KRUGER et al v. NOVANT HEALTH, INC. et al
Filing
39
MEMORANDUM OPINION AND ORDER signed by CHIEF JUDGE WILLIAM L. OSTEEN, JR on 09/17/2015. For the reasons set forth herein, IT IS HEREBY ORDERED that Defendants' Motion to Dismiss (Doc. 19 ) is DENIED.(Taylor, Abby)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
KAROLYN KRUGER, M.D., CANDACE
CULTON, FRANCES BAILLIE,
EILEEN SCHNEIDER, JUDY LEWIS,
LINDA CHRISTENSEN, and
TERESA POWELL, individually
as representatives of a class
of similarly situated persons,
and on behalf of the Novant
Health Retirement Plus Plan,
Plaintiffs,
v.
NOVANT HEALTH, INC.,
ADMINISTRATIVE COMMITTEE OF
NOVANT HEALTH, INC., NOVANT
HEALTH RETIREMENT PLAN
COMMITTEE, and JOHN DOES 1-40,
Defendants.
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1:14CV208
MEMORANDUM OPINION AND ORDER
OSTEEN, JR., District Judge
This matter comes before this court on the Motion to
Dismiss (Doc. 19) filed by Defendants Novant Health, Inc.,
Administrative Committee of Novant Health, Inc., and Novant
Health Retirement Plan Committee, pursuant to Rule 12(b)(6) of
the Federal Rules of Civil Procedure. Plaintiffs filed a
response (Doc. 26) and Defendants have replied (Docs. 33, 34).
This matter is now ripe for resolution, and for the reasons
stated herein, this court will deny Defendants’ Motion.
I.
BACKGROUND
A.
The Parties
Karolyn Kruger, Candace Culton, Frances Baillie, Eileen
Schneider, Judy Lewis, Linda Christensen, and Teresa Powell
(collectively “Plaintiffs”) filed the present class-action
lawsuit on March 12, 2014, pursuant to 29 U.S.C. § 1132(a)(2)
and (3)1 on behalf of the Tax Deferred Savings Plan of Novant
Health, Inc., and the Savings and Supplemental Retirement Plan
of Novant Health, Inc. (collectively “the Plan”). Named as
Defendants are: Novant Health, Inc. (“Novant”), Administrative
Committee of Novant Health, Inc. (“Administrative Committee”),
Novant Health Retirement Plan Committee (“Retirement Plan
Committee”) (collectively “Defendants”), and John Does 1-40.2
(Complaint (“Compl.”) (Doc. 1).) Plaintiffs, all former or
current employees of Novant, are residents of North Carolina and
are all participants in the Plan. (Id. at 3-4.) Novant is a
North Carolina corporation comprised of member hospitals,
1
29 U.S.C. § 1132 (2012) is the Civil Enforcement Section
of the Employee Retirement Income Security Program (“ERISA”).
2
John Does 1-20 are the individual members of the
Administrative Committee and John Does 21-40 are the individual
members of the Retirement Plan Committee. Plaintiffs do not know
the identity of the individual John Does. (Compl. (Doc. 1) at
6.)
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medical centers, and outpatient surgery centers throughout North
Carolina, South Carolina, and parts of Virginia. (Id. at 4.)
B.
The Plan
The Plan is an Employee Retirement Income Security Program
(“ERISA”) governed individual account plan. (Defs.’ Mem. of Law in
Supp. of Mot. to Dismiss (“Defs.’ Mem.”) (Doc. 20) at 6.)3
Pursuant to ERISA, Novant is the sponsor of the Plan (29 U.S.C.
§ 1002(16)(B) (2012)), the administrator of the Plan (29 U.S.C.
§ 1002(16)(A)), and a party in interest to the Plan (29 U.S.C.
§ 1002(14)). (Compl. (Doc. 1) at 4.) The Plan is offered to Novant
employees to manage their retirement savings. (Id. at 2.) The Plan
is administered by the Administrative Committee. The Retirement
Plan Committee is a committee appointed by Novant’s board to
oversee the investment options of the Plan. (Id. at 5-6.)
