civ. P. 12(b)(6). When considering a motion to
dismiss, courts must presume all factual allegations in the complaint to be true and make all
reasonable inferences in favor of the non-moving party. Total Benefits Planning Agency, Inc. v.
Anthem Blue Cross & Blue Shield, 552 F.3d 430, 434 (6th Cir. 2008) (citation omitted). “But the
district court need not accept a bare assertion of legal conclusions.” Tackett v. M & G Polymers,
USA, LLC, 561 F.3d 478, 488 (6th Cir. 2009) (citation omitted). “A pleading that offers labels and
conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does a
complaint suffice if it tenders naked assertion[s] devoid of further factual enhancement.” Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted) (citation omitted).
To survive a motion to dismiss under Rule 12(b)(6), the plaintiff must allege “enough facts
to state a claim to relief that is plausible on its face.” Traverse Bay Area Intermediate Sch. Dist.
v. Mich. Dep’t of Educ., 615 F.3d 622, 627 (6th Cir. 2010) (internal quotation marks omitted)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim becomes plausible “when
the plaintiff pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S.
at 556). “A complaint will be dismissed pursuant to Rule 12(b)(6) if no law supports the claims
made, if the facts alleged are insufficient to state a claim, or if the face of the complaint presents
an insurmountable bar to relief.” Southfield Educ. Ass’n v. Southfield Bd. of Educ., 570 F. App’x
485, 487 (6th Cir. 2014) (citing Twombly, 550 U.S. at 561-64).
IV.
A.
DISCUSSION
Defendants’ Motion to Dismiss Complaint (DN 19)
Norton Defendants have moved to dismiss the claims asserted against them in the
Complaint. (Defs.’ Mot. Dismiss, DN 19). Because the Amended Complaint subsumes the
3
allegations in the original Complaint, the Court will deny this motion as moot. See Herran Props.,
LLC v. Lyon Cty. Fiscal Court, No. 5:17-CV-00107-GNS, 2017 WL 6377984, at *2 (citing Cedar
View, Ltd. v. Colpetzer, No. 5:05-CV-00782, 2006 WL 456482, at *5 (N.D. Ohio Feb. 24, 2006));
Ky. Press Ass’n, Inc. v. Kentucky, 355 F. Supp. 2d 853, 857 (E.D. Ky. 2005) (citing Parry v.
Mohawk Motors of Mich., Inc., 236 F.3d 299, 306 (6th Cir. 2000)).
B.
Defendants’ Motions to Dismiss Amended Complaint (DN 31, 32)
Following the filing of the Amended Complaint, Defendants moved to dismiss the claims
asserted against them. Each claim will be addressed below.
1.
Background and Overview
Before 2012, Norton provided its employees retirement benefits in the form of a “bundled
plan” administered by Transamerica Life Insurance and its affiliates. (Am. Compl. 35). The term
“bundled plan” means Norton purchased a pre-packaged platform where custody, record keeping,
and investments were provided in an integrated platform. (Am. Compl. ¶ 35).
In 2012, Norton restructured the Plan, which is now funded under a group annuity contract
and a trust arrangement. (Am. Compl. ¶¶ 16, 36). Norton established a trust with Delaware Charter
Guarantee and Trust, doing business as Principal Trust. (Am. Compl. ¶ 16). Norton also
established a group annuity contract with Principal Life Insurance (“Principal Life”).1 The alleged
class period concerns only Plan decisions made after the restructuring.
Lockton Defendants provided advice to Norton Defendants with respect to its restructure
of the Plan. (Am. Compl. ¶ 37). Plaintiffs allege Lockton Defendants advised Norton Defendants
on matters including but not limited to the following: the selection and compensation of service
1
Where appropriate, the Court will refer to Principal Trust and Principal Life collectively as
“Principal.”
4
providers; initial plan and vendor analysis; investment selection and monitoring; fiduciary and
compliance services; employee communication and education; mergers; and acquisitions and
divestitures. (Am. Compl. ¶ 37). Lockton Defendants continued advising Norton after the
restructuring as well. (Am. Compl. ¶ 37).
2.
Count I: Breach of the Duty of Prudence for Failing to Employ Viable
Methodology for Selecting and Monitoring Investment Options
Plaintiffs’ claims regarding Defendants’ breach of the duty of prudence can be separated
into two categories: Defendants’ selection of and failure to replace higher cost share classes when
identical shares with lower costs were available, and Defendants’ selection of and failure to replace
the Principal Fixed Income Option as its sole stable value fund. Because Defendants’ motion first
addresses the share class issue, the Court will begin its analysis there.
a.
Selection of Share Classes
According to the Amended Complaint, a general principle of investment management
holds that investors with greater assets enjoy greater bargaining power when negotiating
management fees because the more assets they possess, the lower the management fees will be
when expressed as a percentage of the overall portfolio. (Am. Compl. ¶ 83). The two most
common classes of mutual funds are retail funds and institutional funds. (Am. Compl. ¶ 84). Retail
funds are available to a broad spectrum of investors, including individuals, whereas institutional
funds, as their names suggests, are generally only available to larger investors including 401(k)
and 403(b) plans. (Am. Compl. ¶ 84). Institutional funds typically charge lower expense ratios
than similarly situated retail mutual funds. (Am. Compl. ¶ 84).
As there are different classes of mutual funds, there are also different share classes of a
single mutual fund. (Am. Compl. ¶¶ 85, 87). Retail share classes possess different shareholder
rights and responsibilities from institutional class shares, which are also called “R Class shares.”
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(Am. Compl. ¶ 87). These may include differing fee and load charges. (Am. Compl. ¶¶ 85, 87).
But while the fees differ, the assets underlying the various share classes as well as their
management and investment styles are identical. (Am. Compl. ¶ 85).
Plaintiffs state that a prudent fiduciary should have in place a methodology for taking
advantage of discounts available through the purchase of institutional shares. (Am. Compl. ¶ 90).
