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Sixth Circuit Affirms Dismissal of ERISA Case, Holding that Plan Management was not Imprudent



Yosaun Smith v. CommonSpirit Health et al. concerns the Plaintiff’s, Yosaun Smith (“Smith”), action against the administrators of her ERISA retirement plan, Defendants CommonSpirit (“CommonSpirit”) and Catholic Health Initiatives Retirement Plans Subcommittee (“Subcommittee”) alleging that the Defendants violated ERISA when they did not replace “actively managed mutual funds with passively managed mutual funds.” The Court of Appeals for the Sixth Circuit upheld the decision from the district court, affirming that ERISA does “not give the federal courts a broad license to second-guess the investment decisions of retirement plans,” and that remedies are only available under ERISA when a fiduciary duty has been violated. Thus, the Plaintiff in this case alleged no facts supporting the conclusion that the Defendants had violated any fiduciary duties under ERISA.

Over the last few decades, employer provided retirement funds have commonly been structured as defined-contribution 401(k) plans. These plans allow participants to contribute pre-tax income to accounts, the amount often matched by employers. Therefore, the value of the assets in the account is the determining factor of the amount participants will receive in their payout; “A beneficiary’s payout thus may ‘turn on the plan fiduciaries’ particular investment decisions.’” ERISA provides that under a defined-contribution plan, participants may bring an action for breach of fiduciary duty against the plan administrators if the fund is imprudently managed. Until recent years, plans were actively managed by plan fiduciaries where “the portfolio manager actively makes investment decisions and initiates buying and selling of securities in an effort to maximize return.” However, more recent trends have enabled investors to use index funds, creating a “fixed portfolio structured to match the overall market or a preselected part of it.” This option means that there is “little to no judgment” involved in the management of the plan.

The Plaintiff in this case is an employee of Catholic Health Initiatives (otherwise known as CommonSpirit Health) and has been a participant in its defined-contribution 401(k) plan (“Plan”) since 2016. The Plan is administered by an appointed administrative committee and serves more than 105,000 participants with more than $3 billion in assets. Options available to participants include index funds with low management fees (0.02%) as well as funds that are actively managed with management fees up to 0.82%. If employees do not select a fund, they are placed by default into the Fidelity Freedom Funds, which are actively managed. These are a group of “target date fund[s]” meaning that “managers change the allocation of the underlying investments that they hold over time, say by selling funds that hold stocks to buy a greater proportion of funds that hold bonds or cash.” The purpose of this management is the “reallocation of asset types [allowing] managers to protect an employee’s investment gains and spare her the unpredictability of market fluctuations as she approaches retirement.”

The Plaintiff alleged that CommonSpirit breached its fiduciary duty of prudence under ERISA when it offered multiple actively managed investment funds despite the availability of index funds with “higher returns and lower fees.” The Plaintiff specifically referenced three actively managed funds (the Fidelity Freedom Funds, American Beacon Fund, and AllianzGI Fund) that demonstrated worse performance than relative available index funds. It is further alleged that fees associated with the recordkeeping and management of the Plan were excessive.

The Defendants’ motion to dismiss the complaint was granted by the district court. The court held that the Plaintiff “failed to allege facts from which it could plausibly infer that CommonSpirit had acted imprudently in violation of ERISA.” In analyzing the case on appeal, the Court states that in an examination of a dismissal based on the “sufficiency of a complaint,” dismissal is appropriate under Federal Rule of Civil Procedure 12(b)(6) when a complaint “fails to state a claim upon which relief can be granted.” Combined with Federal Rule of Civil Procedure 8 (requiring a “short and plain statement of the claim showing that the pleader is entitled to relief”), a plaintiff must provide sufficient “facts to state a claim to relief that is plausible on its face.”