Plaintiffs allege that all Defendants are Plan fiduciaries. (Id.
at 4-6.) To date, Defendants have not denied their fiduciary
status.
Great-West Life & Annuity Insurance Company (“Great-West”)
is a service provider to the Plan, providing both administrative
and recordkeeping services. Great-West is compensated for said
3
All citations in this Memorandum Opinion and Order to
documents filed with the court refer to the page numbers located
at the bottom right-hand corner of the documents as they appear
on CM/ECF.
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services by the Plan. (Id. at 8.)
D.L. Davis & Company, Inc.
(“Davis”) is a brokerage company founded by Derrick L. Davis
who, at all times relevant herein, served as the chief executive
officer and president of Davis. (Id.) Davis received payments
from the Plan for advisory services. (Id. at 9.)
Defendants determine what investment choices Plan
participants have as investment options. (Id.)
The investment
options in the two retirement vehicles that comprise the Plan
are identical, and participants are instructed to select their
investments for both plans. (Id. at 7.) Generally, the Tax
Deferred Savings Plan is the retirement plan designated for
participants’ contributions through salary deferrals, and the
Savings and Supplemental Retirement Plan is the retirement plan
designated for the employer matching contributions. (Id.) In
2009, the Plan consisted of approximately 25,000 participants,
and the number of participants has not materially changed since
then. (Id.)
Despite little increase in the number of Plan participants,
the Plan’s assets have grown consistently since 2008. In 2008,
the Plan’s total assets were approximately $612 million. In
2009, the Plan’s assets grew to over $940 million, an increase
of more than 54%. By 2012, the Plan’s total assets had grown to
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over $1.42 billion, an increase of over 128% from 2008. (Id.
at 8.)
C.
Factual Allegations
Plaintiffs assert five causes of action alleging breach of
fiduciary duties by Defendants in their payment of excessive
fees stemming from (1) imprudent investments in unnecessarily
expensive funds and (2) overpayment to two service providers,
Great-West and Davis. (Id. at 2.)
Specifically, Plaintiffs
argue that Defendants breached their fiduciary duty when the
Plan offered only retail class shares to participants when
identical, less expensive, institutional class shares of the
same funds were available. Plaintiffs allege that the Plan is
comprised of a very large pool of assets and that retirement
plans of such size have the ability to obtain institutional
class shares of mutual funds. Despite this ability, each of the
funds included in the Plan offers only retail class shares,
which charge significantly higher fees than institutional shares
for the same return on investment. (Id. at 9-11.)
Plaintiffs next assert that the increased assets in the
Plan have greatly increased the amount of payment to the service
providers, Great-West and Davis, in excess of what is reasonable
for the services they provide. (Id. at 21-22, 25-26.) Plaintiffs
further allege that the revenue-sharing setup of the Plan,
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ostensibly used to defray administrative costs, is actually
being used to provide additional payments in the form of
“kickbacks” to Great-West and Davis. (Id. at 23, 26-27.) These
costs are allegedly being paid by the Plan in spite of
Defendants’ repeated representations that Novant itself is
responsible for the payment of administrative fees of the Plan.
(Id. at 20.)
Novant informs Plan participants that they are entitled to
obtain copies of Plan documents and information by making a
written request to the Chairman of the Administrative Committee.
(Id. at 9.) Plan participants should receive this requested
information within 30 days. (Id.) Plaintiff Kruger made such a
demand on January 27, 2014, but had not received any response
when the Complaint in the current action was filed on March 12,
2014. (Id.) Therefore, Plaintiffs had no Plan documentation when
this action was filed.
II.
LEGAL STANDARD
“To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim
to 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)).
A claim is facially plausible
provided the plaintiff provides enough factual content to enable
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the court to reasonably infer that the defendant is liable for
the misconduct alleged.
Id. (citing Trombly, 550 U.S. at 556).
