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Court Dismisses Case Alleging Breach of ERISA

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Fiduciaries of 401(k) retirement plans continue to be plagued by class actions brought under the Employee Retirement Income Security Act (ERISA) challenging their fiduciary management of investment options and participant fees.

A recent federal court decision, however, shows that fiduciaries of ERISA retirement plans may be able to attack and defeat complaints alleging breaches of ERISA fiduciary duties at the pleading stage if the right arguments are made and if certain fact patterns are present.

In Jones v. Dish Network Corp. (case), pending before the U.S. District Court for the District of Colorado, the Plaintiffs sued the Dish Network Corporation, its Board of Directors, and its Retirement Plan Committee (the "Defendants") alleging they breached their ERISA fiduciary duties of prudence and loyalty with respect to the company's 401(k) Plan (the "Plan"). Specifically, the Plaintiffs alleged that the Defendants selected and retained both a total return institutional class fund (the "Class Fund") and an actively managed target date suite of funds (the "Managed Funds") in the Plan's investment option menu despite alleged poor market performance and high expense ratios. The Plaintiffs also alleged it was imprudent to allow the Plan to pay excessive recordkeeping and administrative fees.

The Defendants filed a motion to dismiss the Plaintiffs' complaint. Their motion was referred to a magistrate judge. On January 31, 2023, the magistrate judge issued a report and recommendation that recommended granting the Defendants' motion. A district judge then adopted that report and recommendation and entered an order dismissing the Plaintiffs' complaint on March 27, 2023.

The Plaintiffs' Imprudent Investment Allegations

In their motion, the Defendants argued the Plaintiffs lacked standing to challenge the Class Fund as an imprudent investment selection. The court agreed, holding that the Plaintiffs did not have standing because no Plaintiff ever invested in the Class Fund. The Plaintiffs argued they were challenging the Defendants' investment selection and monitoring process as a whole, but the court reasoned that because none of the Plaintiffs had ever invested in the alleged imprudent fund they did not allege an injury that could be traced back to the allegedly imprudent decision to retain the Class Fund, or the process used to make that decision. So, they had no standing to challenge decision-making process for the Class Fund.

The Defendants also argued the Plaintiffs' complaint failed to plausibly plead a breach of the ERISA duty of prudence regarding the Managed Funds because the complaint did not contain facts that, if true, demonstrated a flawed fiduciary decision-making process. The court accepted this argument, reasoning that the Plaintiffs had not pled facts supporting an inference that the Defendants had a flawed process for reviewing the Managed Funds. The Plaintiffs argued it was imprudent to offer the Managed Funds to plan participants, as they were actively managed and had higher fee ratios than the lower cost index versions of the Managed Funds. Yet the court reasoned that it is not per se unreasonable to offer actively managed funds, and that prudent fiduciaries offer ranges of reasonable investment options – including funds that are actively and passively managed. The mere inclusion of a higher-cost investment option therefore did not support an inference that the process the Defendants used to evaluate investment funds was imprudent.

The Plaintiffs also argued that retaining the Managed Funds was imprudent because Morningstar reports indicated that investors were pulling investments out of the Managed Funds. The court rejected this argument, reasoning that the Morningstar reports should be considered as a whole "rather than cherrypicked for statements supporting Plaintiffs' position[.]" So, the Plaintiffs were unable to establish the Managed Funds had such a poor reputation that no reasonable fiduciary would have retained them.

The Plaintiffs' Excessive Fee Allegations

The Plaintiffs also claimed the Defendants breached their ERISA fiduciary duties by allowing the Plan to pay unreasonable recordkeeping and administrative fees. They tried to point to comparator plans with lower fees to support this assertion. Yet the court dismissed the claim, reasoning that both the Plaintiffs' calculations and comparisons were flawed.

To support their claim, the Plaintiffs averaged the Plan's per-participant administrative fees over five years. They then found purported comparator plans that paid lower per-participant administrative fees in the year 2020 than the Plan had during the five-year period. The court, however, rejected this pleading methodology and reasoned that the attempt to compare the Plan's average fee over five years with fees paid by comparators during a single year was "inapt and insufficient for the Court to plausibly infer that the Plan's [administrative] fees were excessive."

The Plaintiffs' Breach of Duty of Loyalty Allegation

The Plaintiffs further alleged that the Defendants' selection and retention of the Managed Funds constituted a breach of the ERISA fiduciary duty of loyalty. They claimed the Defendants' actions allowed the investment firm managing those funds to collect allegedly improper compensation. Yet the court dismissed this claim because the Plaintiffs did not plead any facts demonstrating that the Defendants acted with the purpose of improperly benefiting themselves or the investment firm at the Plan's expense. So, the Plaintiffs failed to plead a breach of the duty of loyalty because they presented no facts indicating that the Defendants' acted with a motive of placing their own economic interests, or the interests of the investment firm, before the best interests of the Plan.

Takeaways

Fiduciaries of ERISA retirement plans are still being targeted by class actions brought under ERISA accusing fiduciaries of acting imprudently or not being loyal to the interests of the participants in the retirement plans for which they are responsible. Fiduciaries facing such complaints should review the allegations carefully and consider how the facts and methodology offered by the plaintiffs can be challenged if, taken as a whole, they show that the plaintiffs lack standing or have not pled enough facts to suggest a flawed fiduciary process.

Posted In: Employee Retirement Income Security Act (ERISA)

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