The Court concludes that the Plaintiff has not met the requirements of Rule 12(b)(6) and Rule 8, and that she did not “plausibly [plead] that this ERISA plan acted imprudently merely by offering actively managed funds in its mix of investment options.” The Plaintiff opines that “investors should be very skeptical of an actively managed fund’s ability to consistently outperform its index,” and that the Freedom Funds plan “[chases] returns by taking levels of risk that render [them] unsuitable for the average retirement investor.” The Court rejects this argument, stating that “there is nothing wrong with permitting employees to choose [plans] in hopes of realizing above-average returns over the course of the long lifespan of a retirement account – sometimes through high-growth investment strategies, sometimes through highly defensive investment strategies.” Further, the Court states that if plan managers refused to provide this option to participants, that action would constitute imprudent management. The Court additionally highlights that the Plaintiff (as well as any participant in the Plan) could choose to participate in an index fund offered by the Defendants. It is concluded that “[o]ffering actively managed funds in addition to passively managed funds was merely a reasonable response to customer behavior.” The Court cites several cases from other circuits stating that the offering of both actively and passively managed funds does not violate any fiduciary duty under ERISA. Therefore, the Defendants did not act imprudently in the management of the Plan.

The Court also addressed whether it is imprudent for administrators to offer actively managed plans at all, deciding that as long as the company does not imprudently offer “specific actively managed funds,” it has not violated its fiduciary duties. Put simply, the court states that ERISA “does not allow fiduciaries merely to offer a broad range of options and call it a day.” Thus, so long as the options offered by the fiduciaries are prudent, there has been no violation under ERISA. The Court states that the Plaintiff in this case has also not alleged facts showing that the Defendants violated ERISA in this manner. Rather, she only compared the performance of the Fidelity Freedom Funds to its passively managed counterpart, the Fidelity Freedom Index Funds. Though the Index Funds trailed the Freedom Funds by up to 0.63 percentage points annually, this does make other funds imprudent. Therefore, “a showing of imprudence [does] [not] come down to simply pointing to a fund with better performance.” Further, “claims require evidence that an investment was imprudent from the moment the administrator selected it, that the investment became imprudent over time, or that the investment was otherwise clearly unsuitable for the goals of the fund based on ongoing performance.”

The Plaintiff brings other facts forward alleging imprudent actions on the part of the plan managers, calling certain decisions “red flags.” She includes the “discretion that fund managers had in choosing investment, net outflows from these funds to other investments, and outside analysts’ critical evaluations of the funds” as indicators that the managers were acting imprudently. The Court again disagrees, stating then when “[viewed] with the proper foresight-over-hindsight perspective, [these] [facts] do not make a cognizable claim of imprudence.”

Regarding the Plaintiff’s allegation that the Plan charged excessive fees for recordkeeping and administration, she alleged that the Plan charged between $30 and $34 per person compared to $35 charged for both recordkeeping and administration by smaller plans. She further opines that investment management fees associated with the Plan were excessive, as they amount to “around 0.55% of total assets annually.” Regarding allegations of excessive recordkeeping fees, the Court holds that “Smith fails to give the kind of context that could move this claim from possibility to plausibility.” This failure stems from her failure to “[plead] that the services that CommonSpirit’s fee covers are equivalent to those provided by the plans comprising the average in the industry publication that she cites.”

In addressing Smith’s allegations that management fees were excessive, the Court states that it is rejected for the same reason as Smith’s base allegations of imprudence: the Defendants offer multiple plan options with a variety of costs and the existence of one that is more expensive than others alone is not proof of mismanagement. They state, “An average plan-wide management fee of 0.55% is merely evidence that CommonSpirit offers a number of actively managed funds, and an imprudence claim based on this fee alone fails for the same reason that Smith’s more general attack on active investment fails.” The Court further states that the rejection of claims for excessive fees when “it is clear those fees are set by market forces” is common in appellate courts and therefore the appropriate decision.

Therefore, the Court of Appeals affirmed the district court, dismissing the Plaintiff’s claims.

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