Chendes et al v. Xerox HR Solutions, LLC

Filing 38

OPINION AND ORDER granting 23 Motion to Dismiss Plaintiffs' First Amended Class Action Complaint and granting Plaintiffs leave to replead by 11/2/2017.. Signed by District Judge Robert H. Cleland. (LWag)

UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

PATRICK CHENDES, JILLIAN SMITH,
and DION TUMMINELLO,
Plaintiffs,
v.

Case No. 16-13980

XEROX HR SOLUTIONS, LLC,
Defendant.
/
OPINION AND ORDER GRANTING MOTION TO DISMISS
Plaintiffs are participants in three Ford Motor Company retirement plans. (Dkt.
#21 Pg. ID 360.) They bring this proposed class action against Defendant Xerox HR
Solutions, LLC—the company that provides “platform and recordkeeping services” for
the administration of their plans (id. at Pg. ID 362)—for alleged violations of the
Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. Before
the court is Defendant’s “Motion to Dismiss Plaintiffs’ First Amended Class Action
Complaint” (Dkt. # 23). The motion is fully briefed, and this court held a hearing on
October 25, 2017. For the following reasons, Defendant’s motion is granted, and
Plaintiffs are given limited leave to replead.
I. BACKGROUND
Plaintiffs are participants in three Ford Motor Company retirement plans (“Ford
Plans”): the Ford Retirement Plan, the Ford Motor Company Savings and Stock
Investment Plan for Salaried Employees, and the Ford Motor Company Tax-Efficient
Savings Plan for Hourly Employees. (Dkt. #21 Pg. ID 360.) These plans are “‘individual

account plans,’ tax qualified retirement plans maintained by employers for the benefit of
their employees.” (Id. at Pg. ID 362.) Participants in the Ford Plans are in charge of
directing the investment of their accounts among the available investment options. (Id.
at Pg. ID 363.) Plaintiffs bring this action on behalf of their plans and “all other similarly
situated qualified retirement plans.” (Id. at Pg. ID 360.)
The Ford Plans “participate in the Ford Defined Contribution Plan Master Trust”
(“Master Trust”), which was created “to permit the commingling of trust assets of the
Ford Plans for investment and administrative purposes.” (Id. at Pg. ID 361.) “Participant
accounts in the Ford Plans are thus comprised of various combinations of any
employee contributions, any employer contributions[,] and any investment income
earned from the individual investment options selected within the participant account.”
(Id.) At the end of 2015, the net assets in the Master Trust totaled $13.94 billion. (Id. at
Pg. ID 362.)
Defendant “provides platform and recordkeeping services to the Master Trust for
the administration of the Ford Plans.” (Id.) “[A]mong the optional services that Xerox HR
makes available to its qualified plan customers is the opportunity for plan participants to
obtain professional investment advice regarding the investment of their plan accounts.”
(Id. at Pg. ID 364.) For that service, “Xerox HR has contracted with Financial Engines
[(‘FE’)].” (Id.) According to Plaintiffs, Ford decided to include this optional service among
the services that it offered to Plaintiffs and other participants in the Ford Plans, and the
“Ford Plans and/or Master Trust” executed a separate agreement with FE. (Id.) “The
agreement between the Ford Plans and FE contains an acknowledgement that FE is an
ERISA fiduciary with respect to the investment advice program” and provides for the fee

2

Plaintiffs and other plan participants will pay for FE’s services, a percentage of the
participant’s account value on a scaled basis. (Id.)
Plaintiffs allege that, while the Ford Plans and FE executed their own agreement,
Defendant “dictates and controls certain of the terms and conditions on which FE will
provide services to the retirement plans administered on the Xerox HR platform.” (Id.)
As to the cost of being included as the sole investment advice service provider on
Defendant’s platform, “FE agreed to pay—and is paying—Xerox HR a significant
percentage of the fees it collects from Ford’s 401(k) plan investors,” including Plaintiffs.
(Id. at Pg. ID 365.)
This, according to Plaintiffs, is the problem—because Xerox is already collecting
fees for its recordkeeping services, its demand for a percentage of FE’s take from
Plaintiffs amounts to a “kickback.” (Id.) The fees Xerox HR collects from FE “are not
being paid for any substantial services being provided by Xerox HR to FE or to
participants of the Plans, . . . but are instead being paid as part of a so-called ‘pay-toplay’ arrangement.” (Id.) Specifically, Plaintiffs allege that “FE is paying Xerox HR over
30% of the fees it receives from the Ford Plans,” an amount that they believe “is plainly
unreasonable.” (Id. at Pg. ID 370.) Moreover, “[t]his ‘pay to play’ arrangement wrongfully
inflates the price of FE’s professional investment advice services that are critical to the
successful management of workers’ retirement savings and violates the fiduciary
responsibility and prohibited transaction rules of Sections 404, 405[,] and 406 of ERISA,
29 U.S.C. §§ 1104, 1105[,] and 1106.” (Id. at Pg. ID 365.)
Plaintiffs bring four claims for this allegedly wrongful activity. First, Plaintiffs
allege that Defendant and FE breached their fiduciary duties to the Plan participants