Rule 12(b)(6) protects against meritless litigation by
requiring sufficient factual allegations “to raise a right to
relief above the speculative level” so as to “nudge[] the[]
claims across the line from conceivable to plausible.” Twombly,
550 U.S. at 545, 570; see Iqbal, 556 U.S. at 678. Under Iqbal,
the court performs a two-step analysis. First, it separates
factual allegations from allegations not entitled to the
assumption of truth (i.e., conclusory allegations, bare
assertions amounting to nothing more than a “formulaic
recitation of the elements”). Iqbal, 556 U.S. at 681 (quoting
Trombly, 550 U.S. at 555).
Second, it determines whether the
factual allegations, which are accepted as true, “plausibly
suggest an entitlement to relief.” Id. “At this stage of the
litigation, a plaintiff's well-pleaded allegations are taken as
true and the complaint, including all reasonable inferences
therefrom, are liberally construed in the plaintiff's favor.”
Estate of Williams-Moore v. All. One Receivables Mgmt., Inc.,
335 F. Supp. 2d 636, 646 (M.D.N.C. 2004) (citing McNair v. Lend
Lease Trucks, Inc., 95 F.3d 325, 327 (4th Cir. 1996)).
“Nonetheless, the requirement of liberal construction does not
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mean that the court can ignore a clear failure in the pleadings
to allege any facts [that] set forth a claim.”
Id. at 646.
III. ANALYSIS
Plaintiffs assert five causes of action alleging breach of
ERISA fiduciary duties by Defendants in their management of the
Plan. This court takes each cause of action in turn to determine
whether or not Plaintiffs have stated a claim.
A.
Disloyalty and Imprudence as to Excessive Investment
Options
Plaintiffs contend that the Plan is invested in funds that
result in the Plan overpaying millions of dollars in fees.
(Compl. (Doc. 1) at 10.) Plaintiffs claim that when a plan is as
large as Novant’s, fiduciaries can leverage the asset size of a
plan to obtain less expensive institutional rate funds, instead
of the more expensive retail rate funds that the Plan currently
is invested in. (Id.) Plaintiffs specifically allege that:
Defendants breached their duties by retaining the
higher fee share class investment options in the Plan
when far lower cost funds with the identical managers,
investments styles, and stocks were available.
. . . Defendants breached their fiduciary duties by
failing to consider those lower cost funds with the
identical managers, investments styles, and stocks
where available.
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(Id. at 37.)4
Under ERISA, a fiduciary has a duty to operate “with the
care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims.” 29 U.S.C.
§ 1104(a)(1)(B). As the Fourth Circuit has maintained, “[t]he
fiduciary obligations of the trustees to the participants and
beneficiaries of [an ERISA] plan are . . . the highest known to
the law.” Tatum v. RJR Pension Inv. Comm., 761 F.3d 346, 356
(4th Cir. 2014), cert. denied, ____ U.S. ____, 135 S. Ct. 2887
(2015) (quoting Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d
Cir. 1982)). The Fourth Circuit also stated:
Congress enacted ERISA to protect “the interests
of participants in employee benefit plans and their
beneficiaries . . . by establishing standards of
conduct, responsibility, and obligation for
fiduciaries of employee benefit plans, and by
providing for appropriate remedies, sanctions, and
ready access to the Federal courts.”
4
Plaintiffs assert several other ways that the Plan could
potentially reduce fees by changing the funds it is invested in
and changing other investment structures. (Compl. (Doc. 1) at
11-19.) However, relying only on the retail class funds versus
institutional class funds argument, this court finds that
Plaintiffs state an excessive fees breach claim sufficient to
survive a motion to dismiss. Therefore, this court does not need
to address other arguments regarding investment choices at this
juncture.
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Id. at 355 (quoting 29 U.S.C. § 1001(b)). The duty of a
fiduciary to act with prudence includes a duty to “initially
determine, and continue to monitor, the prudence of each
investment option available to plan participants.” DiFelice v.