Because mutual funds are not static, it is important for a prudent fiduciary to monitor the Plan in
the event lower cost share classes become available. (Am. Compl. ¶ 91). Plaintiffs contend Norton
violated its duty of prudence by failing to monitor the availability of lower cost share classes, and
in so doing subjected Plan participants to higher-than-necessary expenses. (Am. Compl. ¶¶ 9293). Further, Plaintiffs contend Norton began correcting the problem by substituting lower cost
share classes in 2015. (Am. Compl. ¶ 93).
To exemplify Plaintiffs’ allegations, they allege that in 2012 Norton offered a mutual fund
known as the Principal Equity R-5 Fund (“PEIQX”). (Am. Compl. ¶ 96). The PEIQX fund offered
a total expense ratio of 0.77%.2 (Am. Compl. ¶ 96). At the same time, Norton offered an identical
product of a different share class, the Principal Equity Institutional Class Fund (“PEIIX”) with an
expense ratio of 0.52%, 0.25% lower than PEIQX. (Am. Compl. ¶¶ 97-98). Plaintiffs argue
because the Plan invested $33,558,344 in the PEIQX, the 0.25% difference in fees resulted in Plan
participants paying $83,896 in additional fees for a different class share of the exact same product.
(Am. Compl. ¶ 98).
In 2013, the expense ratios were the same as the previous year for both the PEIQX and the
PEIIX respectively. (Am. Compl. ¶¶ 99-100). That year, Norton invested $46,955,568 in the
2
Plaintiffs sometimes refer to these percentages in terms of basis points. One basis point is equal
to 0.01%. (Am. Compl. 36 n.18). For purposes of consistency, the Court will use only
percentages.
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PEIQX, an amount Plaintiffs allege resulted in Plan participants paying an extra $117,389. (Am.
Compl. ¶ 101). In 2014, Plaintiffs contend Norton invested $55,479,949 in the PEIQX, bringing
the alleged overpayment to $138,700 before it switched the PEIQX funds to the PEIIX in 2015.
(Am. Compl. ¶¶ 102-06).
Plaintiffs offer identical allegations about a number of other funds, with differences only
in the precise expense ratios and resultant damages. (Am. Compl. ¶¶ 108-65). In total, Plaintiffs
contend the Plan fiduciaries subjected participants to more than $2 million in unnecessary
overpayments. (Am. Compl. ¶ 166). Plaintiffs additionally contend that they lost the money they
would have made by investing the overpayments, bringing their total damages to around $3.3
million. (Am. Compl. ¶ 168).
Defendants now seek dismissal of this claim, arguing Plaintiffs have failed to assert
specific facts that could lead to a conclusion that Norton Defendants acted imprudently. (Defs.’
Mot. Dismiss Am. Compl. 7) Defendants contend Plaintiffs criticize investment decisions based
solely on results viewed with 20/20 hindsight and fail to identify any specific flaw in Defendants’
methodology. (Defs.’ Mot. Dismiss Am. Compl. 7-9). Further, Defendants maintain the Amended
Complaint supports a conclusion that Defendants acted prudently by responding to and correcting
certain problems well before this lawsuit. (Defs.’ Mot. Dismiss Am. Compl. 8-9). Specifically,
Defendants argue that the Complaint acknowledges that Defendants substituted some higher cost
share classes for lower cost institutional options in 2015, and this action supports a conclusion that
Defendants acted prudently by monitoring the Plan. (Defs.’ Mot. Dismiss Am. Compl. 9).
To state a claim for breach of the duty of prudence, a plaintiff must allege (1) that the
defendants were fiduciaries of the plan; (2) that the defendants’ acts or omissions amounted to a
breach of duty; and (3) that harm resulted from the breach. Pegram v. Herdrich, 530 U.S. 211,
7
225-26 (2000). “An ERISA fiduciary must discharge his responsibility ‘with the care, skill,
prudence, and diligence that a prudent person ‘acting in a like capacity and familiar with such
matters’ would use.” Tibble v. Edison Int’l, 135 S. Ct. 1823, 1828 (2015) (Tibble I) (quoting 29
U.S.C. § 1104(a)(1)(B)). A fiduciary must act “solely in the interest of the participants and
beneficiaries and . . . for the exclusive purpose of providing benefits to participants and their
beneficiaries . . . .” 29 U.S.C. § 1104(a)(1)(A). The statute codifies the common law duties of
loyalty and prudence, and these duties are “the highest known to the law.” SEC v. Capital
Consultants, LLC, 397 F.3d 733, 751 (9th Cir. 2005).
“Prudence is measured according to the objective ‘prudent person’ standard developed in
the common law of trusts.” Whitfield v. Cohen, 682 F. Supp. 188, 194 (S.D.N.Y. 1988) (quoting
Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir. 1984)). A fiduciary has a continuing duty to monitor
investments and remove imprudent ones. Tibble I, 135 S. Ct. at 1828-29. The test for whether a
fiduciary has violated the duty of prudence asks whether the fiduciary employed appropriate
methods for investigating the merits of the investment and the investment structure, judged at the
time of the challenged transaction. Pfeil v. State Street Bank & Tr. Co., 806 F.3d 377, 384 (6th
Cir. 2015). Focus should be placed on whether the fiduciary engaged in reasonable decisionmaking consistent with a prudent person acting in a similar capacity. Id.
Norton Defendants do not dispute that they are fiduciaries of the Plan, and Plaintiffs have
alleged damages. Therefore, the issue centers on the second prong of the test, and the Court must
ask whether Defendants’ failure to purchase institutional class mutual funds would constitute a
breach of the duty of prudence if proven.3
3
Lockton Defendants contest their status as Fiduciary to the Plan, but the Court does not address
that challenge here.
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Courts examining this issue have concluded that investment in a retail class fund where an
identical institutional class fund with lower fees is available can violate the duty of prudence.
Tibble v. Edison Int’l, No. CV 07-5359 SVW (AGRx), 2010 WL 2757153, at *26 (N.D. Cal. July
8, 2010) (Tibble II), vacated on other grounds by Tibble v. Edison Int’l, 843 F.3d 1187 (9th Cir.
2016) (Tibble III). In Tibble II, following a bench trial, the District Court for the Northern District
of California held that a plan fiduciary’s inability to present any evidence at trial that it conducted
an investigation before purchasing a retail class mutual fund when an identical institutional class
fund was available with lower fees violated the duty of prudence. Id. That is precisely what
Plaintiffs have alleged occurred in this case. See also Krueger v. Ameriprise Fin., Inc., 304 F.R.D.