3

and beneficiaries in violation of ERISA § 404, 29 U.S.C. § 1104 (“Count I”). (Id. at Pg. ID
387–90.) Second, Plaintiffs allege various “prohibited transactions” in violation of ERISA
§ 406, 29 U.S.C. § 1106, by both Defendant and FE (“Count II”). (Id. at Pg. ID 390–93.)1
Third, Plaintiffs claim that, even if Defendant is not a fiduciary, Defendant is liable for
FE’s commission of prohibited transactions because Defendant knowingly received
improper payment from FE, a fiduciary to the Ford Plans, see Harris Tr. & Sav. Bank v.
Salomon Smith Barney, Inc., 530 U.S. 238, 241 (2000) (“Count III”). (Id. at Pg. ID 394–
95.) Finally, Plaintiffs allege that Defendant failed to meet its disclosure obligations
under 29 C.F.R. § 2550.408b-2(c)2 (“Count IV”). (Id. at Pg. ID 395–96.)
II. STANDARD
Federal Rule of Civil Procedure 8(a)(2) requires that a complaint contain “a short
and plain statement of the claim showing that the pleader is entitled to relief.” “To
survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted
as true, to ‘state a claim for relief that is plausible on its face.’” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
“[W]here the well-pleaded facts do not permit the court to infer more than the mere
possibility of misconduct, the complaint has alleged—but it has not shown—that the
pleader is entitled to relief.” Id. at 679. The court views the complaint in the light most
favorable to the plaintiff and accepts all well-pleaded factual allegations as true. Tackett
v. M & G Polymers, USA, LLC, 561 F.3d 478, 488 (6th Cir. 2009). The court, however,
“need not accept as true legal conclusions or unwarranted factual inferences.” Directv,
1

Plaintiffs also contend Defendant can be held liable for FE’s breaches under
Counts I and II as a co-fiduciary, see 29 U.S.C. § 1105. (Dkt. #21 at Pg. ID 389, 393.)
2
Plaintiffs’ complaint refers to 29 C.F.R. § 4550.408(b)-2(c), but this, according
to Plaintiffs, was a “citation error.” (Dkt. # 27 Pg. ID 1003.)
4

Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007).
“In determining whether to grant a Rule 12(b)(6) motion, the court primarily
considers the allegations in the complaint, although matters of public record, orders,
items appearing in the record of the case, and exhibits attached to the complaint, also
may be taken into account.” Amini v. Oberlin College, 259 F.3d 493, 502 (6th Cir. 2001)
(quoting Nieman v. NLO, Inc., 108 F.3d 1546, 1554 (6th Cir. 1997)). Furthermore,
“when a document is referred to in the pleadings and is integral to the claims, it may be
considered without converting a motion to dismiss into one for summary judgment.”
Commercial Money Ctr. v. Ill. Union Ins. Co., 508 F.3d 327, 335–36 (6th Cir. 2007).
III. DISCUSSION
A. Defendant’s Fiduciary Liability (Count I)
“The threshold question in all cases charging breach of ERISA fiduciary duty is
whether the defendant was ‘acting as a fiduciary (that is, was performing a fiduciary
function) when taking the action subject to complaint.’” Cataldo v. U.S. Steel Corp., 676
F.3d 542, 552 (6th Cir. 2012) (quoting Pegram v. Herdrich, 530 U.S. 211, 226 (2000)). A
fiduciary includes anyone who “exercises any discretionary authority or discretionary
control respecting management of [the] plan or exercises any authority or
control respecting management or disposition of its assets.” 29 U.S.C. § 1002(21)(A)(i).
“[T]he definition of a fiduciary under ERISA is a functional one, is intended to be broader
than the common law definition, and does not turn on formal designations such as who
is the trustee.” Smith v. Provident Bank, 170 F.3d 609, 613 (6th Cir. 1999). Because an
ERISA fiduciary “may wear different hats,” a party may act as a fiduciary with respect to
some matters but not others. See Pegram, 530 U.S. at 225; see also Coulter v. Morgan

5

Stanley & Co., 753 F.3d 361, 366 (2d Cir. 2016).  
Plaintiffs’ first three counts turn on whether Defendant and/or FE was a fiduciary
with respect to the challenged conduct. Counts I and II—for violation of fiduciary duties
and prohibited transactions, respectively—require that Defendant was a fiduciary with
respect to the challenged conduct. To the extent that Plaintiffs argue that Defendant can
also be held liable for FE’s breaches as a co-fiduciary under § 405, 29 U.S.C. § 1105,
(see Dkt. #21 Pg. ID 389, 393), FE must be a fiduciary for liability to attach. Count III,
which alleges that FE committed prohibited transactions for which Defendant can be
liable as a party in interest, requires that FE be a fiduciary. Defendant also contends
that Plaintiffs are required to establish fiduciary duty with respect to Count IV—that
claim, however, is dismissed on other grounds, as set forth below.
Defendant’s first argument on this motion to dismiss is that Plaintiffs cannot state
a claim for breach of fiduciary duties or for prohibited transactions because neither
Defendant nor FE was a fiduciary of the plan with respect to the challenged conduct.
(Dkt. #23 Pg. ID 713–21.) Plaintiffs disagree. Plaintiffs premise Defendant’s fiduciary
status on three grounds. Each will be addressed in turn.
i. Discretion over Compensation
First, Plaintiffs claim that Xerox HR is a fiduciary because it had discretion over
the amount of its compensation. See Pipefitters Local 636 Ins. Fund v. Blue Cross &
Blue Shield of Mich., 722 F.3d 861, 867 (6th Cir. 2013). (Dkt. #27 Pg. ID 987.)
Specifically, Plaintiffs allege that because the agreement between Defendant and Ford
did not cabin Defendant’s ability to seek compensation from a party like FE, Defendant
in effect controlled the terms of its own compensation by seeking additional money from

6

FE. (Id. at Pg. ID 987–90 (“What is significant is that the agreements between Xerox
and the Plans did not limit Xerox’s discretion in negotiating additional fees for itself from
FE.” (emphasis original)).)
Defendant, on the other hand, argues that it and FE cannot be fiduciaries with
respect to their own compensation (i.e., the fees at issue in this case) because
Defendant’s and FE’s business relationships with both each other and Ford amount to
“arm’s length contract[s]” that “[do] not give rise to ERISA fiduciary status.” See Seaway
Food Town, Inc. v. Med. Mut. of Ohio, 347 F.3d 610, 619 (6th Cir. 2003). (Dkt. #23 Pg.
ID 714–17.) While Defendant acknowledges that under Sixth Circuit precedent a party
in an “arm’s length contract” may be held liable as a fiduciary where a contract term
“authorizes the party to exercise discretion” as to its own compensation, see Seaway,
347 F.3d at 619, Defendant argues that it had no discretion in setting its own
compensation as it relates to this case. Defendant points to the fact that Plaintiffs
premise “discretion” on Defendant’s ability to seek compensation from FE. (Id. at Pg. ID
716) (“Of note, Plaintiffs do not allege that the actual FE-Xerox Agreement gives Xerox
any discretion over its compensation, but only that the negotiation of this contract gave
Xerox such discretion.”) But negotiation of this contract, according to Defendant, does
not amount to a fiduciary act. (Id.)
It seems to the court, then, that the question here is what constitutes “discretion”
in setting compensation. The court disagrees with Plaintiffs that “discretion” includes the
ability to seek additional compensation not provided for in the original agreement.
Plaintiffs rely on Pipefitters, which they say “explained that the contract at issue
in that case ‘in no way cabins Defendant’s discretion to charge or set the . . . fee’ that it