U.S. Airways, Inc., 497 F.3d 410, 423 (4th Cir. 2007) (emphasis
omitted).
Although the Fourth Circuit has not specifically addressed
whether or not an excessive fees claim under ERISA can survive a
motion to dismiss, other circuits have. Defendants rely on
several circuit court decisions dismissing excessive fees claims
to support their motion to dismiss. See Loomis v. Exelon Corp.,
658 F.3d 667 (7th Cir. 2011) (holding no fiduciary breach where
plaintiffs argued plan should only offer institutional funds);
Renfro v. Unisys Corp., 671 F.3d 314, 327 (3d Cir. 2011)
(holding no breach where Unisys did not offer exclusively retail
class funds, in fact “[t]he Unisys plan contains a variety of
investment options . . . .”);
Hecker v. Deere & Co., 556 F.3d
575, 586 (7th Cir. 2009) (finding no excessive fee breach when
there was a wide range of expense ratios among the twenty mutual
funds offered and the 2,500 other funds available to
participants online). Specifically, Defendants cite these cases
to assert:
Both the use and fees of the retail funds
challenged in this case are consistent with those in
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Hecker, Renfro, and Loomis. As in those cases, Novant
offers a “sufficient mix” of 23 different investment
options which spanned the risk/return spectrum. The
Plan presented participants with the opportunity to
invest in mutual funds with expense ratios ranging
from 0.42% to 1.51%, which is consistent with the
range of fees that Circuit courts have found
reasonable as a matter of law. This alone dooms
plaintiffs’ investment fee challenges.
(Defs.’ Mem. (Doc. 20) at 16 (citations omitted).)
In affirming that the Hecker plaintiffs failed to state a
claim to survive a motion to dismiss, the Seventh Circuit
focused on the number of investment options available to plan
participants and the range of fees for those options.
We turn next to plaintiffs' contention that Deere
violated its fiduciary duty by selecting investment
options with excessive fees. In our view, the
undisputed facts leave no room for doubt that the
Deere Plans offered a sufficient mix of investments
for their participants. Thus, even if, as plaintiffs
urge, there is a fiduciary duty on the part of a
company offering a plan to furnish an acceptable array
of investment vehicles, no rational trier of fact
could find, on the basis of the facts alleged in this
Complaint, that Deere failed to satisfy that duty. As
the district court pointed out, there was a wide range
of expense ratios among the twenty Fidelity mutual
funds and the 2,500 other funds available through
BrokerageLink. At the low end, the expense ratio was
.07%; at the high end, it was just over 1%.
Importantly, all of these funds were also offered to
investors in the general public, and so the expense
ratios necessarily were set against the backdrop of
market competition. The fact that it is possible that
some other funds might have had even lower ratios is
beside the point; nothing in ERISA requires every
fiduciary to scour the market to find and offer the
cheapest possible fund (which might, of course, be
plagued by other problems).
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Hecker, 556 F.3d at 586. The Hecker analysis suggests two
factors were controlling – the expense ratio ranges and the fact
that the funds were offered to the general public, implicating
“the backdrop of market competition.”
Id.
Relying upon the
Hecker analysis, the Loomis and Renfro cases also dismissed
excessive fees claims in which the range of fees was similar to
Hecker.
See Loomis, 658 F.3d at 669 (0.03% to 0.096%), and
Renfro, 671 F.3d at 319 (0.1% to 1.21%). Both the Seventh
Circuit in Loomis5 and the Third Circuit in Renfro6 held that the
large, diversified menu of options available to plan
participants countered any claim of breach of fiduciary duty.
5
The Seventh Circuit held that “[s]imilar arguments [by
plaintiffs] were made in Hecker but did not prevail. Deere
offered 25 retail mutual funds with expense ratios from 0.07% to
just over 1% annually. We held that as a matter of law that was
an acceptable array of investment options.” Loomis, 658 F.3d at
670.
6
The Third Circuit held that:
We agree with our sister circuits' approach to
evaluating these claims. An ERISA defined contribution
plan is designed to offer participants meaningful
choices about how to invest their retirement savings.