559 (D. Minn. 2014).
Most notably, the Court in Tibble II treated the issue of whether the defendants had violated
their fiduciary duties as a factual issue to be resolved at trial. “To determine whether the decision
to invest in retail share classes constitutes a breach of the duty of prudence, the Court must examine
whether the fiduciaries engaged in a thorough investigation of the merits of the investment at the
time the funds were added to the Plan.” Tibble II, 2010 WL 2757153, at *25 (citations omitted).
Thus, Plaintiffs’ claim that Defendants failed to investigate lower cost options is not a fact couched
as a legal conclusion which should be stricken when considering a motion to dismiss. Rather, it is
a statement of fact that the Court will accept as true for purposes of this 12(b)(6) motion.
Further, the Court in Tibble II noted that plan administrators switched to lower cost
institutional funds upon a subsequent review of plan investments. Id. at *26. The same occurred
here, but Defendants urge the Court not to consider this action lest it might dissuade future plan
administrators from replacing poorly performing investments for fear doing so might support a
claim of imprudence. (Defs.’ Mot. Dismiss Am. Compl. 9). This argument has no merit, however,
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because here the Court is not ruling on the merits of the claim but only assessing whether Plaintiffs
are entitled to proceed to discovery.
Finally, Defendants argue this claim must be dismissed because Defendants applied the
higher fees collected from the retail class funds to pay administrative fees through revenue-sharing.
(Defs.’ Mot. Dismiss Am. Compl. 11-13). Again, however, this is an argument not suited for a
decision on a motion to dismiss. The Court does not know the precise effect of revenue-sharing
on all of the funds Plaintiffs allege are affected. Additionally, while the revenue-sharing argument
may eventually mitigate liability and damages, it still remains to be seen whether Defendants
prudently investigated the higher share class investments before subjecting Plan participants to
those higher fees. Therefore, Defendants’ motion to dismiss Count I with respect to the Plan’s
methodology for selecting and monitoring share classes is denied.
b.
The Plan’s Selection and Monitoring of Its Stable Value Fund
Plaintiffs allege Defendants breached their fiduciary duty of prudence with their selection
of Stable Value Accounts (“SVA”). An SVA is a contract, not a mutual fund investment. (Am.
Compl. ¶ 42). SVAs are similar to money market funds because they offer individual investors
both liquidity and principal protection. (Am. Compl. ¶ 42). At the same time, SVAs are similar
to bond funds because they offer consistent returns over time. (Am. Compl. ¶ 42). They differ
from both, however, because an SVA seeks to offer greater returns than a money market fund
while being less volatile than a bond fund. (Am. Compl. ¶ 42).
In the 2012 restructuring of the Plan, Norton replaced the SVA offered by Transamerica
with the Principal Guaranteed Fixed Income Option offered by Principal. (Am. Compl. ¶ 41). A
fixed annuity contract governs the terms and conditions of the Principal Fixed Income Option, a
type of contract commonly known as a Guaranteed Investment Contract (“GIC”) under which
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Principal guarantees investors a certain return. (Am. Compl. ¶ 43). The Plan owns the contract
but not the actual investments, which reside in Principal’s general account. As a result, those
assets would be available to Principal’s creditors in the event Principal became insolvent. (Am.
Compl. ¶ 43).
The Principal Fixed Income Option is a proprietary product, meaning it is owned by the
plan service provider or one of its affiliates. (Am. Compl. ¶ 44). Plaintiffs point out that an issue
that may arise with proprietary products is that they are selected not based on their merits but
instead because of the relationship between the plan and the service provider. (Am. Compl. ¶ 44).
Proprietary products may create conflicts because the service provider has an incentive to provide
products which generate extra revenue in preference to non-proprietary products. (Am. Compl. ¶
44). These conflicts may deepen if an investment advisor receives a commission when the Plan
adopts a proprietary product because it incentivizes the advisor to make preferential
recommendations based on the advisor’s personal financial interest. (Am. Compl. ¶ 44).
The Principal Fixed Income Option is classified as a short-term fixed income asset. (Am.
Compl. ¶ 45). Annual participant disclosures reveal that it is in fact the only option available to
plan participants in this class, and more than 15% of the Plan’s assets are invested in this option.
(Am. Compl. ¶¶ 45, 46). Therefore, participants wishing to invest in what is considered one of the
least risky investments have no choice other than the Principal Fixed Income Option. (Am. Compl.
¶ 45).
Plaintiffs contend part of the Plan’s duty of prudence requires knowledge of, among other
things, the credit risk qualities of various Stable Value options and their investment performance.
(Am. Compl. ¶ 47). From a credit risk perspective, there are three categories of stable value
products: general account products, separate account products, and synthetic products. (Am.
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Compl. ¶ 48). The Principal Fixed Income Option is a general account product. (Am. Compl. ¶
49). As mentioned above, the Plan does not own the assets of the fund, which are placed in the
insurance company’s general account. Thus, should Principal become insolvent, the Plan could
only recover to the extent assets from Principal’s general accounts are available—i.e., as an
unsecured creditor. (Am. Compl. ¶ 49).
The 1980s and 1990s saw several high-profile insolvencies of stable value providers. (Am.
Compl. ¶ 50). Following these events, many 401(k) fiduciaries stopped using general account
products for their SVAs. (Am. Compl. ¶ 51). Some invested in money market funds, while others
who sought higher yields began investing in separate account contracts for their stable value
products. (Am. Compl. ¶ 51).
The separate account contract, as its name suggests, requires the insurer to create a
segregated account to support the contract. (Am. Compl. ¶ 52). The separate account comprises
a combination of fixed income securities and, like the general account product, offers principal
preservation and a specified return. (Am. Compl. ¶ 52). As with general account products, the
participants do not own the funds being invested, but because the insurance company keeps the
Plan’s investment in a segregated account, there is some limited protection against creditors. (Am.