7

received for its services, and that, as such, ‘Defendant necessarily had discretion in the
way it collected the funds to defray its [costs].’” (Dkt. #27 Pg. ID 987 (brackets and
ellipses in original) (quoting 722 F.3d at 867).) In Pipefitters, the plaintiff insurance fund
brought suit against the defendant insurance company for breach of fiduciary duty. 722
F.3d at 865. The fund alleged that its insurance company had wrongfully imposed and
failed to disclose the imposition of a fee—a cost transfer subsidy—that was arguably
permitted under the terms of the parties’ contract. Id. at 864–65. The term of the
contract at issue, however, did not “set forth the dollar amount for the [fee] or even a
method by which the [fee was] to be calculated.” Id. at 867. Because the defendant only
charged the fee to some of its customers, the Sixth Circuit found that the defendant had
discretion in how it collected funds from the plaintiff.
This case, however, is not like Pipefitters. There is no contract provision between
Defendant and the Plans that permits Defendant to exercise discretion in the amount of
money it receives from the Plans directly. Plaintiffs do not allege that the agreement
between Xerox and the Plans in any way permitted Xerox to exercise discretion in how
much money it received from the Plans. Rather, Plaintiffs rely on the fact that their
agreement with Defendant did not limit Defendant’s ability to seek further compensation
elsewhere. (Dkt. #27 Pg. ID 989.) Indeed Plaintiffs, in response to the motion to dismiss,
refer not to Defendant’s discretion in retaining funds from Plaintiffs, but rather to
Defendant’s “discretion over the compensation it received from FE.” (Id. at Pg. ID 990.)
This is not the kind of discretion that was at issue in Pipefitters, where the defendant
exercised discretion in exacting fees from the plaintiff insurance fund.
Any fees that Defendant collected were collected from FE, and were based firstly

8

on an arm’s length negotiation between Defendant and FE—not Defendant’s discretion
as it related to the Plans. Even after Defendant and FE entered into their agreement,
Defendant’s compensation was based on factors outside of Defendant’s discretion:
namely, the number of participants who used FE’s services and the valuation of the
assets of those participants. Even so, Defendant’s receipt of a portion of FE’s fees is
entirely dependent on whether the Plan’s participants engage FE’s services in the first
place. If participants in the Plans choose not to use FE’s services, Defendant receives
no such fees at all.
Because Defendant did not have discretion over the amount of its own
compensation as it relates to Plaintiffs, Defendant was not acting as a fiduciary in
collecting fees from FE.
ii. Election of a Fiduciary
Second, Plaintiffs contend that Defendant is a fiduciary because it selected
another fiduciary—FE—and “[m]any courts have held that appointing an ERISA
fiduciary is itself a fiduciary act.” (Id. at Pg. ID 990.) They argue that “[c]onsistent with
ERISA’s functional approach, Xerox is a fiduciary by virtue of its de facto control over
FE’s appointment.” (Id.)
Defendant argues that it cannot be held liable as a fiduciary for selecting FE for
the Ford Plans because such a selection amounted to a “product design feature” for
which fiduciary liability cannot attach (Id. at Pg. ID 717–20 (“Xerox’s decision to offer FE
through its platform is a design feature of the products/services offered by Xerox.”).)
Defendants contend, in other words, that Plaintiffs have not adequately alleged that
Defendant indeed chose FE for the Ford Plans; rather, according to Defendant, FE was

9

part of the Xerox HR “product” that Ford ultimately chose. (Id. at Pg. ID 718 (“[E]ven
after Ford chose to use Xerox, Plaintiffs admit that it was Ford who voluntarily ‘elected
to include [] investment advice service[s]’ provided by FE as an additional ‘optional’
benefit for participants.” (quoting First Am. Class Action Compl., Dkt. #21 Pg. ID 364)).)
Any contention by Plaintiffs that Defendant effectively selected FE because “Ford could
not reasonably have simply moved its plans to another platform provider” is, Defendant
argues, “entirely conclusory.” (Dkt. #23 Pg. ID 718.)
The court agrees with Defendant that, from the face of Plaintiffs’ complaint, it was
Ford which ultimately elected to engage FE. (Dkt. # 21 Pg. ID 364 (“Ford elected to
include such investment advice service [sic] among the optional services made
available by Xerox HR to Plaintiff and the other participants in the Ford Plans. A
separate agreement was signed between the Ford Plans and/or Master Trust and
FE.”).) The argument that Ford could not “reasonably” have made a switch to a different
record keeper is inapposite—Ford still made the decision. And Plaintiffs have not
provided the court with any authority to suggest that the inability to “reasonably” switch
to a different record keeper amounts to a lack of choice in deciding on an investment
advice services provider.
Plaintiffs do allege—albeit through conclusory statements—that Defendant
“controlled the negotiation of the terms and conditions under which FE would provide its
services to the participants of the Ford Plans.” (Id. at Pg. ID 376.) They also allege that
“Xerox HR’s discretionary control over the provision of FE’s services to the Plans gives
Xerox HR discretionary authority and control over the management of the Plans
themselves.” (Id. at Pg. ID 378.) A similar argument was raised by plaintiffs in Hecker v.