Accordingly, we hold the range of investment options
and the characteristics of those included options —
including the risk profiles, investment strategies,
and associated fees — are highly relevant and readily
ascertainable facts against which the plausibility of
claims challenging the overall composition of a plan's
mix and range of investment options should be
measured.
Renfro, 671 F.3d at 327.
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Present Plaintiffs suggest the argument in the current
action differs from the cases cited by Defendants in that,
Plaintiffs do not allege that the mere presence of any
retail mutual fund in their Plan is imprudent. Rather,
[Plaintiffs] allege that the absence of any
institutional share class of the same mutual funds
shows a complete disregard of those cheaper but
otherwise identical share classes.
(Pls.’ Opp’n to Mot. to Dismiss (“Pls.’ Resp.”) (Doc. 26) at
13.)
This court is not persuaded the Hecker analysis controls
this case at the pleadings stage, where all inferences must be
drawn in favor of the non-moving party.
First, Hecker seems to
hold that a fees range of 0.07% to just over 1%, when the funds
were also offered to the general public, is reasonable as a
matter of law, and further that a fiduciary has no duty “to
scour the market to find and offer the cheapest possible fund.”
Hecker, 556 F.3d at 586.
By contrast, here, the fees offered by
Defendants range from 0.425 to 1.51%, a notably different range
from that offered in Hecker and related cases, particularly when
looking at overall investment amounts in the millions of
dollars.
Further, Plaintiffs have alleged these fees are
excessive, not by virtue of their percentage as in Hecker and
its progeny, but because there are different versions of the
same investment vehicle available to the Plan that have lesser
fees. “Novant Defendants breached their fiduciary duties by
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failing to consider those lower cost funds with the identical
managers, investments styles, and stocks where available.”
(Compl. (Doc. 1) at 37.) Under the prudent man standard, without
evidence, this court finds it difficult to conclude as a matter
of law that these allegations are not sufficient to state a
claim.
While it may be a close call, all reasonable inferences
must be drawn in favor of Plaintiffs.
Furthermore, it may be reasonable to infer that these
retail investment options are available to the public and
therefore set against the backdrop of market competition.
However, Plaintiffs are not arguing that Defendants had a duty
to scour the market to find and offer any cheaper investment.
Instead, Plaintiffs allege that “lower cost funds with the
identical managers, investments styles, and stocks” should have
been considered by the Plan. (Id.) Plaintiffs assert that the
Plan is comprised of a very large pool of assets and that
retirement plans of such size have the ability to obtain
institutional class shares of mutual funds. Despite this
ability, each of the funds included in the Plan offers only
retail class shares, which charge significantly higher fees than
institutional shares for the same return on investment. (Id. at
9-11.)
This may or may not be true, and may or may not be
required under the applicable “prudent man” standard, but this
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court is not persuaded this is not sufficient to state a
plausible claim.
Plaintiffs argue that another circuit case, Braden v. WalMart Stores, Inc., 588 F.3d 585 (8th Cir. 2009), is more
analogous to the present facts than the cases cited by
Defendants. In Braden, the Eighth Circuit found that the
plaintiff stated enough of a breach of fiduciary duty claim
under ERISA to survive a motion to dismiss where,
The complaint allege[d] that the Plan comprises a very
large pool of assets, that the 401(k) marketplace is
highly competitive, and that retirement plans of such
size consequently have the ability to obtain
institutional class shares of mutual funds. Despite
this ability, according to the allegations of the
complaint, each of the ten funds included in the Plan
offers only retail class shares, which charge
significantly higher fees than institutional shares
for the same return on investment.
Braden, 588 F.3d at 595. Defendants assert that Braden is
distinguishable from the present facts because Braden depended
on the “kickback” allegation. (Defs.’ Mem. (Doc. 20) at 15 n.5.)