Compl. ¶ 52). Namely, unlike general account assets, the segregated account is not subject to the
insurer’s general creditors. (Am. Compl. ¶ 52). To a limited extent, this diversifies the single
entity credit risk inherent to general account products. (Am. Compl. ¶ 52).
Continuing the movement away from general account products, many large 401(k)
providers began using synthetic stable value products in the wake of the 2008 credit crises. (Am.
Compl. ¶¶ 53, 56). A synthetic stable value fund is a diversified portfolio of fixed income
securities and is insulated from interest rate volatilities through wrap contracts with insurers. (Am.
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Compl. ¶ 53). Unlike general account and separate account products, however, with a synthetic
stable value product, the plan participants actually own the underlying assets. (Am. Compl. ¶ 53).
Plaintiffs contend that most large 401(k) and 403(b) plans have at this point divested themselves
of general account and separate account products in favor of synthetic GICs. (Am. Compl. ¶¶ 5556).
Moreover, Plaintiffs point out that general account products create uncertainty as to
management fees. (Am. Compl. ¶¶ 58-59). This is because the retirement plan owns only a
contract rather than the underlying assets. (Am. Compl. ¶ 58). With respect to the Principal Fixed
Income Option, Principal does not disclose a Rate Level Service Fee disclosure. (Am. Compl. ¶
58). Plaintiffs contend this leaves plan sponsors to compare investment returns with other SVAs,
and an SVA should be removed from the Plan if other insurance carriers offer a higher rate. (Am.
Compl. ¶ 58).
Plaintiffs maintain Defendants “failed to implement a prudent methodology for selecting,
monitoring, and replacing the Principal stable value product and, where appropriate, diversifying
into other, less-risky stable value products, based upon the risks, costs, and returns of other readily
available investment products.” (Am. Compl. ¶ 63). Plaintiffs claim Defendants should have but
did not implement a methodology that considers factors such as the risk of general account
products, the product’s performance following the credit crisis, the return to participants, the
amount of plan assets exposed to general credit risk, the cost of the product, and the benefit to
Principal from the use of this proprietary product. (Am. Compl. ¶ 63).
Next, Plaintiffs assert Plan participants were unnecessarily exposed to single entity credit
risk. (Am. Compl. ¶ 66). Plaintiffs contend Defendants could have easily offered a more
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diversified selection of short-term fixed income options, particularly given the fact that such a
substantial portion of plan assets were invested in this product. (Am. Compl. ¶ 66).
Plaintiffs further aver the Plan’s fiduciaries failed to evaluate the nature, performance, and
cost of the product. (Am. Compl. ¶ 67). As an example, a prudent investor would have compared
the Principal Fixed Income Option’s returns with those of one of Principal’s major competitors
such as TIAA-CREF. (Am. Compl. ¶ 67). Performing such a comparison would have revealed
that the Principal product “essentially went into free fall following the 2008 credit crisis.” (Am.
Compl. ¶ 68). Plaintiffs point out that TIAA-CREF holds an A++ rating while Principal holds an
A+ rating. (Am. Compl. ¶ 67). As a result, Plaintiffs argue that Principal should have offered a
higher return to account for the higher credit risk. (Am. Compl. ¶ 67).
Additionally, given that an SVA’s performance is guaranteed from the outset, a plan
fiduciary knows from the date of selection what the product’s returns will be. (Am. Compl. ¶ 81).
Since SVAs are designed to be stable, a product that is underperforming can be expected to
continue to underperform at around the same level. (Am. Compl. ¶ 81). Thus, Plaintiffs contend,
had fiduciaries of the Plan monitored the Principal Fixed Income Option in appropriate six-month
intervals they would have seen that the product was consistently underperforming and elected to
replace it. (Am. Compl. ¶ 82).
Plaintiffs note that returns on general account products are not directly linked with the
underlying assets supporting the contract but instead are tied to the performance of the insurer’s
general fund as a whole. (Am. Compl. ¶ 60). This results in the insurance company earning a
profit, termed “the spread,” when the assets supporting the contract with a retirement plan
outperform the overall general fund. (Am. Compl. ¶ 60). Plaintiffs state that a prudent fiduciary
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must monitor the spread, and this process may require the fiduciary to seek additional information
from the insurance company and in some instances state regulators. (Am. Compl. ¶ 61).
Plaintiffs allege Defendants failed to monitor the amount of profit Principal was earning
from the spread. (Am. Compl. ¶ 69). This failure was particularly impactful in this instance
because Principal was also the recordkeeper. (Am. Compl. ¶ 70). Defendants should have, but
did not, account for the spread when calculating Principal’s compensation for recordkeeping,
Plaintiffs contend. (Am. Compl. ¶ 70).
Next, Plaintiffs assert that Defendants had a duty to educate Plan participants about general
account products’ single entity credit risk and failed to do so. (Am. Compl. ¶ 71). Instead,
Defendants stated in their brochure that the product “‘is supported by the multi-billion dollar
general account of Principal Life, which invests in private market bonds, commercial mortgages
and mortgage-backed securities.’” (Am. Compl. ¶ 71). Plaintiffs argue that this may be true in a
“hypertechnical sense,” but the reality is the Principal Fixed Income Option is backed only by a
piece of paper. (Am. Compl. ¶ 71).
Defendants now move for dismissal on three grounds: (1) Plaintiffs fail to state a claim by
pointing out that Principal’s A+ credit rating is slightly lower than some other SVAs; (2) Plaintiffs
fail to state a claim by highlighting the Principal SVA’s below average performance from 20122016; and (3) Plaintiffs fail to state a claim by alleging that the Principal SVA is an unreasonable
risk because it is a general account product. (Defs.’ Mot. Dismiss Am. Compl. 13). Plaintiffs’
allegations are subject to the same test regarding the duty of prudence as the share class allegations
discussed above. Defendants have excised three separate issues that it contends individually fail
to state a claim for breach of the duty of prudence. The problem, however, is that complaints
“‘should be read as a whole, not parsed piece by piece to determine whether each allegation, in
15
isolation, is plausible.’” Game Sci., Inc. v. Gamestation, Inc., No. 4:14CV-00044-JHM-HBB,
2014 WL 12726643, at *13 (W.D. Ky. Oct. 21, 2014) (quoting Braden v. Wal-Mart Stores, Inc.,
588 F.3d 585, 594 (8th Cir. 2009)).
Further, both Plaintiffs and Defendants have submitted exhibits and engaged in detailed
arguments concerning comparative credit ratings for the funds. (See, e.g., Defs.’ Mot. Dismiss
Am. Compl. 13; Pls.’ Resp. Defs.’ Mot. Dismiss Am. Compl. 14-22, DN 38 [hereinafter Pls.’