10

Deere & Co., 556 F.3d 575, 583–84 (7th Cir. 2009). In Hecker, plaintiffs were
participants in retirement plans offered by Deere. 556 F.3d at 578. They alleged, inter
alia, that Fidelity Trust (acting simultaneously as a record keeper and administrator of
their plans, as well as trustee of two of the plans) violated its duties as a “functional
fiduciary” by improperly selecting funds that were managed by Fidelity Research, who in
turn was giving Fidelity Trust a portion of the fees it collected. Id. at 583.
The Seventh Circuit in Hecker determined that there was nothing wrong with
Fidelity’s arrangement, finding “[t]o the contrary, as Fidelity points out, there are cases
holding that a service provider does not act as a fiduciary with respect to the terms in
the service agreement if it does not control the named fiduciary's negotiation and
approval of those terms.” Id. (emphasis added). The Seventh Circuit found that Fidelity
Trust lacked such control because “the Trust Agreement gives Deere, not Fidelity Trust,
the final say on which investment options will be included. The fact that Deere may have
discussed this decision, or negotiated about it, with Fidelity Trust does not mean that
Fidelity Trust had discretion to select the funds for the Plans.” Id. While the plaintiffs on
appeal alleged that “Fidelity Trust exercised de facto control over the selection of the
funds and Deere rubber-stamped its recommendations,” the Seventh Circuit rejected
that argument because the plaintiffs had not included it in the complaint. Id. at 583–84.
Rather, plaintiffs had alleged that Fidelity Trust had merely “played a role” in the
selection of investment options. Id. As the Seventh Circuit noted: “There is an important
difference between an assertion that a firm exercised ‘final authority’ over the choice of
funds, on the one hand, and an assertion that a firm simply ‘played a role’ in the
process, on the other hand.” Id. at 584. Because the Hecker plaintiffs had not

11

sufficiently alleged control, the court declined to comment on the “possible scope of the
‘functional fiduciary’ concept.” Id.
Plaintiffs here, however, have alleged control. (See, e.g., Dkt. #21 Pg. ID 376
(“Xerox HR hired FE and controlled the negotiation of the terms and conditions under
which FE would provide its services to the participants of the Ford Plans.”).) Ultimately,
in light of the fact that the “definition of a fiduciary under ERISA is a functional one,”
Smith, 170 F.3d at 613, it is possible for a party to act as a functional fiduciary to the
extent that it controls the terms and conditions under which a fiduciary will act in a
fiduciary capacity with respect to another party.
Plaintiffs seem to suggest, in this portion of the complaint, that by “control” over
the negotiation of terms and conditions, they mean simply that FE, after contracting with
the Ford Plans, would still be required to pay Defendant a portion of its fees. (Id.
(specifying that the “terms and conditions” Defendant controlled were, “specifically, the
terms requiring payment to Xerox HR of a portion of the fees paid by retirement plan
investors for participating in the investment advice program.”).) The court doubts that
such an allegation—an allegation that does not say that Defendant was directly involved
in the Ford-FE negotiations—rises to the level of appointment of a fiduciary sufficient to
impose fiduciary liability. However, as Plaintiffs’ complaint is unclear on this point (and
thus does permit the court to infer more than a “mere possibility of misconduct,” Iqbal,
556 U.S. at 678) Plaintiffs will be given leave to replead to allege—to the extent that
they can—facts demonstrating that Defendant “exercised de facto control” over the
election of FE as a fiduciary for the Plans.
iii. Control Over the Ford-FE Agreement

12

Finally, Defendant is an ERISA fiduciary, according to Plaintiffs, because
fiduciary status is “ultimately a matter of functional control over a plan or its assets” and
the agreement between Ford and FE amounts to a “plan asset” over which Defendants
had “functional control.” (Id. at Pg. ID 994.) This argument is slightly different than
Plaintiffs’ argument, raised above, that Defendant selected FE as a fiduciary by
maintaining control over the terms of FE’s agreement with Ford; this argument alleges
that the agreement itself was a “plan asset” rather than a means for Defendant to select
FE as a plan fiduciary.
Defendant contends that it cannot be an ERISA fiduciary with respect to control
over the “plan asset” of the Ford-FE agreement because there is no reason to believe
that the Ford-FE agreement is an “asset of the Plans.” (Id. at Pg. ID 720–21.) Moreover,
Defendant argues, negotiation of the Ford-FE agreement was not a fiduciary act, and
the contract itself gives Defendant no authority over plan assets. (Id. at Pg. ID 720.)
ERISA itself does not define what it means to be an “asset” of a plan.3 Black’s
Law Dictionary, however, defines “asset” as “1. An item that is owned and has
value. 2. (pl.) The entries on a balance sheet showing the items of property owned,
including cash, inventory, equipment, real estate, accounts receivable, and
goodwill. 3. (pl.)All the property of a person (esp. a bankrupt or deceased person)
available for paying debts or for distribution.” Black’s Law Dictionary (10th ed. 2014).
“Central to the definition of ‘asset,’ then, is that the person or entity holding the asset
has an ownership interest in a given thing, whether tangible or intangible.” In re Luna,

3

29 C.F.R. § 2510.3–102 does define ERISA plan assets as they relate to
employee contributions, but only to employee contributions; as such, it is irrelevant for
this analysis.
13

