This is an Advertisement

Sixth Circuit Revives ERISA Claim, Provides Opportunity for Discovery



The 6th Circuit recently heard a case in which participants in a TriHealth (“Defendants”) 401(k) fund (“Plan”) alleged that the administrators of the Plan breached their fiduciary duty to the participants by offering costly mutual fund options. The 6th Circuit revived one of the class claims, though affirmed the lower court’s dismissal of other claims brought under ERISA. This case was brought by the named Plaintiff, Danielle Forman, and included allegations that TriHealth breached its fiduciary duties under ERISA by charging high fees to participants, providing funds that underperformed their counterparts, and offering expensive actively managed options. The decision to dismiss these claims relied heavily on the precedent set in Yosaun Smith v. CommonSpirit Health et al. (follow the link to see a summary of CommonSpirit:

However, one of the claims against TriHealth was not governed by the CommonSpirit decision. The 6th Circuit panel of judges stated that “[t]he gist [of the claim] is this: Even if a prudent investor might make available a wide range of valid investment decisions in a given year, only an imprudent financier would offer a more expensive share when he could offer a functionally identical share for less.” Therefore, “The plaintiffs in this last respect have stated a plausible claim that TriHealth acted imprudently.”

Forman’s attorney argued that the differences between the fees charged for the respective funds were “sort of a bulk purchase discount”, and that “[s]hare classes that were in the fund lineup were simply more expensive than other share classes of the same fund that were available to the Defendants for years.” This argument weighed into the panel’s decision to uphold this particular claim while dismissing the others. They further rejected arguments made by the Defendants that the Plaintiffs hadn’t provided a comparable plan to demonstrate that the retail share classes’ returns were lower than other options available to the Defendants. The Court stated, “Unlike a claim premised on an imprudent choice between two different mutual funds that perform differently over time, a claim premised on the selection of a more expensive class of the same fund guarantees worse returns.”

The Defendants also argued that the share class offerings were “revenue-sharing arrangements” and thus the remaining claim should also be dismissed. The Court disagreed, first stating that the argument was offered in an amicus brief by the U.S. Chamber of Commerce, not TriHealth, and second that the argument provides a “competing inference” as an explanation for the offering of the funds. Therefore, “In the absence of discovery or some other explanation that would make an inference of imprudence plausible, we cannot dismiss the case on this ground.”

This case began in July of 2019 with the named Plaintiff brining an action in Ohio federal court, which dismissed the case based on the failure to state a claim several months later in September. The Plaintiffs subsequently appealed. The case is now remanded by the Court of Appeals to address the remaining claim against the Defendants.

The result of this case shows a trend in the 6th Circuit to let issues such as the one revived by the panel be resolved in discovery. Attorneys have speculated that this process will provide clarity for the standards expected in pleadings. After the Supreme Court decision in Hughes v. Northwestern University, this clarity is welcome. Essentially, courts are now considering whether revenue-sharing agreements are considered to be under the purview of Hughes (which held that employers couldn’t rely on providing better investment options to relieve them from claims stemming from offering worse ones). Therefore, TriHealth gives lower courts the chance to determine if revenue-sharing agreements breach the fiduciary duties required under ERISA. Opinions of this decision vary between counsel for beneficiaries and counsel for employers, with each side focusing on the aspects that most favor arguments that will have to be made in the future. The former feel positively about the revival of the share class claim due to the commonality of employers providing such options to employees. The latter focus on the claims for violations of ERISA that were dismissed by the court. The nature of the holding is such that plaintiffs are now more likely to move past the pleading stage in cases of this nature and therefore engage in discovery, which may facilitate settlement agreements between parties

Contact Information