Resp.]). A motion to dismiss is not, however, the appropriate vehicle for arguments regarding the
truth of Plaintiffs’ allegations or the accuracy of their statements. See Amini v. Oberlin Coll., 259
F.3d 493, 502 (6th Cir. 2001); Beshwate v. BMW of N. Am., LLC, No. 1:17-cv-00417-SAB, 2017
WL 6344451, at *17 (C.D. Cal. Dec. 12, 2017). The Court will therefore not attempt to resolve
these issues at this juncture.
Neither party has identified—nor has the Court located—a case with allegations paralleling
Plaintiffs’ claims with regard to the Principal Fixed Income Option. The crux of Plaintiffs’
argument again appears to be that the Plan fiduciaries failed to employ a prudent methodology in
selecting the Plan’s stable value fund. Defendants correctly point out that any attempt by Plaintiffs
to rely on hindsight to prove this breach is improper. Pfeil, 806 F.3d at 386; DeBruyne v. Equitable
Life Assurance Soc’y, 720 F. Supp. 1342, 1349 (N.D. Ill. 1989). However, Plaintiffs have alleged
a failure to employ a prudent methodology and comparisons with better performing SVAs may be
reasonably interpreted as a demonstration of a breach of care.
Plaintiffs note a defining feature of a stable value fund is its stability. (Am. Compl. ¶ 81).
It is reasonable to conclude that if a predictable investment continues to chronically underperform,
one could draw a conclusion that the fiduciaries overseeing that fund have breached their duty. In
order to state a claim, a complaint need not detail the fiduciaries’ direct knowledge, methods, or
16
investigations during the relevant times, so long as the inference can be reasonably be drawn from
the surrounding factual circumstances that the decision-making process was flawed. Pension
Benefit Guar. Corp. ex rel. St. Vincent Catholic Med. Ctrs. Ret. Plan v. Morgan Stanley Inv. Mgmt.
Inc., 712 F.3d 705, 718 (2d Cir. 2013).
The Court concludes Plaintiffs have stated a claim. As a result, Defendants’ motion will
be denied with respect to Plaintiffs’ claim regarding the selection and monitoring of the stable
value fund.
3.
Count II: Excessive Administrative Fees
Count II is divisible into separate claims for a violation of the duty of prudence, and a
violation of the duty of loyalty. Both claims will be addressed separately.
a.
Duty of Prudence
Plaintiffs challenge the monitoring and recordkeeping fees charged under the Plan.
Plaintiffs contend that, in general, the actual cost to the Plan of keeping records depends on the
number of participants, not the amount invested in the Plan. (Am. Compl. ¶ 170). Therefore,
prudent fiduciaries do not negotiate recordkeeping fees as a percentage of plan assets. (Am.
Compl. ¶ 171).
Selecting a recordkeeper should involve a competitive bidding process, and fiduciaries
should learn not only the recordkeeper’s cost per participant, but also the number of the
recordkeeper’s proprietary investment products in which the plan would be required to invest.
(Am. Compl. ¶ 173). Part of the selection process should also involve a practice known as
benchmarking, where fiduciaries compare a plan’s present fee structure with those of competitors.
(Am. Compl. ¶ 174).
Moreover, Plaintiffs assert a prudent fiduciary should engage in a
competitive bidding process approximately every three years. (Am. Compl. ¶ 175).
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Plaintiffs allege, based on information presently available, a reasonable cost for
recordkeeping in 2012 for the Plan would have been $50 per participant. (Am. Compl. ¶ 176).
The actual cost, based on Plaintiffs’ estimate, was in excess of $70. (Am. Compl. ¶ 178). Had
Norton engaged in a competitive bidding process, it would have become apparent that a more costeffective option was available and because Principal was the recordkeeper a competitive bidding
process could have further served to offset the alleged losses caused by the Plan’s use of Principal’s
SVA. (Am. Compl. ¶ 177).
In addition to Plaintiffs’ challenge to Defendants’ reliance on asset-based payments for
recordkeeping, Plaintiffs contest the Plan’s payment of administrative fees through revenue
sharing. (Am. Compl. ¶ 180). Instead of paying Principal’s recordkeeping fees directly from
Participants’ accounts, Norton deducted the fees from the expense ratios of the Plan’s mutual fund
investments. (Am. Compl. ¶ 180).
According to Plaintiffs, the use of revenue sharing to pay administrative fees becomes a
problem when the assets of a plan grow rapidly. (Am. Compl. ¶ 183). Plaintiffs argue the Plan in
this case exhibited rapid growth, and Norton failed to employ a prudent methodology to ensure
Principal did not receive excessive compensation. (Am. Compl. ¶¶ 183-84). Further, Plaintiffs
claim Norton’s use of Principal’s proprietary products resulted in an unfair boon to Principal. (Am.
Compl. ¶¶ 184-87). Finally, Plaintiffs allege that Norton’s use of an asset-based system for
compensating the recordkeeper drove the decision to select higher share classes. (Am. Compl. ¶¶
187-90).
Failure to engage in a competitive bidding process with respect to plan administrative fees
may in some circumstances violate a fiduciary’s duty of prudence. George v. Kraft Foods Glob.,
Inc., 641 F.3d 786, 799 (7th Cir. 2011). Plaintiffs may demonstrate this through expert testimony.
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Id. at 798-99. Because of the context-sensitive nature of such inquiries, claims of unreasonable
fees often turn on questions of fact that cannot be determined on a motion to dismiss. Cassell v.
Vanderbilt Univ., 285 F. Supp. 3d 1056, 1065 (M.D. Tenn. 2018) (citing White v. Chevron, No.
16-cv-0793-PJH, 2016 WL 4502808, at *14 (N.D. Cal. Aug. 29, 2016)).