406 F.3d 1192, 1199 (10th Cir. 2005). Accordingly, as Plaintiffs note, “assets of an
employee benefit plan generally are to be identified on the basis of ordinary notions of
property rights.” Hi-Lex Controls, Inc. v. Blue Cross Blue Shield of Mich., 751 F.3d 740,
745 (6th Cir. 2014) (citation and internal quotation marks omitted).
Plaintiffs rely on In re Luna, 406 F.3d at 1199–2000, for the proposition that
“[c]ontractual rights are, ordinarily, intangible property rights, which makes them plan
assets for the purposes of ERISA.” (Dkt. #27 Pg. ID 995.) But at issue in Luna was the
contractual right to collect unpaid employer contributions to the plan—not the entirety of
a contract for the provision of services between two third parties. Plaintiff has cited no
authority for the proposition that a contract for services independently negotiated
between third parties constitutes an intangible property interest rising to the level of a
plan asset. The court, therefore, finds no reason to conclude that the Ford-FE
agreement was an “asset” of the plan. Accordingly, Defendant was not a fiduciary based
upon the proffered theory that it exercised control over the Ford-FE agreement.4
B. Whether Defendant’s Fees Were “Reasonable”
Defendant argues that Plaintiffs’ claims should also be dismissed because
Plaintiffs have failed to sufficiently allege that Defendant’s fees were “unreasonable.”
Specifically, Defendant maintains that “nothing in ERISA prohibits the asset-based fee
sharing arrangement between FE and Xerox.” (Id. at Pg. ID 721.) For this proposition,
Defendant cites Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009). In Hecker, as
noted above, participants in Deere’s retirement plans brought suit against Deere,
Fidelity Management (the plans’ record keeper and trustee), and Fidelity Research (the
4

This finding does not limit Plaintiffs’ right to replead, it they can, that Defendant
had de facto control over the appointment of FE as a fiduciary as described above.
14

plans’ investment advisor) for, inter alia, failing to disclose that Fidelity Research shared
its asset-based fees with Fidelity Management. 556 F.3d at 578. The district court
dismissed the plaintiffs’ claims, and the Seventh Circuit affirmed, ruling that the failure to
disclose the fee sharing was not actionable because “such an arrangement . . . violates
no statute or regulation.” Id. at 585.
Defendant also alleges that the fee sharing arrangement in this case is
reasonable in light of the fact that “it is to the plan participants’ benefit that FE and
Xerox cooperate in providing FE’s investment advice services” and that “[u]ndertaking
the responsibility for effectuating FE’s trading instructions is a significant risk warranting
compensation commensurate with that risk.” (Dkt. #23 Pg. ID 722–23.) Moreover,
Plaintiffs do not, according to Defendant, allege that the same services are available
elsewhere for less money. (Id. at Pg. ID 723.)
Plaintiffs counter that they have alleged that Defendant’s take of FE’s charges to
the plans—approximately 30% of the gross amount in fees FE received—is “patently
disproportionate” to the “data connectivity services” Defendant ostensibly provided.
(Dkt. #27 Pg. ID 996.) That patent disproportionality, according to Plaintiffs, is made
more obvious by the fact that Defendant was “already obligated to provide data
connectivity services by virtue of its recordkeeping agreements with the plans.” (Id.)
Plaintiffs argue there is also no reason for an asset-based fee for data connectivity
services because “they are not the kind of services that get more costly to provide or
valuable in proportion to the amount of assets under management.” (Id. at Pg. ID 997.)
Plaintiffs, relying on Braden v. Wal-Mart Stores, Inc., 588 F.3d 585 (8th Cir.
2009), essentially argue that their allegations thus far permit the inference that

15

Defendant’s fees were unreasonable, and that dismissal on the basis of unreasonable
fees would be improper at this stage. (Dkt. #27 Pg. ID 998.) In Braden, a participant in
Wal-Mart’s employee retirement plan brought suit against Wal-Mart and various
individual executives for breach of fiduciary duties in managing the plan. 588 F.3d at
590. The plaintiff claimed that defendants had mismanaged the plan by allowing the
plan’s trustee to have a revenue-sharing arrangement with mutual funds that the trustee
selected for the plan participants. 588 F.3d at 595–96. The Eighth Circuit reversed the
district court’s dismissal. The district court had faulted the plaintiff for pleading “no
allegations regarding the fiduciaries’ conduct,” id. at 595, but the circuit determined that
while “none of [plaintiff’s] allegations directly addresses the process by which the plan
was managed,” it was “reasonable . . . to infer from what [was] alleged that the process
was flawed,” id. at 596.
Dismissal on the basis of whether or not the fees in this case were
“unreasonable” would be inappropriate. Indeed, an indefinite concept like
“reasonableness” is precisely the kind of factual inquiry inappropriate for a motion to
dismiss. While the fee-sharing arrangement itself, as Defendant notes, is not per se a
violation of ERISA, it does not follow that Defendant’s arrangement must have been
reasonable. The court declines Defendant’s invitation to dismiss on this basis.
C. Prohibited Transaction Claims (Count II and III)
Plaintiffs allege in Counts II and III that Defendant and/or FE engaged in
“prohibited transactions” in violation of ERISA § 406, 29 U.S.C. § 1106. Count II is
premised on Defendant’s status as a fiduciary and alleges four types of prohibited
transactions in violation of § 406(a) and § 406(b). (Dkt. #21 Pg. ID 390–91.) Count III

16

alleges that—even if Defendant is not a fiduciary—Defendant is subject to “appropriate
equitable relief” for FE’s prohibited transactions.
i. Defendant’s Fiduciary Liability
Section 406(a) bars certain transactions between the plan and a “party in
interest”—the transactions involved in § 406(a) “generally involve uses of plan assets
that are potentially harmful to the plan.” Lockheed Corp. v. Spink, 517 U.S. 882, 893
(1996). The statute provides, in relevant part, that:
Except as provided in section 1108 of this title . . . a fiduciary with respect
to a plan shall not cause the plan to engage in a transaction, if he knows
or should know that such transaction constitutes a direct or indirect . . . (C)
furnishing of goods, services, or facilities between the plan and a party in
interest; [or] (D) transfer to, or use by or for the benefit of a party in
interest, of any assets of the plan.
29 U.S.C. § 1106(a)(1)(C)–(D). Thus, in order to state a claim against Defendant for a
prohibited transaction under § 406(a), Plaintiffs are required to plead adequate facts to
establish that Defendant was a fiduciary. Additionally, under § 406(a)(1)(C), Plaintiffs
must show a transaction involving the plan and a party in interest. Under § 406(a)(1)(D),
Plaintiffs must show a transaction for the benefit of a party in interest that involves
“assets of the plan.”
Section 406(b) prohibits certain transactions between the plan and a fiduciary.
The statute provides, in relevant part, that:
A fiduciary with respect to a plan shall not . . . (1) deal with the assets of
the plan in his own interest or for his own account, [or] (3) receive any
consideration for his own personal account from any party dealing with
such plan in connection with a transaction involving the assets of the plan.
29 U.S.C. § 1106(b)(1),5 (3). As with § 406(a), Plaintiffs are required to plead

