401(k) Lawsuit Dismissal for Excessive Charges

A 401(k) excessive fee case was dismissed for failing to present a sufficient case to go to trial, but was given an opportunity to remedy the situation.

This is plaintiff Lauren Cunningham[i] alleged that the USI Insurance Services defendants failed to prudently and loyally monitor the Plan’s RPS expenses, “instead of allowing the Plan to pay USICG nearly three times what a prudent and loyal fiduciary would have paid for such services”. Specifically, Judge Nelson S. Román of the U.S. District Court for the Southern District of New York noted that the lawsuit — filed just over a year ago — alleged that plan participants paid excessive RPS fees to USI because it extracted these fees directly from their accounts, as well as indirectly through investment options that contain revenue sharing.

Not only that, the lawsuit claims that the plan pays more for the RPS provided by USI than other smaller plans (fees ranging from $81 to $154 per participant, whereas a reasonable annual fee would have been around $42 $ per participant), and that USICG fees were excessive “compared to other plans of similar size[ii] materially receiving the same services. These charges resulted in lower net returns, “significantly reducing the retirement savings of the plaintiff and other plan participants, causing them millions of dollars in additional losses, to the benefit of USI.”

Motion to dismiss

In deciding a motion to dismiss under Rule 12(b)(6), Judge Román noted that “the Court must accept all of the factual allegations in the Complaint as true and draw all reasonable inferences in favor of the plaintiff”, and that in order “…to survive a motion to dismiss, a complaint must contain sufficient factual elements, accepted as true, to state a plausible prima facie claim for relief. Further, he explained – citing precedents – than “mere labels and conclusions” or “the recitation of formulas[s] elements of a cause of action will not suffice”; rather, the complaint is “[f]the actual allegations must be sufficient to elevate a right to redress above the speculative level.

In making this motion to dismiss, Judge Román explained (Cunningham vs. USI Ins. Serves., LLC, SDNY, No. 7:21-cv-01819, 3/25/22) which USI defendants dismissed for failure to report. “Specifically,” he wrote, “they argue that: (1) Plaintiff ignores the pleading requirement that a claim for breach of duty of care based on excessive fees must establish that the fees were excessive in relation to the specific services rendered; (2) Plaintiff’s claim for breach of duty of loyalty fails because the allegations underlying that claim represent a mere repackaging of the “excessive fees” allegations; and (3) plaintiff’s claim for failure to supervise fails because it is based on her frivolous claim for breach of duty of care.”

Regarding the first point, Judge Román noted that the suit provides a compiled table of data from the 2018 Form 5500 filings of several “comparable retirement savings plans” and that “in this table, the applicant identifies ten planes with a range of different numbers. participants, assets, registrar and administration (“RK&A”) price and RK&A price per participant”, together with Applicant’s own calculated estimates of the average number of plan participants, RK&A price and of the RK&A price per participant from its Form 5500 deposits from 2015 to 2019. “At the end of the day,” he notes, “the table shows that if the RK&A price of the other plans per participant ranges between $28 and $53 $, that of the plan is $109.”

It goes on to note that the Defendants argue that while the Plaintiff’s excessive expense allegations attempt to compare these other “‘carefully selected 401(k) plans’ with the plan based on certain numbers”, it “fails to allege how these retirement savings plans compare in the services they render…. Basically, the comparison was only on the fees without taking into account the services rendered for these fees. And although the plaintiff here alleged that the services were “substantially the same”, Judge Román pointed out that “none of these ten allegedly ‘comparable’ schemes offer participants the services of advice or assessment in benefits that the USICG offers to plan participants”.

“Critical Failure”

However, this was not the main flaw in Judge Roman’s assessment. Citing this as “most important”, he explained that the allegations “also fail crucially” because there is no “indication as to how [she] calculated the per participant fee for record keeping and administration fees” for the plan and each of the comparable retirement savings plans. While the allegation was that USI charged plan participants fees directly through periodic deductions from their accounts and indirectly through revenue sharing, “plaintiff appears to allege that the plan’s RK&A price per participant of $109 in the Complaint table is the average of the sum of direct and indirect plan costs per participant from 2015 to 2019. However, the plaintiff does not specify how it calculated the indirect plan costs because they are not available on their own on the filings of Form 5500.” In fact, he noted, “…nowhere in the Complaint does Plaintiff provide any figures, estimates, or formulas from which the Court could reasonably infer that Plaintiff has obtained such results.

“Instead,” he explained, “plaintiff alleges that (i) $49 per year was deducted directly from plan participants’ accounts; and (ii) the amounts of money USI received as direct compensation from 2015 and 2019. Plaintiff then generally alleges that USI indirectly charged plan participants subtransfer agency fees (without to mention numbers), after which it offers another table purporting to provide the sum of the direct and indirect costs charged to each Plan member for each year from 2015 to 2019.” Further, he explained that there was no explanation of how the same figures were calculated for the allegedly “comparable” plans.

Regarding the second and third complaints, Judge Roman said that “…even interpreting the complaint in the way most favorable to her, the plaintiff’s claim for breach of duty of loyalty seems inherently dependent on her claim for breach of the duty of care. In other words, if plaintiff’s claim for breach of duty of care fails, then her claim for breach of duty of loyalty will also fail. Thus, because plaintiff has essentially “recast[s] alleged breaches of duty of care as unfair acts, it does not make a sufficient claim for breach of duty of loyalty” – and dismissed plaintiff’s claim for breach of duty of loyalty – but without prejudice – giving plaintiff up to May 20 to amend the complaint/lawsuit and remedy its shortcomings.

What does that mean

In recent days, following the United States Supreme Court’s decision in the Northwestern case, the Ninth Circuit Court of Appeals has shown willingness to reinstate two lawsuits that had previously been dismissed for alleged lack of credible and specific allegations, concluding that the allegations made by the party not seeking to dismiss the lawsuit were, in fact, plausible and believed to be factual.

Here we have another district, and what appears to be a fairly detailed analysis of the claims made and the calculations behind them. Although the dismissal is only temporary (pending an amendment), it reveals a willingness to really dig into the details behind these comparison charts, rather than just accepting them at face value.

Will there be an amendment? Will it prove the case – at least to the point of going to trial? We will see.

[i] Represented by Franklin D. Azar & Associates PC and Chimicles Schwartz Kriner & Donaldson-Smith LLP.

[ii] The original lawsuit said the plan had 9,867 participants with account balances and nearly $848 million in net assets as of December 31, 2019, based on publicly available Form 5500 data.

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