It has been a wild year for new 401(k) excessive-fee litigation, but a recent dismissal shows that not every lawsuit holds water -- at least on the first pass.
Last week a federal judge in U.S. District Court for the Northern District of California tossed a case filed against Salesforce.com Inc. over alleged fiduciary breaches in its $2 billion retirement plan. That lawsuit, which was filed in March, is among dozens filed this year by law firm Capozzi Adler; it has brought similar claims against LinkedIn, TriNet, Nvidia, Sutter Health, B. Braun Medical and others.
In the complaint filed against Salesforce, the plaintiffs alleged that the company violated its fiduciary duty by failing to select the lowest-cost investment options available to the plan. As in many other lawsuits, they pointed to the presence of actively managed funds on the plan menu, rather than lower-fee passively managed funds. They also alleged that not opting for lower-cost share classes of the some of the 27 funds in the plan, or institutional products such as collective investment trusts, represented a breach in the duty of prudence.
The complaint listed numerous investments that were purportedly similar but lower cost. However, lawyers specializing in the Employee Retirement Income Security Act have long noted that courts tend not to look at fees in isolation. Further, plan fiduciaries that document a prudent process for selecting investments, rather than simply choosing the lowest-cost options available, have some defense against excessive-fee claims.
“In support of their asserted comparison, plaintiffs allege the passively managed funds have ‘the same investment style’ or ‘materially similar characteristics’ as certain actively managed funds offered in the plan … Such conclusory allegations, however, are not sufficient to state a claim for relief,” Judge Maxine Chesney wrote in the Oct. 5 order. “Moreover, as defendants also point out, allegations ‘based on five-year returns are not sufficiently long-term to state a plausible claim of imprudence.’”
The plaintiffs also alleged that the plan fiduciaries should have known that lower-cost share classes of the same mutual funds used in the plan were available. However, the mere existence of lower-fee versions of the same products was not compelling, the judge wrote.
Further, the claim about the plan not having considered CITs failed because the products are different from mutual funds and should not be compared solely on cost, the order read.
The plaintiffs also raised a complaint over an alleged failure by the plan sponsor to monitor fiduciaries, though the judge noted that that issue was derivative of the first claim and thus dismissed it.
Though the claims were dismissed, the plaintiffs have until Oct. 23 to file an amended complaint that addresses the deficiencies the judge cited. It is common to refile amended complaints in ERISA excessive-fee cases, though one of the law firms representing the plaintiffs, Los Angeles-based Rosman & Germain, declined to comment. Lawyers from Capozzi Adler, which is seeking approval to represent plaintiffs in California, where they do not practice, did not respond to a request for comment.
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