Defendants argue Plaintiffs have failed to state a claim for breach of the duties of prudence
and loyalty with respect to the Plan’s administrative fees. (Defs.’ Mot. Dismiss Am. Compl. 17).
First, Defendants contend Plaintiffs admit that Norton engaged in a competitive bidding process
in 2012 when it restructured the Plan, so that Plaintiffs cannot claim Norton failed to engage in a
competitive bidding process. (Defs.’ Mot. Dismiss Am. Compl. 17). As previously noted,
however, Plaintiffs asserted that a prudent fiduciary should engage in this process every three
years. Defendants do not mention whether a competitive bidding process occurred in 2015, three
years after the restructuring, nor do they refute Plaintiffs’ claim that every three years is an
appropriate interval for seeking bids. The Court will therefore reject this argument.
Disregarding Defendants’ argument concerning competitive bidding undercuts their next
point: without a claim for failure to engage in competitive bidding, Defendants contend Plaintiffs
can only claim that they should have collected fees via an asset-based system rather than through
revenue-sharing. (Defs.’ Mot. Dismiss Am. Compl. 17-18). Because the Court finds Plaintiffs
alleged a cognizable failure to engage in a competitive bidding process, Defendants’ contention is
without merit.
Next, Defendants argue Plaintiffs are asserting that Norton had a duty to find the lowest
administrative fees available. (Defs.’ Mot. Dismiss Am. Compl. 18-19). Plaintiffs make no such
assertion. Rather, as outlined above, Plaintiffs allege that the average per participant fee during
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the relevant period was around $50, whereas the per participant fee for the Norton Plan was around
$70. This is sufficient to survive a motion to dismiss. Cassell, 285 F. Supp.3d at 1064.
b.
Duty of Loyalty
ERISA’s duty of loyalty requires that a fiduciary “shall discharge his duties with respect
to a plan solely in the interest of the participants and beneficiaries” and for the exclusive purpose
of (1) providing benefits to participants and their beneficiaries and (2) defraying reasonable
expenses of administering the plan. 29 U.S.C. § 1104(a)(1)(A). To state a claim for breach of the
duty of loyalty, a plaintiff must do more than merely reincorporate alleged breaches of the duty of
prudence as disloyal acts. Sacerdote v. N.Y. Univ., No. 16-cv-6284 (KBF), 2017 WL 3701482 at
*5 (S.D.N.Y. Aug. 25, 2017). “Rather, a plaintiff must allege facts that permit a plausible inference
that the defendant engaged in transactions involving self-dealing or in transactions that otherwise
involve or create a conflict between the trustee’s fiduciary duties and personal interests.” Cassell,
285 F. Supp. 3d at 1062 (quoting Sacerdote, 2017 WL 3701482, at *5).
Review of the Amended Complaint discloses that the disloyalty claim asserted in this count
is merely derivative of the imprudence claim discussed above. Nowhere do Plaintiffs allege that
the Plan’s fiduciaries were engaged in self-dealing with respect to the administrative fees.
Plaintiffs argue in their response that both Lockton Defendants and Norton Defendants appear to
deny responsibility for managing the fees and interactions with third parties, and this uncertainty
creates a factual question as to whether the Plan was administered loyally. (Pls.’ Resp. 28). This
allegation does not appear in the Amended Complaint, however, and is therefore not well taken.
But even if it were, the Amended Complaint nonetheless fails to allege facts sufficient to support
a claimed breach of the duty of loyalty. The allegations do not support an inference that Norton
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was engaged in self-dealing or otherwise violating the duty of loyalty. Cassell, 235 F. Supp. 3d at
1061-62. This portion of Count II will therefore be dismissed.
4.
Count III: Failure to Diversify
Plaintiffs further argue Defendants violated their duty to diversify because they offered no
other short-term fixed income option besides the Principal product. (Am. Compl. ¶¶ 72-75).
Distilled, the argument is that no prudent fiduciary with a sound methodology could have analyzed
the range of short-term fixed income products available to a plan as large as Norton’s and selected
the Principal Fixed Income Option. (Am. Compl. ¶ 75).
According to Plaintiffs, Norton also directed money to the Principal SVA through
allocations made to Qualified Default Investment Alternatives (“QDIA(s)”), which are investment
plans created for retirement contributions made by plan participants who do not specify investment
instructions. (Am. Compl. ¶ 76). The Department of Labor has rejected the idea of using an SVA
as a stand-alone QDIA, though an SVA may be part of a QDIA. (Am. Compl. ¶ 76). Instead, a
QDIA must be diversified, may not directly contain securities in the company that employs the
participant, and may not carry a penalty for early withdrawal. (Am. Compl. ¶ 76).
Defendants offered an automatic asset allocation service provided by Principal known as
RetireView. (Am. Compl. ¶ 77). Plaintiffs allege that nearly every QDIA included the Principal
product for its SVA. (Am. Compl. ¶ 77). Plaintiffs describe Defendants’ actions as “effectively
funneling the assets of the Plan participants into an insufficiently diversified stable value option.”
(Am. Compl. ¶ 78). Further, the Principal product consistently underperformed, returning 100
basis points lower than higher rated insurance carriers reflecting Defendants’ alleged failure to
monitor and replace the underperforming investment option. (Am. Compl. ¶ 80).
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An ERISA fiduciary has a duty to diversify a plan’s investments “so as to minimize the
risk of large losses, unless under the circumstances it is clearly prudent not to do so[.]” 29 U.S.C.
§ 1104 (a)(1)(C). A fiduciary “‘should not normally invest all or an unduly large portion of plan
funds in a single security, or in any one type of security, or even in various types of securities that
depend on the success of one enterprise.’” Yates v. Nichols, 286 F. Supp. 3d 854, 862 (N.D. Ohio
2017) (quoting Bruner v. Boatmen’s Tr. Co., 918 F. Supp. 1347, 1353 (E.D. Mo. 1996)).
Defendants argue that Plaintiffs cannot state a claim because they allege only that the
Principal SVA was not diversified, not that the Plan as a whole was not diversified. (Defs.’ Mot.
