The Sixth Circuit recently issued a mixed opinion in a 401(k) plan investment litigation.  The Court upheld the dismissal of the plaintiffs’ fiduciary-breach claims relating to the investment management fees and performance of several of the plan’s investment options, but reinstated a claim for breach of fiduciary duty based solely on the plan fiduciaries’ alleged failure to offer less expensive “institutional” share classes of mutual funds.

Plaintiffs were former TriHealth, Inc. employees who sued the company in the U.S. District Court for the Southern District of Ohio, alleging that the TriHealth 401(k) plan fiduciaries breached their duties of prudence and loyalty in connection with plan management.  In particular, plaintiffs claimed that the fiduciaries violated the duty of loyalty in choosing investments that  benefited third-party investment managers, and the duty of prudence by allowing the plan to pay excessive fees, selecting and retaining investment options that were expensive and underperformed relative to alleged alternatives, and offering “retail” shares of seventeen mutual funds despite the availability of less expensive “institutional” shares of the same funds.

Last year, TriHealth successfully moved to dismiss the complaint.  The district court held that plaintiffs failed to plausibly allege that TriHealth acted imprudently with respect to any of their claims.

The Sixth Circuit affirmed the dismissal of most of the claims consistent with its recent decision in Smith v. CommonSpirit Health, No. 21-5964, 2022 WL 2207557 (6th Cir. June 21, 2022), which we discussed in a recent post.  First, as to plaintiffs’ claims that the plan’s “average plan expenses” were excessive, the Court held that the claims failed because plaintiffs failed to plead that these fees were high relative to the services provided or that the fees could not be justified by the plan’s strategic goals.  Second, the Court rejected plaintiffs’ identification of alleged “available alternatives in the same investment style” as insufficient to plausibly plead imprudence; the plaintiffs were required to show that these cheaper and better performing alternatives were otherwise equivalent to the challenged funds in order to justify the inference that plan fiduciaries used an imprudent process in selecting and retaining them.  Third, with respect to their disloyalty claim, plaintiffs failed to allege the “fiduciary’s operative motive was to further its own interests.”

But the Sixth Circuit reversed as to the share class claim, holding that plaintiffs stated a plausible claim of imprudence related to TriHealth’s failure to offer the cheapest share class for certain mutual funds.  The plaintiffs showed that many of the plan’s mutual funds offered a cheaper, but otherwise identical share class to larger investors, for which the plan—with nearly half a billion dollars in assets—was large enough to qualify.  The Court held that “these allegations permit the reasonable inference that TriHealth failed to exploit the advantages of being a large retirement plan that could use scale to provide substantial benefits to its participants.”  The Sixth Circuit noted that facts learned in discovery—such as the existence of revenue sharing arrangements lowering the retail shares’ fees, or facts showing the plan was ineligible for the institutional shares—could disprove these claims, but that “at the pleading stage, it is too early to make these judgment calls.”  The Court also held that, in this context, plaintiffs need not specifically allege facts showing the institutional share class is in fact a meaningful benchmark, because “this claim has a comparator embedded in it,” and that any explanations for retail shares’ underperformance fail because the higher fees of otherwise identical funds “guarantee[] worse returns.”

Proskauer’s Perspective

In reversing the dismissal of the share class claim, the Sixth Circuit joined the Second, Third, Eighth, and Ninth Circuits in allowing imprudence claims based on share class differentials to overcome motions to dismiss.  The decision serves as notice to plan fiduciaries that, at least in these circuits, offering anything but the lowest share class of a mutual fund in a 401(k) plan—even if defendants can provide a reasonable explanation for doing so—all but guarantees that in litigation this claim will proceed to discovery.  If fiduciaries find themselves facing this claim in one of these circuits, they should consider the prospects of staging discovery in a fashion that will facilitate an early motion for summary judgment following targeted narrow discovery on the rationale for offering the more expensive share class.

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Photo of Tulio Chirinos Tulio Chirinos

Tulio D. Chirinos is an associate in the Labor & Employment Law Department and a member of the Employee Benefits & Executive Compensation Group and the Workplace Investigations Practice Group.

Tulio works on a wide variety of ERISA and non-ERISA plan litigation matters…

Tulio D. Chirinos is an associate in the Labor & Employment Law Department and a member of the Employee Benefits & Executive Compensation Group and the Workplace Investigations Practice Group.

Tulio works on a wide variety of ERISA and non-ERISA plan litigation matters, including fee and investment litigation cases, breach of fiduciary duty claims and benefits claims. He also represents management in workplace investigations and litigation of employment-related matters, including claims of unlawful discrimination, harassment and retaliation. Tulio focuses his pro bono efforts on immigration matters where he has represented several juveniles from Central America in their asylum petitions and special immigrant juvenile status (SIJ) petitions.

Tulio is the author of several ERISA-related articles, including several focusing on ERISA fee and investment litigation that appeared in the Benefits Law Journal (2016-2023), Bloomberg BNA, and Law360. He is a contributing author to Chapter 10 (Fiduciary Responsibility) of BNA’s Employee Benefits Law treatise. He is also the co-editor and a frequent contributor to Proskauer’s Employee Benefits & Executive Compensation Blog.

Prior to joining Proskauer, Tulio clerked for the Federal Public Defender’s office for the Middle District of Florida. Tulio is a retired Lieutenant Colonel in the Army National Guard and served three tours of duty in Iraq, Kuwait, and Jordan.

Photo of Sydney Juliano Sydney Juliano

Sydney L. Juliano is an associate in the Labor & Employment Department and a member of the Employee Benefits & Executive Compensation Group, where she focuses on ERISA Litigation.

Sydney works on a variety of ERISA litigation matters, including fee- and investment-related breach…

Sydney L. Juliano is an associate in the Labor & Employment Department and a member of the Employee Benefits & Executive Compensation Group, where she focuses on ERISA Litigation.

Sydney works on a variety of ERISA litigation matters, including fee- and investment-related breach of fiduciary duty claims, benefit claims, and claims by trustees of multiemployer plans for withdrawal liability and delinquent contributions. Sydney is also a frequent contributor to Proskauer’s Employee Benefits & Executive Compensation Blog.

Sydney maintains an active pro bono practice, including representing clients in immigration and family court matters.

Sydney received her J.D. from the University of Virginia School of Law, where she was an Articles Editor of the Journal of Law and Politics and Director of Coaching for the Extramural Moot Court team.  While at UVA, she worked at the U.S. Attorney’s office for the Southern District of Florida.