The Seventh Circuit recently provided a ray of sunshine in what has largely been a gloomy stretch for plan sponsors and fiduciaries defending ERISA breach of fiduciary duty claims based on allegedly excessive investment and administrative fees and investment underperformance.  In this particular case, Oshkosh emerged victorious with the Seventh Circuit affirming the dismissal—at the motion to dismiss stage—of claims that it mismanaged its 401(k) plan by paying excessive recordkeeping fees, failed to ensure investment options were prudent, and unreasonably maintained high-cost investment advisors.  The case is Albert v. Oshkosh Corp., No. 21-2789, 2022 WL 3714638, __F.4th __ (7th Cir. Aug. 29, 2022).

Background

Albert, a former employee and participant in the Oshkosh 401(k) plan, advanced several ERISA fiduciary-breach and prohibited transaction claims based on what have become relatively common allegations related to excessive fees and investment underperformance.  First, Albert alleged that the plan paid excessive recordkeeping fees and failed to regularly solicit competitive bids.  Second, he alleged that the plan paid excessive investment management fees and, in particular, that the plan would have paid lower fees by investing in a more expensive share class with a revenue sharing component that theoretically would rebate all revenue sharing fees to the plan participants.  Third, Albert alleged that certain actively managed funds should not have been offered because they are more expensive than passively managed funds.  Fourth, Albert alleged that the plan offered personalized investment advisor services that were unreasonably expensive.  Lastly, in addition to these more commonly asserted claims, Albert also alleged that the plan failed to provide a detailed explanation of how revenue sharing payments were calculated in Form 5500 filings and that the plan’s payment of fees to its service providers resulted in violations of ERISA’s prohibited transaction rules.

The district court dismissed the complaint prior to the Supreme Court’s decision in Hughes v. Northwestern University, 142 S. Ct. 737 (2022), which notably vacated and remanded another Seventh Circuit ruling affirming dismissal of fee and investment claims.

The Seventh Circuit’s Decision

The Seventh Circuit affirmed the dismissal of all claims.  As a preliminary matter, the Court concluded that Albert had Article III standing to pursue his claims because his investment in “at least some actively managed funds” was sufficient to confer standing on a motion to dismiss, but the issue could be revived with additional discovery and on class certification.

Turning to Albert’s substantive allegations, the Court made the following rulings:

  • Allegations about recordkeeping fees, devoid of context regarding the actual recordkeeping services provided, did not move the “claim from possibility to plausibility.” In so ruling, the Court explained that there is no requirement for fiduciaries to regularly solicit bids from service providers.
  • Addressing Albert’s novel share class theory, the Court observed that the complaint’s basis for alleging that revenue sharing would have caused the plan participants to pay a lower amount of net fees was flawed because Albert had no basis for alleging that the revenue sharing proceeds would have actually been rebated to plan participants. The court observed that the plan’s Form 5500 did not disclose to whom revenue sharing proceeds are paid—to the recordkeeper as profits, or to the plan participants.  As revenue sharing proceeds do not always entirely redound to the investors’ benefit, one cannot arrive at net cost figures simply by subtracting revenue sharing from the investment management expense ratio, and Albert did not allege more.
  • Albert’s allegation that certain actively managed funds in the plan were imprudent because they were more expensive than passively managed funds was threadbare and failed to provide a comparison to a meaningful benchmark.
  • Albert provided no basis for comparison between the investment advisor service fees paid and fees paid to other service providers, and merely stating on information and belief that defendants did not solicit competitive bids from other service providers was insufficient to state a claim.
  • Albert’s prohibited transaction claims were circular. The Court explained that it would lead to absurd results and frustrate ERISA’s purpose to hold that a viable prohibited transaction claim was asserted merely because an entity providing services to a plan (which definitionally is a party-in-interest) received a fee for those services.
  • There is no requirement to disclose detailed information on how revenue sharing is calculated in Forms 5500.

Proskauer’s Perspective

The ruling in Oshkosh tends to validate our previous advice that the Supreme Court’s decision in Hughes was a much narrower decision than the plaintiffs’ bar (and some in the defense bar) initially pronounced, and thus should not lead to a trend toward denying motions to dismiss.  The Supreme Court did not address the plausibility of any of the underlying claims that the Seventh Circuit dismissed but merely held that the Seventh Circuit relied on an inappropriate “investor choice” theory to support dismissal.  In so ruling, the Supreme Court also instructed courts considering motions to dismiss ERISA complaints to apply the pleading standard set forth in Twombly, which allowed for the consideration of obvious and lawful explanations for the alleged wrongdoing, and that “due regard” must be given to the “reasonable judgments a fiduciary may make based on her experience and expertise.”  Notwithstanding an initial set of discouraging post-Hughes opinions denying motions to dismiss, which we wrote about here, the more recent trend has turned in a more favorable direction.  In addition to the ruling in Oshkosh, the Sixth Circuit (in two separate cases) and two district courts have affirmed dismissal of similar fee and investment claims (discussed here and here).  These decisions show that in a post-Hughes environment, courts will still (and arguably must) dismiss complaints that fail to strictly adhere to the applicable pleading standards.