This court disagrees. In Braden, the court held that the
plaintiff’s claim of fiduciary breach stemming from the use of
the retail class shares by the plan when institutional options
were available was enough to survive a motion to dismiss. The
Braden court explained that the plaintiff satisfied pleading
requirements where the complaint alleged that: (1) the 401(k)
plan was comprised of a very large asset pool, (2) large
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retirement plans have the ability to utilize institutional
shares instead of retail shares, and (3) the plan’s funds only
included retail class shares which charge significantly higher
fees than institutional shares for the same return on
investment.7 Braden, 588 F.3d at 595. The Braden court did not
require the kickback allegation to survive a motion to dismiss,
as Defendants assert. (Defs.’ Mem. (Doc. 20) at 15.) Addressing
the kickback allegation in the Rule 12(b)(6) context, the Eighth
Circuit noted:
Braden could not possibly show at this stage in the
litigation that the revenue sharing payments were
unreasonable in proportion to the services rendered
because the trust agreement between Wal–Mart and
Merrill Lynch required the amounts of the payments to
be kept secret. It would be perverse to require
plaintiffs bringing prohibited transaction claims to
plead facts that remain in the sole control of the
parties who stand accused of wrongdoing.
7
The Braden court addressed other allegations, but the fact
that the enrichment of the trustee at the expense of the plan is
considered after the court had already decided that the
plaintiff had sufficiently alleged the process was flawed
indicates that the court did not give it the great weight that
present Defendants would have this court accord to this
distinction. See Braden, 588 F.3d at 596. Furthermore, the
Braden court characterized the payments to the trustee as
revenue sharing that was “not made in exchange for services
rendered.” Id. Given that the amounts paid to Great-West and
Davis have been characterized as “revenue sharing” that
Plaintiffs allege were not accompanied by an equivalent value of
services from the two providers, this court fails to see the
distinction between Braden and this case that Defendants attempt
to draw. Braden did not conclusively find that a breach had been
committed, only that the plaintiff had produced sufficient
allegations to “state a claim for breach of fiduciary duty.” Id.
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Braden, 588 F.3d at 602 (citation omitted).
In light of the present facts, this court is persuaded that
the Braden analysis agrees with Fourth Circuit precedent that
fiduciaries of an ERISA plan are responsible for monitoring “the
prudence of each investment option available to plan
participants.” DiFelice, 497 F.3d at 423 (emphasis omitted).
This court finds Braden persuasive on the issue of what is
required for a plaintiff to state an excessive fees claim for
breach of fiduciary duty under ERISA at the motion to dismiss
stage. In Braden, as in the present action, the plaintiff
alleged that the plan fiduciaries were utilizing imprudently
expensive investment options to the detriment of the plan.
Following this logic, present Plaintiffs have stated enough of a
claim for breach of fiduciary duty to survive Defendants’ motion
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to dismiss based on the imprudent retention of the retail class
funds when institutional class shares were available.8
B.
Disloyalty and Imprudence as to Excessive Payments to
Great-West
Plaintiffs next assert that Defendants breached their
fiduciary duties by making excessive payments to service
provider Great-West for recordkeeping services. Specifically,
Plaintiffs allege:
Defendants failed to monitor Great-West’s compensation
to ensure that those payments provided no more than
reasonable compensation, failed to recover for the
Plan the amount of revenue Great-West received that
exceeded a reasonable fee for the type of services it
provided, and failed to put the recordkeeping services
out for competitive bidding.
(Compl. (Doc. 1) at 41.)
As with liability for the selection and maintenance of
retail class funds over institutional class funds, the duty of
the Plan fiduciaries with respect to the recordkeeping fees paid
8
Defendants’ arguments in support of their motion to
dismiss are not limited to those addressed in this Order.
Defendants also argue that the Internal Revenue Code bars
certain contentions as a matter of law, that the comparison to
Vanguard Fund fees is inapt, and that revenue sharing is not
accounted for in Plaintiffs’ allegations. (Defs.’ Mem. (Doc. 20)
at 7.) These are all strong arguments proffered by Defendants.