5

Defendant contends in its motion to dismiss that although Plaintiffs cite
17

adequate facts to establish that Defendant was a fiduciary. As relevant here, they
are also required to demonstrate that the fiduciary “deal[t] with assets of the
plan.”
Defendant again argues that liability for prohibited transactions in Count II cannot
attach because Defendant was not a fiduciary with respect to the challenged conduct.
(Dkt. #23 Pg. ID 726.) In addition, Defendant claims that Plaintiffs cannot establish a
transaction between the “plan” and a party in interest because the Ford Plans were not
parties to the FE-Xerox Agreement. (Id.) Finally, Defendant argues that it cannot be
subject to liability under § 406(a)(1)(D), § 406(b)(1), or § 406(b)(3) because Plaintiffs
cannot show a transaction involving “assets of the plan.” (Id.) According to Defendants,
once the Plans paid FE for FE’s services, the money collected was an asset of FE—not
an asset of the plans. (Id. at Pg. ID 726–28.)
Plaintiffs argue, as above, that Defendant was a fiduciary. (Dkt. #27 Pg. ID
1000.)6 They also argue that “[t]he Xerox-FE agreement related only to the provision of

§ 406(b)(1) in their complaint, they have not identified a violation of this section. (Dkt.
#23 Pg. ID 725 n.12.) Plaintiffs seem, in their response, to counter that such a violation
is implied by the factual statements in the First Amended Class Action Complaint. (Dkt.
#27 Pg. ID 999 n.13.) For the purposes of this Opinion and Order, the court assumes
that Plaintiffs have alleged that Defendant engaged in a transaction that violates
§ 406(b)(1).
6
Plaintiffs also note in this section of their response that “even if Xerox were not
a fiduciary, it was indisputably a party in interest, and so its receipt of compensation
from FE was still a ‘direct or indirect’ ‘furnishing of . . . services . . . between the plan
and a party in interest’ prohibited by ERISA § 406(a)(1)(C) and the diversion of fees
from FE was at least an ‘indirect’ ‘transfer to . . . a party in interest’ of plan assets
prohibited by ERISA § 406(a)(1)(D).” (Dkt. #27 Pg. ID 1000.) Plaintiffs appear to
suggest by this argument that Defendant’s status as a party in interest, standing alone,
would be enough to impose liability on Defendant for these transactions. (Id. at Pg. ID
1000–01 (“In any event, non-fiduciaries who knowingly participate in or benefit from
prohibited transactions are subject to equitable remedies, including disgorgement of
traceable proceeds . . . .”).) The court notes, however, that the prohibited transaction
18

services to ERISA plans, and in fact governed the provision of services to all of the
plans in the class,” which amounts to a “transaction involving a plan.” (Id. at Pg. ID
1001.) Finally, Plaintiffs characterize Defendant’s view of “plan assets” as “overly
myopic,” arguing that “Congress drafted the statute” to refer to “direct and indirect”
transactions “to put a stop to formalistic arguments like the one Xerox makes here, that,
if adopted, could provide an easy roadmap to launder self-dealing payments.” (Id.)
As addressed above, Plaintiffs have not sufficiently pled that Defendant was
acting as a fiduciary with respect to the Ford Plans. Therefore, Plaintiffs’ claims of
prohibited transactions in Count II will be dismissed. Because the court has granted
Plaintiffs leave to replead fiduciary status based on de facto control over fiduciary
appointment, however, the court will address Defendant’s remaining arguments.
The court agrees with Defendant that the payments from FE to Defendant do not
constitute “plan assets.” Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009), is again
helpful. The Hecker plaintiffs alleged—as Plaintiffs do here—that the Fidelity defendants
maintained discretion over the Plans’ assets “by determining how much revenue Fidelity
Research would share with Fidelity Trust.” 556 F.3d at 584. The defendants—along with
the Department of Labor—countered that the fees collected were not plan assets
because they were drawn from the mutual funds at issue in the case. Id. The court
determined that “[o]nce the fees are collected from the mutual fund’s assets and
transferred to one of the Fidelity entities, they become Fidelity’s assets—again, not the
assets of the Plans.” Id. (citing 29 U.S.C. § 1001(b)(1), which exempts assets of an
rules in § 406(a) and (b) still require that a fiduciary is involved somehow. The court will
therefore consider this argument only as it relates to Defendant’s alleged liability for
FE’s prohibited transactions to the extent that Plaintiffs have alleged that FE is a
fiduciary.
19

investment company issuing securities from being plan assets under ERISA). Plaintiffs
maintain that this “myopic” view, “if adopted, could provide an easy roadmap to launder
self-dealing payments.” (Dkt. #27 Pg. ID 1001.) But Plaintiffs have cited no authority
holding that funds paid by a plan to a service provider continue to be plan assets after
the transfer. And they fail to present any meaningful way that a court could draw a line
representing where plan assets, once lawfully paid as fees to a service provider under
the terms of a negotiated agreement, would cease to be plan assets. Plaintiffs’
argument is accordingly rejected.
This does not, however, dispose of Plaintiffs’ argument that Defendant committed
a prohibited transaction under § 406(a)(1)(C), which, by its plain language, does not
require “assets of the plan.” Defendant contends that it cannot be liable under this
provision because the plan was not a party to the Xerox-FE Agreement, and therefore
the Defendant could not have “cause[d] the plan to engage in a transaction” with FE as
required by § 406(a). (Dkt. #23 Pg. ID 726).7 Under the complaint as currently alleged,
the court agrees. Plaintiffs have nowhere alleged facts that would tend to show that
Defendant (even if it were acting as a fiduciary) caused the Ford Plans to enter into a
transaction constituting the “furnishing of goods, services, or facilities between the plan
and a party in interest.” Plaintiffs, however, will be given leave to replead facts that
would make this claim “plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009).
7

