6th Circuit Tosses ERISA Fiduciary Breach Claims
On June 21, 2022, CommonSpirit Health defeated a putative class action brought by former employees who alleged that the company mismanaged their 401(k) plan by offering higher-cost, actively managed investment options when lower-cost index funds with better returns were available. The plaintiffs also alleged that the plan’s recordkeeping and investment management fees were excessive when compared to industry averages.
The plaintiffs argued that CommonSpirit and its retirement plan committee were imprudent for offering actively managed funds instead of cheaper index funds in the plan’s investment lineup, noting that the actively managed funds trailed the three- and five-year returns of purportedly comparable index funds. The 3-judge panel disagreed and affirmed the district court’s dismissal, reasoning that “[m]erely pointing to another investment that has performed better in a five-year snapshot of the lifespan of a fund that is supposed to grow for fifty years does not suffice to plausibly plead an imprudent decision—largely a process-based inquiry—that breaches a fiduciary duty.” The Court clarified that comparing actively and passively managed funds, without consideration for each fund’s discrete objectives, “will not tell a fiduciary which is the more prudent long-term investment option.”
The Court also affirmed dismissal of the recordkeeping and management fee claims. The plaintiffs alleged that the plan’s recordkeeping fee, ranging between $30 and $34 per participant, was excessive compared to “industry average costs” totaling $35 per person in other plans. But the Court held that the plaintiffs failed to plead that the fees were excessive relative to the services rendered, noting that the plaintiffs failed “to give the kind of context that could move this claim from possibility to plausibility.” And as to the management fees, the Court opined that this claim was merely a recast of the active vs. passive fund claim, iterating that higher investment fees alone are insufficient to state a breach of fiduciary duty claim, a process-based inquiry.
The case is Smith v. CommonSpirit Health, et al., No. 21-5964 (6th Cir. 2022)