However, it does appear to this court, under the prudent man
standard, that these arguments are better resolved at a later
stage of the proceedings in light of the fact this court finds
the allegations sufficient to allow the excessive fees claim to
move forward. This court will therefore defer ruling on these
arguments to summary judgment, (see Fed. R. Civ. P. 12(i)), and
will deny the motion to dismiss without prejudice.
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by the Plan is the “prudent man” standard. See 29 U.S.C.
§ 1104(a)(1)(B) (2012). Furthermore, plan fiduciaries are
obligated to continue to monitor the financial state of the plan
and ensure that the investments are prudent. DiFelice v. U.S.
Airways, Inc., 497 F.3d 410, 423 (4th Cir. 2007). Though the
Fourth Circuit has not yet reached the question of when
recordkeeping fees become imprudent, case law from other
jurisdictions indicates that recordkeeping fees can rise to a
level to be adjudged imprudent. See, e.g., Tussey v. ABB, Inc.,
746 F.3d 327, 335–37 (8th Cir.), cert. denied, ____ U.S. ____,
135 S. Ct. 477 (2014) (affirming the lower court’s findings that
the plan’s fiduciaries were liable for their failure to monitor
recordkeeping costs, despite the presence of revenue sharing
offsets); George v. Kraft Foods Glob., Inc., 641 F.3d 786, 798–
800 (7th Cir. 2011) (holding that, based upon the opinions of
experts in the field that recordkeeping costs should have been
less, “a trier of fact could reasonably conclude that defendants
did not satisfy their duty to ensure that [the recordkeeper’s]
fees were reasonable”); Wsol v. Fiduciary Mgmt. Assocs., Inc.,
266 F.3d 654, 657–58 (7th Cir. 2001) (upholding the prudence of
a fund selection tainted by ethical problems solely on the basis
that the rates charged were standard rates and not excessive).
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While Tussey features “significant allegations of
wrongdoing” which the Eighth Circuit found to be important in
their decision, Tussey, 746 F.3d at 336, the Seventh Circuit did
not describe any such wrongdoing in George, 641 F.3d at 798-800,
nor was the lack of such wrongdoing dispositive to the fees
issue in Wsol, 266 F.3d at 657-58. This court is not determining
whether or not the revenue-sharing plan constitutes a wrongful
“kickback” as Plaintiffs allege.9 See Tussey, 746 F.3d at 336
(positively summarizing the district court’s finding that
revenue sharing is a “common and acceptable investment industry
practice[] that frequently inure[s] to the benefit of ERISA
plans”)(internal quotation marks omitted). But see Braden, 588
F.3d at 590–91, 600-01 (finding that plaintiff had sufficiently
alleged that the revenue-sharing scheme employed by Wal-Mart was
“not reasonable compensation for services rendered by [the
trustee], but rather were kickbacks paid by the mutual fund
companies in exchange for inclusion of their funds in the
[p]lan” at the motion to dismiss stage).
9
Despite the fact that the revenue sharing may not
constitute an illegal kickback, this court notes that Plaintiffs
allege Defendants repeatedly represented that the administrative
costs of the Plan would not be paid by the Plan itself (Compl.
(Doc. 1) at 30), yet Defendants’ brief claims that the expenses
were being paid by the Plan and later partly defrayed by revenue
sharing. (Defs.’ Mem. (Doc. 20) at 19-21.)
- 20 -
However, even without the kickback allegations, Plaintiffs
state a plausible claim that the failure to monitor the sudden
spike in recordkeeping fees rendered their judgment imprudent.
Like the George plaintiffs, present Plaintiffs allege that the
Plan’s recordkeeping fees exceed a prudent amount. Whether or
not those fees were actually imprudent is a question of fact and
not one that can be resolved on the pleadings. George, 641 F.3d
at 800 (finding that “a trier of fact could reasonably conclude
that defendants did not satisfy their duty to ensure that [the
recordkeeper’s] fees were reasonable”).
