Recently, a federal judge in Texas court ruled in favor of retired NFL player, Michael Cloud, determining that the administrators of The Bert Bell/Pete Rozelle NFL Player Retirement Plan (“Plan”) violated their fiduciary duties under ERISA in denying Cloud a full and fair application review. Cloud’s appeal concerned his eligibility for the highest level of disability benefits under the Plan, which was subsequently denied by the Defendants.

Cloud boasts an impressive NFL career, playing 7 seasons, including for the New England Patriots during their 2004 Super Bowl winning year. Cloud additionally played for the Kansas City Chiefs and the New York Giants between 1999 and his retirement in 2006. During his career, Cloud states that he injured “virtually every aspect of his body” as well as endured numerous cases of head trauma known as “dings” (an instance where a player’s vision goes black due to a hard hit to their head). One of Cloud’s last head injuries sustained in 2004 led to his early retirement, as the frequency and severity of the injuries had caused “cumulative mental disorders.” In 2010, Cloud began receiving benefits under the retirement Plan, and was found to be “totally and permanently” disabled in 2014. Subsequently, in 2016 Cloud applied for reclassification under the Plan but was denied both initially and on appeal.

Cloud brought an action against the Plan in 2020, alleging that his application for reclassification was never fully reviewed by the Defendants. He alleged that the Defendants (including six board members for the Plan) did not adequately review his over 1000-page application. Instead, a paralegal was made to write a summary of the application for the administrators. It has been speculated that the decision on the matter was already drafted before the administrators viewed the summary of the new appeal, as it cited to incorrect documents that belonged to the wrong benefits plan. Further, the denial letter included contradicting information with written minutes taken at the board meeting during their deliberation; the minutes state that the only reason for the denial was the Cloud did not show by clear and convincing evidence the existence of a new injury, while the letter additionally states that the application was made outside of a 180-day deadline among other timing issues. During closing arguments, counsel for Cloud stated that the issue of unfair denial is not new nor exclusive to Cloud, and that the Plan consistently failed to fully review applications by reviewing as many as 50 at a time with no discussion of the specific cases.

The Defendants argued that the payment of benefits was not appropriate, as Cloud did not sustain any new injuries between his first application in 2014 and his application for reclassification in 2016. They further opined that Cloud’s current benefits category was “exactly where he should be” and that he was one of the few beneficiaries to bring an action against the Plan.

The Court did not agree, stating that the denial was incorrect and Cloud’s reclassification application should be granted and he should be placed in the highest benefits category due to the injuries sustaining during his career. Judge Karen Gren Scholer stated that the Plan obviously spent “virtually no time in rubber-stamping the decision.” She further stated that the Plan’s practice of reviewing player’s applications was “wrong and absurd.” Regarding the argument that the low number of cases brought against the Plan is evidence that the decision was correct, Judge Scholer stated that this essentially constituted an “if it ain’t broke, don’t fix it” argument and thus was rejected. She further speculated that it is incredible that under the Plan only 30 former players (all of whom have injuries causing paralysis) are at the highest benefit tier. Thus, she stated that, “The Plan is broke and it’s time to fix it.”

Both Cloud and his family are grateful that the long battle for benefits due to him under the Plan is finally over. Cloud described the Plan’s denial and its effects had “tortured [his] family for years without caring.” This decision is not only a victory for Cloud and his family, but other members of the same or similar retirement plans who have been denied full and fair review of applications by plan administrators. In fact, even outside of the realm of plans relating to former athletes, the decision solidifies the fiduciary duties owed to beneficiaries under ERISA and sets the standard for individualized, thorough, and fair reviews of applications and benefit determinations.

The 6^th 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 6^th 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: https://www.mehrfairbanks.com/blog/sixth-circuit-affirms-dismissal-of-erisa-case-holding-that-plan-management-was-not-imprudent/).

However, one of the claims against TriHealth was not governed by the CommonSpirit decision. The 6^th 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 6^th 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

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.

Recently, a federal judge in Texas court ruled in favor of retired NFL player, Michael Cloud, determining that the administrators of The Bert Bell/Pete Rozelle NFL Player Retirement Plan (“Plan”) violated their fiduciary duties under ERISA in denying Cloud a full and fair application review. Cloud’s appeal concerned his eligibility for the highest level of disability benefits under the Plan, which was subsequently denied by the Defendants.

Cloud boasts an impressive NFL career, playing 7 seasons, including for the New England Patriots during their 2004 Super Bowl winning year. Cloud additionally played for the Kansas City Chiefs and the New York Giants between 1999 and his retirement in 2006. During his career, Cloud states that he injured “virtually every aspect of his body” as well as endured numerous cases of head trauma known as “dings” (an instance where a player’s vision goes black due to a hard hit to their head). One of Cloud’s last head injuries sustained in 2004 led to his early retirement, as the frequency and severity of the injuries had caused “cumulative mental disorders.” In 2010, Cloud began receiving benefits under the retirement Plan, and was found to be “totally and permanently” disabled in 2014. Subsequently, in 2016 Cloud applied for reclassification under the Plan but was denied both initially and on appeal.

Cloud brought an action against the Plan in 2020, alleging that his application for reclassification was never fully reviewed by the Defendants. He alleged that the Defendants (including six board members for the Plan) did not adequately review his over 1000-page application. Instead, a paralegal was made to write a summary of the application for the administrators. It has been speculated that the decision on the matter was already drafted before the administrators viewed the summary of the new appeal, as it cited to incorrect documents that belonged to the wrong benefits plan. Further, the denial letter included contradicting information with written minutes taken at the board meeting during their deliberation; the minutes state that the only reason for the denial was the Cloud did not show by clear and convincing evidence the existence of a new injury, while the letter additionally states that the application was made outside of a 180-day deadline among other timing issues. During closing arguments, counsel for Cloud stated that the issue of unfair denial is not new nor exclusive to Cloud, and that the Plan consistently failed to fully review applications by reviewing as many as 50 at a time with no discussion of the specific cases.

The Defendants argued that the payment of benefits was not appropriate, as Cloud did not sustain any new injuries between his first application in 2014 and his application for reclassification in 2016. They further opined that Cloud’s current benefits category was “exactly where he should be” and that he was one of the few beneficiaries to bring an action against the Plan.

The Court did not agree, stating that the denial was incorrect and Cloud’s reclassification application should be granted and he should be placed in the highest benefits category due to the injuries sustaining during his career. Judge Karen Gren Scholer stated that the Plan obviously spent “virtually no time in rubber-stamping the decision.” She further stated that the Plan’s practice of reviewing player’s applications was “wrong and absurd.” Regarding the argument that the low number of cases brought against the Plan is evidence that the decision was correct, Judge Scholer stated that this essentially constituted an “if it ain’t broke, don’t fix it” argument and thus was rejected. She further speculated that it is incredible that under the Plan only 30 former players (all of whom have injuries causing paralysis) are at the highest benefit tier. Thus, she stated that, “The Plan is broke and it’s time to fix it.”

Both Cloud and his family are grateful that the long battle for benefits due to him under the Plan is finally over. Cloud described the Plan’s denial and its effects had “tortured [his] family for years without caring.” This decision is not only a victory for Cloud and his family, but other members of the same or similar retirement plans who have been denied full and fair review of applications by plan administrators. In fact, even outside of the realm of plans relating to former athletes, the decision solidifies the fiduciary duties owed to beneficiaries under ERISA and sets the standard for individualized, thorough, and fair reviews of applications and benefit determinations.