Plaintiffs, in response, appear to misapprehend what is required by the statute.
(See Dkt. #27 Pg. ID 1001.) Plaintiffs contend that Defendant is incorrect to say “that
there was no transaction involving a plan in the Xerox-FE agreement” because “the
Xerox-FE agreement related only to the provision of services to ERISA plans.” (Id.)
(emphasis original). But what is required by § 406(a) is not merely a transaction
involving the plan, but that the fiduciary “cause[d] the plan to engage in a transaction.”
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ii. Defendant’s Non-Fiduciary Liability
Plaintiffs claim in Count III that even if Defendant is not a fiduciary with respect to
the challenged conduct, FE undoubtedly is. Defendant, therefore, can still be liable to
Plaintiffs for prohibited transactions under ERISA § 406(a)(1)(C), (a)(1)(D), (b)(1), or
(b)(3) because Defendant is a “party in interest” to the Ford Plans. (Dkt. #21 Pg. ID
394–95; Dkt #27 Pg. ID 1000–01.) Specifically, Plaintiffs argue that FE is a fiduciary to
the Ford Plans because it “‘rendered investment advice for a fee or other compensation’
with respect to Plan assets, and thus satisfies ERISA § 3(21)(A)(ii).” (Dkt. #27 Pg. ID
986.) FE has also, according to Plaintiffs, acknowledged its status as a fiduciary in both
its agreement with Ford and the filings by its parent company with the Securities and
Exchange Commission. (Id. at Pg. ID 986–87.) And even if FE is not a fiduciary,
according to Plaintiffs, “[t]he Ford Plans’ other fiduciaries are, by definition, fiduciaries,”
and “[o]f course the Plans’ fiduciaries should have been aware of the fees being paid to
Xerox.” (Id. at Pg. ID 1003.)
Defendant counters that it cannot be held liable for a prohibited transaction claim
by FE because FE was not a fiduciary “with respect to its negotiation and receipt of
compensation.” (Dkt. #23 Pg. ID 730.) Defendant also contends that Plaintiffs have not
sufficiently alleged that any Ford Plan fiduciaries (including “sponsors, trustees,
administrators, and investment committees”) were involved in the alleged prohibited
transactions. (Id. at Pg. ID 730.) Finally, Defendants argue, Plaintiffs have failed to
allege that a fiduciary “‘cause[d] the plan’ to engage in a prohibited transaction that ‘he
knows or should know’ constitutes a prohibited transaction” as required by § 406(a).
(Id.) While “Ford ‘caused’ the Ford plans to enter the Ford-FE agreement[,] . . . there are

21

no allegations regarding the Ford Plans’ fiduciaries and their actual or constructive
knowledge of the alleged prohibited transaction.” (Id.)
The court agrees that there is nothing to suggest that FE was a fiduciary to the
Ford Plans when it negotiated its own compensation with Ford. See Seaway Food
Town, Inc. v. Med. Mut. of Ohio, 347 F.3d 610, 619 (6th Cir. 2003). While FE became a
fiduciary to the Ford Plans with respect to the investment advice it provided, it was not
wearing its “fiduciary hat” when it negotiated its agreement with Ford. See Pegram v.
Herdrich, 530 U.S. 211, 226 (2000). Moreover, there is nothing to suggest that FE was
acting as a fiduciary for the Ford Plans when it negotiated its agreement with
Defendant, either. And while Plaintiffs make the blanket statement in their response to
the motion to dismiss that “the Ford Plans’ other fiduciaries are, by definition,
fiduciaries” that should have been aware that Defendant’s receipt of fees constituted a
prohibited transaction, the court finds this claim nowhere alleged or supported in the
complaint. Accordingly, Plaintiffs’ claim for non-fiduciary liability under Count III is
dismissed. Plaintiffs are given leave to replead, if they can, that the Ford Plans’ other
fiduciaries caused the Plans to enter into a transaction that they knew or should have
known was prohibited.
iii. Defendant’s “Safe Harbor” Under § 408(b)(2)
Defendant argues that even if Plaintiffs have sufficiently alleged that it engaged
in prohibited transactions, Defendant is still entitled to dismissal because “Xerox’s
receipt of fees from FE falls comfortably within the prohibited transaction exemption set
forth in ERISA § 408(b)(2).” (Id. at Pg. ID 728.) Section 408(b)(2), 29 U.S.C.
§ 1108(b)(2), provides that prohibitions on transactions in § 406 “shall not apply” to

22

transactions including “[c]ontracting or making reasonable arrangements with a party in
interest for office space, or legal, accounting, or other services necessary for the
establishment or operation of the plan, if no more than reasonable compensation is paid
therefor.”
The court notes at the outset that—though neither party has addressed this
distinction—to the extent that Defendant would be entitled to a prohibited transaction
“safe harbor,” that safe harbor would only extend to violations of § 406(a), not § 406(b).
See Hi-Lex Controls, Inc. v. Blue Cross Blue Shield of Mich., 751 F.3d 740, 750–51 (6th
Cir. 2014) (holding, along with “the majority of courts that have examined this statutory
interpretation issue,” that § 408 applies to transactions under § 406(a), not § 406(b)).
Regardless, as Plaintiffs point out in their response, this “safe harbor” is a
defense that is not an appropriate basis for dismissal on a motion to dismiss. See Allen
v. GreatBanc Trust Co., 835 F.3d 670, 676 (7th Cir. 2016) (“[A]n ERISA plaintiff need
not plead the absence of exemptions to prohibited transactions.”)). Defendants, citing
Hecker, 556 F.3d at 588, contend that this court may properly consider this exemption
because Plaintiffs “put it in play” by anticipating it in their complaint. (Dkt. #23 Pg. ID
728.) But, as the Hecker court acknowledged, dismissal on the basis of a § 408(b)
exemption, even when anticipated in the complaint, requires that the complaint includes
“facts that establish an impenetrable defense to its claims.” Hecker, 556 F.3d at 588
(quoting Tamayo v. Blagojevich, 526 F.3d 1074, 1086 (7th Cir. 2008)). Here, as noted
above, the court finds nothing in the complaint to suggest that Plaintiffs have
inadequately pled that FE’s fees were unreasonable. The court, therefore, will not
dismiss the complaint on the basis of Defendant’s proposed “safe harbor.”