Dismiss Am. Compl. 21). Defendants offer two primary citations supporting proposition. First,
in Harmon v. FMC Corp., No. 16-6073, 2018 WL 1366621, (E.D. Pa. Mar. 16, 2018), the District
Court held that ERISA does not contemplate diversification claims based on the failure to diversify
a single fund. Id. at *4. In Harmon, however, the Court was addressing a challenge to one of five
long-term mutual funds that was allegedly insufficiently diversified. Id. at *1. By contrast, the
SVA being challenged in this case represents the sole fixed-income option for Plan participants.
Apart from this factual distinction, the Court notes that Harmon is an unpublished District Court
opinion resting its holding on an unpublished Second Circuit opinion. Id. at *4 (citing Young v.
Gen. Motors Inv. Mgmt. Corp., 325 F. App’x 31, 33 (2d Cir. 2009)).
Thus, there are both factual distinctions from cited authority as well as questions of law at
issue which have not yet been addressed in the Sixth Circuit. The Court therefore concludes
dismissal would be inappropriate at this point.
5.
Count IV: Failure to Monitor
Defendants next argue Plaintiffs’ failure to monitor claim should be dismissed on the
premise that if the Court accepts that Plaintiffs have failed to state a claim with respect to the
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counts previously discussed, then there can be no breach of fiduciary duty and thus no failure to
monitor. (Defs.’ Mot. Dismiss Am. Compl. 22-23). As the Court has rejected Defendants’
previous arguments and found that, in all but one circumstance, Plaintiffs have stated a claim, this
argument loses its basis.
Defendants further assert that all of Plaintiffs’ allegations concerning the failure to monitor
are conclusory and therefore should be stricken. (Defs.’ Mot. Dismiss Am. Compl. 23). Plaintiffs,
however, need not directly assert actions by Defendants that demonstrate their failure to monitor
to survive a motion to dismiss, so long as the Court can plausibly conclude from the surrounding
factual circumstances that a violation occurred. Pension Ben. Guar. Corp., 712 F.3d at 718. For
reasons discussed in detail above, Plaintiffs have alleged numerous instances of Defendants’
failure to monitor Plan assets. These include Norton’s failure to monitor which share classes Plan
assets were invested in, Norton’s failure to monitor the performance of the Principal Fixed Income
Option, and Norton’s failure to monitor the spread on the Principal Fixed Income Option. The
Court therefore concludes Plaintiffs have alleged sufficient facts which, when taken as a whole,
state a claim for breach of the duty to monitor.
6.
Count VII: Failure to Supply Requested Information
“The administrator shall, upon written request of any participant or beneficiary, furnish a
copy of the latest updated summary, plan description, and the latest annual report, any terminal
report, the bargaining agreement, trust agreement, contract, or other instruments under which the
plan is established or operated.” 29 U.S.C. § 1024(b)(4). Plan fiduciaries need not disclose
information that is not included within ERISA’s statutory guidelines. Sprague v. Gen. Motors
Corp., 133 F.3d 388, 405 (6th Cir. 1998) (en banc) (“It would be strange indeed if ERISA’s
fiduciary standards could be used to imply a duty to disclose information that ERISA's detailed
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disclosure provisions do not require to be disclosed.” (citations omitted)). However, this duty
does carry a negative obligation that fiduciaries not misinform as well as an affirmative obligation
to inform where silence may be harmful. James v. Pirelli Armstrong Tire Corp., 305 F.3d 439,
452 (6th Cir. 2002).
Plaintiffs allege that Defendants violated their affirmative duty: specifically, that the Plan
fiduciaries had a duty to inform participants of the risk of the Principal Fixed Income Option and
failed to do so. (Am. Compl. ¶ 71). Plaintiffs further allege that the Plan did not disclose specific
documents required by 29 U.S.C. § 1024(b)(4), but fail to identify these documents. Ordinarily
this would merit dismissal of the claim. Taylor v. KeyCorp, 678 F. Supp. 2d 633, 641-42 (N.D.
Ohio 2009). However, because Plaintiffs further allege inaccurate or incomplete information, the
Court concludes Count VII states a claim and will therefore not be dismissed.
7.
The Class Period
Defendants allege that, if Plaintiffs have stated a claim, ERISA’s three-year statute of
limitations nonetheless precludes any claim for actions before January 22, 2015. (Defs.’ Mot.
Dismiss Am. Compl. 24-26). ERISA requires a plaintiff to bring suit no more than “three years
after the earliest date on which the plaintiff had actual knowledge of the breach or
violation . . . . ” 29 U.S.C. § 1113(2). In the Sixth Circuit, actual knowledge does not require that
a plan participant know that the fiduciaries’ actions amount to a cognizable claim under ERISA.
Cataldo v. U.S. Steel Corp., 676 F.3d 542, 548 (6th Cir. 2012); Wright v. Heyne, 349 F.3d 321,
331 (6th Cir. 2003). Rather, the inquiry is when the information that constitutes the alleged breach
became known to plan participants, and it is not required that the plaintiff has seen or read the
documents containing the alleged wrongdoing. Brown v. Owens Corning Inv. Review Comm., 622
F.3d 564, 571 (6th Cir. 2010).
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Defendants allege that Plan documents disclosed the expense ratios, and it was apparent
that a portion of those expenses were going to pay Plan fees. (Defs.’ Mot. Dismiss Am. Compl.
23). Notably, Defendants cite generally to a Plan document attached as Exhibit 4 but do not offer
a precise page where such allegations are confirmed. Exhibit 4 is ninety-seven pages, and
conclusory statements about such a fact-driven inquiry are unpersuasive. The Court will not
attempt to divine the class period at this time, though Defendants may raise the argument again in
the summary judgment context. See Bernaola v. Checksmart Fin. LLC, 322 F. Supp. 3d 830 (S.D.
Ohio 2018).
In Bernaola, the court was addressing a mixed motion to dismiss and motion for summary
judgment. Id. at 833. The court sua sponte converted a portion of the defendant’s motion to
dismiss to one for summary judgment and allowed discovery to go forward on the limited issue of
when the plaintiffs had actual knowledge of the alleged harm. Id. at 836. This Court concludes
that, given its rulings on the remainder of Defendants’ motion, no need exists for a similar
limitation on discovery. However, the Court makes no conclusions regarding the class period, and
Defendants may raise the argument again at a later time.