Defendants argue that the $35 per account recordkeeping fee
Plaintiffs cite as the industry average is insufficient to
allege an unreasonable fee without an accounting for how
Plaintiffs arrived at this figure. (Defs.’ Mem. (Doc. 20) at
21-22.) However, the mere addition of a figure for context does
not alone dispose of Plaintiffs’ allegations. Plaintiffs are not
claiming that $35 is the only reasonable fee. Instead,
Plaintiffs use the $35 figure to bolster their argument that
“the compensation [that recordkeepers] received from the Plan
increased dramatically, such that a material change occurred in
the administration of the Plan and the level of payment of these
services.” (Compl. (Doc. 1) at 40.) Consequently, Defendants’
failure to monitor the Plan to rectify such overpayment resulted
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in a loss to the Plan of substantial assets. (Id. at 40-41.)
This is sufficient to raise an allegation of breach of fiduciary
duty under George, which this court finds persuasive. While
Defendants claim that Plaintiffs have not alleged facts
regarding why the amount of the recordkeeping fees are
excessive, the services provided, or how the fees charged to the
Plan were excessive in light of those services, this court finds
that those are the types of facts warranting discovery, and,
therefore, dismissal at this stage is not appropriate.
C.
Disloyalty and Imprudence as to Excessive Payments to
Davis
Plaintiffs next allege that Defendants breached their
fiduciary duties when they allowed the Plan to compensate Davis
at unreasonable and excessive levels. Further, Plaintiffs allege
that Defendants “failed to have a prudent process for evaluating
the reasonableness” of Davis’ compensation. (Compl. (Doc. 1) at
42-44.) Defendants assert that “[t]hese allegations are not
plausibly pled in light of the D.L. Davis service agreement with
the Plan.” (Defs.’ Mem. (Doc. 20) at 24.) This court is not
persuaded by Defendants’ argument on this point. At this stage
in the proceedings, it is impossible to deduce whether or not
Davis’ compensation was reasonable without further discovery
into facts about Davis, including what exactly Davis did, how
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exactly Davis was paid, and whether Defendants evaluated Davis’
compensation prudently.10
D.
Failure to Monitor Fiduciaries and Knowing
Participation in Breaches of Fiduciary Duties
Plaintiffs’ fourth and fifth claims of failure to monitor
and knowing participation are derivative claims, intrinsically
related to the first three claims. This court does not find
dismissal of Counts I, II, or III warranted at this time, and
thus declines to dismiss Plaintiffs’ remaining claims.
10
Plaintiffs argue that several documents pertaining to
Davis’ compensation and duties are inadmissible in the Rule
12(b)(6) motion stage. (Pls.’ Resp. (Doc. 26) at 14-15.) The
cases cited by Defendants to support their assertion that this
court can consider these documents in this stage of the
proceedings do not persuade this court. Specifically, Haberland
v. Bulkeley, 896 F. Supp. 2d 410 (E.D.N.C. 2012), which
Defendants rely on, allowed the court to “consider documents
that are referenced in and central to the complaint, and the
authenticity of which neither party questions.” Haberland, 896
F. Supp. 2d at 419. The Haberland court used this logic to allow
consideration of documents filed with the Securities and
Exchange Commission and referenced specifically in the
complaint. Here, the documents Defendants would like this court
to consider were not referred to in the complaint and are not
public filings. Therefore, this court finds it improper to
consider these documents, like the Davis service agreement, at
this time. See also Phillips v. LCI Int'l, Inc., 190 F.3d 609,
618 (4th Cir. 1999) (holding that the court may consider an
article not attached to the complaint in determining whether to
dismiss the complaint because the article was integral to and
explicitly relied on in the complaint and because the plaintiffs
did not challenge its authenticity).
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IV.
CONCLUSION
For the reasons set forth herein, IT IS HEREBY ORDERED that
Defendants’ Motion to Dismiss (Doc. 19) is DENIED.
This the 17th day of September, 2015.
_______________________________________
United States District Judge
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