Recent Trends in Excessive Fee Litigation
As plan sponsors and fiduciaries are no doubt aware, there has been a substantial uptick in excessive fee litigation over the past few years. This update discusses cases since the Supreme Court’s decision in Hughes v. Northwestern Univ., 595 U.S. 170 (2022), which reaffirmed that a plaintiff must plead facts establishing the plausibility of his claim. Since its issuance, federal courts have applied Hughes and provided greater clarity for pleading requirements, and potential bases for dismissal of, excessive fee cases. In evaluating the plausibility of excessive fee claims, courts have held plaintiffs to pleading standards focused on (1) the requisite specificity of alleged excessive fees; (2) whether comparisons used of such fees are appropriate “apples-to-apples” comparisons; and (3) whether fees are truly excessive compared to the services rendered. In addition, lack of standing remains an important ground for potential dismissal. Following the recent trend of decisions, it appears that the volume of newly filed excessive fee cases is trending down from previous years.1
PLEADING STANDARDS:
The Supreme Court’s decision in Hughes v. Northwestern Univ. requires plaintiffs to “plausibly allege[] a violation” of ERISA, “applying the pleading standard discussed in Ashcroft v. Iqbal, 556 U.S. 662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).” 595 U.S. 170, 177 (2022). Under Twombly and Iqbal’s “plausibility standard,” the “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 545–46. However, as Hughes noted in the context of claims for alleged breach of fiduciary duty under ERISA, “the appropriate inquiry will necessarily be context specific,” and at times, “courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” Hughes, 595 U.S. at 177.
Following Hughes, courts have continued to grapple with the pleading standards for excessive fee cases. Several key considerations have emerged in determining whether plaintiffs have plausibly stated a claim.
- No Conclusory Allegations of Excessive Fees
As explained by the Seventh Circuit on remand in Hughes, to plausibly state an excessive fee claim, plaintiffs must provide “some further factual enhancement to take a claim of fiduciary duty violation from the realm of possibility to plausibility.” Hughes v. Northwestern Univ., 63 F.4th 615, 628 (7th Cir. 2023) (internal quotation marks omitted). In other words, plaintiffs cannot summarily allege that fees were excessive but must support that claim with specific allegations to support such belief. See, e.g., Matousek v. MidAmerican Energy Co., 51 F.4th 274, 278 (8th Cir. 2022) (noting that “[t]he key to nudging an inference of imprudence from possible to plausible is providing ‘a sound basis for comparison—a meaningful benchmark’—not just alleging that ‘costs are too high, or returns are too low.’”); Albert v. Oshkosh Corp., 47 F.4th 570, 581 (7th Cir. 2022) (same); Matney v. Barrick Gold of N. Am., 80 F.4th 1136, 1152 (10th Cir. 2023) (same); Kong v. Trader Joe’s Co., No. 20-56415, 2022 WL 1125667, at *1 (9th Cir. Apr. 15, 2022) (noting that the “appropriate inquiry” for imprudence violations “will necessarily be context specific”); Cotter v. Matthews Int’l Corp., No. 20-CV-1054-WCG-SCD, 2023 WL 9321285, at *6 (E.D. Wis. Aug. 9, 2023) (granting motion to dismiss where plaintiff simply alleged that the plan “paid too much for the same quality of services and failed to regularly solicit competitive bids for recordkeeping fees.”); Jones v. Dish Network Corp., No. 22-cv-00167-CMA-STV, 2023 WL 2796943, at *10 (D. Colo. Jan. 31, 2023) (recommending to grant motion to dismiss where plaintiff “simply allege[d] that the Plan paid higher fees than Plaintiffs believe it should have.”).