8.
Plaintiffs’ Jury Demand
Defendants move to strike Plaintiffs’ demand for a jury trial. (Defs.’ Mot. Dismiss Am.
Compl. 26). In the Sixth Circuit, ERISA is considered a suit in equity, so there is no associated
right to a trial by jury. Reese v. CNH Am. LLC, 574 F.3d 315, 327 (6th Cir. 2009); Bittinger v.
Tecumseh Prods. Co., 123 F.3d 877, 882-83 (6th Cir. 1997); Golden v. Kelsey-Hayes Co., 73 F.3d
648, 660-63 (6th Cir. 1996).
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Plaintiffs argue Great-West Life & Annuity Co. v. Knudson, 534 U.S. 204 (2002), merits
reconsideration of this precedent. (Pls.’ Resp. 39). The Sixth Circuit has specifically disavowed
this notion:
Knudson, first and foremost, is not a Seventh Amendment case. It dealt with
whether an action “seek[ing] . . . to impose personal liability . . . for a contractual
obligation to pay money-relief” falls within § 502(a)(3) of ERISA, 29 U.S.C. §
1132(a)(3), which authorizes suits for “appropriate equitable relief.” See Knudson,
534 U.S. at 209-10, 122 S. Ct. 708. The Court’s conclusion—that such claims were
not covered by § 502(a)(3) because they were legal in nature, not equitable, see id.
at 210, 220-21, 122 S. Ct. 708—does not undermine our prior decisions. Golden,
for example, acknowledged that “a monetary award, generally, is a form of legal
relief,” 73 F.3d at 661, before concluding that in health-care benefits cases like this
one, any backward-looking relief is at best “incidental” in comparison to the
primary goal of ensuring injunctive access to health-care benefits in the future, id.
Knudson, by contrast, did not involve forward-looking relief but only
“reimbursement . . . for past medical treatment,” 534 U.S. at 208-09, 122 S. Ct. 708,
leaving the Court no opportunity to say, much less hold, anything that would lead
us to second guess Golden.
Reese, 574 F.3d at 327.
Plaintiffs seek to “restore the Plan to the position it would have occupied but for the
breaches of fiduciary duty . . . .” (Am. Compl. 85). This prayer contemplates not only remedies
in the form of damages, but potential prospective injunctive relief as well. See also Howard v.
Prudential Ins. Co. of Am., 248 F. Supp. 3d 862, 868 (W.D. Ky. 2017). The Court will therefore
grant Defendants’ motion to strike Plaintiffs’ jury demand.
9.
Count V: Lockton Defendants’ Fiduciary Breaches as Plans’ Investment
Adviser
Lockton Defendants have separately moved to dismiss Count V of the Amended
Complaint. Plaintiffs allege Lockton Defendants have served as the Plan’s primary investment
advisor since 2012. (Am. Compl. ¶ 31). According to Plaintiffs, Lockton Defendants are a
fiduciary to the Plan because they rendered investment advice for a fee. (Am. Compl. ¶ 31 (citing
29 U.S.C. § 1002(21)(A)(ii)).
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It is this alleged fiduciary relationship that is the center of Lockton Defendants’ motion.
Lockton Defendants urge the Court to examine only its service agreement with Norton, but the
Sixth Circuit has made it clear that fiduciary relationships are not an all-or-nothing proposition.
Briscoe v. Fine, 444 F.3d 478, 486 (6th Cir. 2006). Instead, the Sixth Circuit employs a functional
test in determining whether an individual is acting as a fiduciary capacity. Id. (citing Hamilton v.
Carell, 243 F.3d 992, 998 (6th Cir. 2001)). As a result, courts look to the conduct at issue. Id.
In this case, the terms of the service agreement cited by Lockton Defendants are not the
final measure of its fiduciary status. The Court does not yet have a full picture of Lockton
Defendants’ functional role, and allowing this case to proceed to discovery will clarify this issue.
Lockton Defendants’ argument that Briscoe was decided before Iqbal and its subsequent
heightened pleading standard is unavailing. Briscoe was reviewing a motion for summary
judgment, not a motion to dismiss. Id. at 482. Thus, determinations of fiduciary status are likely
fact-intensive inquiries and should therefore not be decided at the outset. It is true that the Court
must draw the inference that Lockton Defendants are a fiduciary in order to find Plaintiffs’
allegations sufficient to state a claim, but this is a reasonable inference to draw in favor of the nonmoving party in this situation. Total Benefits Planning Agency, Inc., 552 F.3d at 434. Lockton
Defendants’ motion will therefore be denied.
C.
Plaintiffs’ Motion for Leave to File Sur-Reply (DN 54)
Finally, Plaintiffs’ have moved to leave to file a sur-reply to Defendants’ Motion to Dismiss
the Amended Complaint. (Pls.’ Mot. Leave File Sur-Reply 1, DN 54). Neither the Federal Rules
of Civil Procedure nor the Court’s local rules permit the filing of sur-replies. “As many courts
have noted, ‘[s]ur-replies . . . are highly disfavored, as they usually are a strategic effort by the
nonmoving party to have the last word on a matter.’” Liberty Legal Found. v. Nat’l Democratic
27
Party of the USA, Inc., 875 F. Supp. 2d 791, 797 (W.D. Tenn. 2012) (citation omitted). Because
sur-replies are highly disfavored and it is unnecessary for the Court to consider the tendered surreply in ruling on the pending dispositive motions, this motion will be denied.
V.
CONCLUSION
For the reasons stated, IT IS HEREBY ORDERED as follows that:
1.
Defendants’ Motion to Dismiss (DN 19) is DENIED AS MOOT.
2.
Defendants’ Motions to Dismiss (DN 31, 32) are GRANTED IN PART and
DENIED IN PART. Count II is dismissed only with respect to the duty of loyalty claim. Counts
I, III, IV, V, VI, and VII remain.
3.
Plaintiffs’ Motion for Leave to File Sur-Reply (DN 54) is DENIED.
August 2, 2019
cc:
counsel of record
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