23

D. Disclosure Requirements (Count IV)
Finally, Plaintiffs claim that Defendant is liable for its failure to disclose its fee
sharing arrangement under 29 C.F.R. § 2550.408b–2(c). Defendant contends that
“there is no basis to conclude that this regulation provides a private right of action.” (Dkt.
#23 Pg. ID 731.) Plaintiffs claim that the private right of action stems first from § 409, 29
U.S.C. § 1109, which provides for relief against “a fiduciary with respect to a plan who
breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by
this subchapter.” Plaintiffs also claim the right stems from § 502(a)(2) and § 502(a)(3),
which provide that a civil action may be brought “for appropriate relief under section
1109 of this title” and for relief from “any act or practice which violates any provision of
this subchapter,” respectively. (Dkt. #27 Pg. ID 1004.) Plaintiffs, in their response to the
motion to dismiss, use brackets to replace “this subchapter” in these provisions with
“[ERISA].”8 Thus, according to Plaintiffs, because § 2550.408b–2(c) was promulgated
pursuant to § 535, it is a “‘provision of ERISA’ and a ‘responsibility, obligation, or duty,’
imposed by ERISA” subjecting Defendant to liability under § 409, § 502(a)(2), and
§ 502(a)(3). (Id.).
Plaintiffs cite no authority for the proposition that this regulation provides a
private right of action, and the court has found none. Rather, Defendant argues—and
the court agrees—that Plaintiffs improperly rely on the slight-of-hand substitution of
“[ERISA]” for “this subchapter” to support their argument that § 2550.408b–2(c) provides
a private right of action. In the court’s view, Congress’ use of the phrase “this

8

See, e.g., Dkt. #27 Pg. ID 1004 (“See ERISA § 409 (providing relief against
fiduciaries who ‘breach[] any of the responsibilities, obligations, or duties imposed . . .
by [ERISA]’).” (brackets in original)).
24

subchapter” means nothing other than that; this provision is limited to the actual
statutory language, and excludes ERISA regulations like § 2550.408b–2(c) from the
scope of civil enforcement through a private cause of action.
This interpretation is supported by the fact that another ERISA provision
specifically permits enforcement based on violation of ERISA regulations: section 501,
which permits criminal enforcement of ERISA, provides that “[a] person who willfully
violates any provision of part 1 of this subtitle, or any regulation or order issued under
any such provision, shall upon conviction be fined not more than $100,000 or
imprisoned not more than 10 years, or both.” 29 U.S.C. § 1131 (emphasis added). The
civil enforcement provisions of ERISA, however, contain no such language. “Where
Congress includes particular language in one section of a statute but omits it in another
section of the same Act, it is generally presumed that Congress acts intentionally and
purposely in the disparate inclusion or exclusion.” Russello v. United States, 464 U.S.
16, 23 (1983) (internal quotation omitted).
This decision also accords with other courts’ refusal to permit a private cause of
action for violations of ERISA regulations promulgated pursuant to subsections of
ERISA §§ 502 and 503, 29 U.S.C. §§ 1132 and 1133. See, e.g., Mass. Mut. Life Ins.
Co. v. Russell, 473 U.S. 134, 144 (1985) (determining that, despite the fact that claim
processing took longer than the time permitted by ERISA regulation, “there really is
nothing at all in the statutory text [of § 503] to support the conclusion that such a delay
gives rise to a private right of action for compensatory or punitive relief”); Walter v. Int’l
Ass’n of Machinists Pension Fund, 949 F.2d 310, 316 (10th Cir. 1991) (declining to
permit a private cause of action for failure to disclose under ERISA regulation 29 C.F.R.

25

§ 2560.503–1(g)); Groves v. Modified Ret. Plan, 803 F.2d 109, 118 (3d Cir. 1986)
(“Because § 502(c) authorizes penalties only for breach of duties imposed by ‘this
subchapter,’ such sanctions cannot be imposed for violation of an agency regulation.”).
IV. Conclusion
Plaintiffs have not yet carried their burden under Iqbal and Twombly to plead
facts sufficient to “state a claim for relief that is plausible on its face.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009). Because the court “need not accept as true legal conclusions
or unwarranted factual inferences,” Directv, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir.
2007), Plaintiffs’ claims in Counts I, II, and III will be dismissed. Plaintiffs are granted
leave to replead as described herein by November 2, 2017, if they can do so consistent
with Rule 11. Because Plaintiffs have no private right of action for violation of 29 C.F.R.
§ 2550.408b–2(c), Count IV is dismissed without leave to replead. Accordingly,
IT IS ORDERED that Defendant’s Motion to Dismiss Plaintiffs’ First Amended
Class Action Complaint is GRANTED and Plaintiffs’ First Amended Class Action
Complaint (Dkt. #21) is DISMISSED.
s/Robert H. Cleland
ROBERT H. CLELAND
UNITED STATES DISTRICT JUDGE

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Dated: October 19, 2017
I hereby certify that a copy of the foregoing document was mailed to counsel of record
on this date, October 19, 2017, by electronic and/or ordinary mail.
s/Lisa Wagner
Case Manager and Deputy Clerk
[phone]
S:\Cleland\KNP\Civil\16-13980.CHENDES.dismiss.ERISA.KNP.docx

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