For instance, without comparisons to fees paid by other plans, courts are often inclined to find excessive-fee-allegations insufficient. See, e.g., Cunningham v. Cornell Univ., 86 F.4th 961, 968 (2d Cir. 2023) (affirming the district court’s dismissal because “it is not enough to allege that the fees were higher than some theoretical alternative service.”); Laabs v. Faith Techs., Inc., No. 20-CV-1534-WCG-SCD, 2023 WL 9321358, at *7 (E.D. Wis. Aug. 30, 2023) (granting motion to dismiss for failing to compare fees paid by other plans); Singh v. Deloitte LLP, No. 21-cv-8458, 2023 WL 4350650, at *3 (S.D.N.Y. July 5, 2023) (declining to allow amendment of complaint following dismissal where plaintiffs failed to allege services from comparator plans).
- Apples-to-Apples Comparisons of Recordkeeping Services & Costs
While many courts have required comparisons to other plans to plausibly allege that fees were excessive, other courts have also made clear that the comparisons must be apt. That is, the allegations must “permit an apples-to-apples comparison” of recordkeeping services and costs. Matney v. Barrick Gold of N. Am., 80 F.4th 1136, 1149 (10th Cir. 2023); Singh v. Deloitte LLP, 650 F. Supp. 3d 259, 267 (S.D.N.Y. 2023); cf. In re Sutter Health ERISA Litig., No. 1:20-cv-01007-JLT, 2023 WL 1868865, at *10 (E.D. Ca. Feb. 9, 2023) (requiring that plaintiffs allege “specific facts supporting their claims” that the fees were “excessive for its size” but providing that an “apples to apples” comparison is not required in the Ninth Circuit).
“[A]pples to oranges” comparisons are insufficient to plausibly allege that a cost disparity exists and the complaint “must state facts to show the funds or services being compared are, indeed, comparable.” Matney, 80 F.4th at 1149–50. For example, allegations comparing the fees charged to other plans must utilize plans of comparable size based on the number of participants and assets. See, e.g., England v. DENSO Int’l Am., Inc., No. 22-11129, 2023 WL 4851878, at *5 (E.D. Mich. July 28, 2023) (granting motion to dismiss where comparator plans differed in size); Guyes v. Nestle USA, Inc., No. 20-CV-1560-WCG-SCD, 2023 WL 9321363, at *5 (E.D. Wis. Aug. 23, 2023) (same).
- Fees Must be Excessive Relative to the Services Rendered
Many courts have also held that plaintiffs must allege that fees are excessive relative to the services rendered to plausibly state a claim. See Smith v. CommonSpirit Health, 37 F.4th 1160, 1169 (6th Cir. 2022).2 Put differently, even for the same types of services, the relative quality of the services matters in evaluating whether the fees were allegedly excessive. Cunningham v. Cornell Univ., 86 F.4th 961, 978 (2d Cir. 2023) (affirming dismissal for failure to state a claim where plaintiffs “failed to allege any facts going to the relative quality of the recordkeeping services provided”); England v. DENSO Int’l Am., Inc., No. 22-11129, 2023 WL 4851878, at *4 (E.D. Mich. July 28, 2023) (granting motion to dismiss where plaintiff failed to “give any context to the services rendered”); Probst v. Eli Lilly & Co., No. 1:22-cv-01106-JMS-MKK, 2023 WL 1782611, at *10 (S.D. Ind. Feb. 3, 2023) (granting motion to dismiss where plaintiff’s allegations did not “identify what specific types of services comparator plans received relative to the Plan.”).
STANDING CONCERNS:
In addition to pleading standards for excessive fee claims, whether plaintiffs have Article III standing—specifically, whether plaintiffs have sufficiently alleged a concrete injury—continues to be an important ground for potential dismissal. Whether such a challenge will succeed will likely turn on the structure of the plan and nature of the fees at issue.
In light of the Supreme Court’s decision in Thole v. U.S. Bank N.A., participants in defined-benefit plans will be hard pressed to show that they have standing if they will continue to receive the same fixed monthly benefit regardless of the litigation’s outcome. 140 S. Ct. 1615, 1622 (2020). However, participants in defined-contribution plans may be differently situated if they can show that fees alleged to have been improperly paid by the plan would have increased their account balance. See, e.g., Boley v. Universal Health Servs., Inc., 498 F. Supp. 3d 715, 724 (E.D. Pa. 2020) (holding that plaintiff established standing in excessive fee suit relating to their defined-contribution plan “because at least a portion of the excessive fees or lower returns affected their individual accounts”); Glick v. Thedacare Inc., No. 20-C-1236, 2022 WL 3682863, at *4 (E.D. Wis. Aug. 25, 2022) (holding that plaintiff established standing in excessive fee suit relating to his defined-contribution plan by alleging that “his account balance will be greater based on excessive fees”).
As in defined-benefit pension plans, participants in welfare plans generally do not have a stake in how their plans are managed, so long as they get the benefits that were promised to them. Such participants may have difficulty establishing standing unless the plan fails to provide the promised benefits. See, e.g., Winsor v. Sequoia Benefits & Ins. Servs., LLC, 62 F.4th 517, 520–24 (9th Cir. 2023) (dismissing excessive fee claims based on lack of standing where plaintiffs failed to show concrete injury from alleged excessive administrative fees and premiums set by plan sponsor); Knudsen v. Metlife Grp., Inc., No. 2:23-cv-00426, 2023 WL 4580406, at *6 (D.N.J. July 18, 2023) (dismissing excessive fee claims based on lack of standing where plaintiffs failed to allege an “individualized injury” from alleged excessive costs); cf. Chavez v. Plan Benefit Servs. Inc., 77 F. 4th 370, 376–77 (5th Cir. 2023) (affirming the district court’s finding of standing where plaintiffs adequately alleged concrete injuries from alleged excessive fees and different rates for identical services).
BEST PRACTICES FOR PLAN FIDUCIARIES
Hughes and cases applying it continue to refine and clarify the pleading standards for excessive fee cases. Despite the lack of a bright-line rule, there remains fertile ground to argue for dismissal of such claims. As with standing, the likelihood of success will largely turn on the structure of the plan, the challenged fees and services, and the specificity of the allegations.
Nevertheless, plan fiduciaries can mitigate their exposure to excessive fee claims by following best practices in discharging their duties under ERISA. These include:
- Knowing your obligations as a plan fiduciary.
- Establishing a prudent process that captures the ways in which plan-related decisions are made.
- Maintaining records from meetings, communications, and decisions, including the selection and retention of plan service providers.
- Choosing your recordkeeper and advisors wisely and ensuring service providers have the requisite skillsets, e.g., accounting and finance backgrounds.
- Conducting periodic reviews of recordkeeping fees.
- Embracing the help of outside professionals when there is no expertise internally.
- Considering venue clauses in the event litigation occurs.
1 See Daniel Aronowitz, Summary of 2023 Excess Fee and Performance Litigation, EUCLID FIDUCIARY (Jan. 8, 2024), https://www.euclidspecialty.com/summary-of-2023-excess-fee-and-performance-litigation.
2 See also Cunningham v. Cornell Univ., 86 F.4th 961, 978 (2d Cir. 2023); Hughes v. Northwestern Univ., 63 F.4th 615, 632 (7th Cir. 2023); Seibert v. Nokia of Am. Corp., No. 21-20478, 2023 WL 5035026, at *6 (D.N.J. Aug. 8, 2023); McDonald behalf of Lab’y Corp. of Am. Holdings Emps.’s Ret. Plan, No. 1:22CV680, 2023 WL 4850693, at *3 (M.D.N.C. July 28, 2023); England v. DENSO Int’l Am. Inc., No. 22-11129, 2023 WL 4851878, at *2–3 (E.D. Mich. July 28, 2023); Ramos v. Banner Health, 461 F. Supp. 3d 1067, 1132 (D. Colo. 2020).
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