Nevertheless, many courts continue to deny motions to dismiss based on substantially similar allegations.  In those instances where prevailing on a motion to dismiss remains unlikely, consideration should be given to filing instead an early motion for summary judgment, in which the court will have an opportunity to resolve factual issues that would otherwise have prevented the motion to dismiss from being granted.

In all events, with weekly (sometimes daily) class action complaints being filed, plan sponsors and fiduciaries are well advised to continue making sure that they have implemented appropriate procedures for monitoring plan administrative and investment management fees, and investment performance.

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Photo of Myron Rumeld Myron Rumeld

Myron D. Rumeld has over thirty-five years of experience handling all aspects of ERISA litigation at both the trial and appellate level. His broad experience includes numerous representations of 401(k) plan fiduciaries defending class action employer stock and excessive fee claims, and representations…

Myron D. Rumeld has over thirty-five years of experience handling all aspects of ERISA litigation at both the trial and appellate level. His broad experience includes numerous representations of 401(k) plan fiduciaries defending class action employer stock and excessive fee claims, and representations of large multiemployer pension and health fund trustees in the defense of a large assortment of fiduciary breach lawsuits. He has defended class action suits against Charles Schwab, Barnabas Health, Inc., Neuberger Berman, and the American Federation of Musicians Pension Fund, among many other clients; and he has tried cases for The Renco Group and Foot Locker, Inc., among others.

Chambers USA cites Myron as a “brilliant” and “sensational litigator,” who is “sharp, articulate, clever, and deeply committed to the work he does.” Similarly, The Legal 500 United States has called Myron an “outstanding ERISA lawyer.”

Myron is presently co-chair of Proskauer’s ERISA Litigation Group.  He previously served as co-chair of Proskauer’s nationally renowned Employee Benefits & Executive Compensation Group. He also served as the past co-chairman of the Board of Editors for the American Bar Association publication, Employee Benefits Law (BBNA).

Photo of Russell Hirschhorn Russell Hirschhorn

Russell L. Hirschhorn, co-head of the ERISA Litigation Group, represents plan fiduciaries, trustees, sponsors and service providers on the full range of ERISA and state law benefit and fiduciary issues. From single plaintiff litigation and arbitration to complex class action litigation, he provides…

Russell L. Hirschhorn, co-head of the ERISA Litigation Group, represents plan fiduciaries, trustees, sponsors and service providers on the full range of ERISA and state law benefit and fiduciary issues. From single plaintiff litigation and arbitration to complex class action litigation, he provides practical guidance, develops unique litigation defense strategies and, when appropriate, mediates successful resolutions.

Russell represents clients across a wide array of publicly-held, multi-national companies and privately owned companies across a multitude of industries including, banking, finance and investments, pharmaceuticals, retail products and construction, to name just a few. In addition, he also counsels benefit plan clients on a host of compliance and federal and state government agency enforcement matters, including complex and lengthy investigations and audits by the U.S. Departments of Justice and Labor.

Russell is management co-chair of the American Bar Association Employee Benefits Committee as well as management co-chair of the Trial Institutes Committee of the American Bar Association’s Labor and Employment Law. He also writes on cutting-edge ERISA litigation issues, serving as a contributing author and a past chapter editor to Employee Benefits Law (BNA Third Edition).

Deeply dedicated to pro bono work, Russell was a principal drafter of several amicus briefs for the Innocence Project, a legal non-profit committed to exonerating wrongly convicted people. Russell has been recognized on several occasions for his commitment to pro bono work including by President George W. Bush in receiving the U.S. President’s Volunteer Service Award.

Photo of Daniel Wesson Daniel Wesson

Dan is an associate in Employee Benefits & Executive Compensation and focuses on ERISA Litigation. His litigation practice ranges from complex class actions to individual benefit claims concerning all types of plans, including 401(k) and 403(b) plans, defined benefit plans and health and…

Dan is an associate in Employee Benefits & Executive Compensation and focuses on ERISA Litigation. His litigation practice ranges from complex class actions to individual benefit claims concerning all types of plans, including 401(k) and 403(b) plans, defined benefit plans and health and welfare plans.  Dan represents large corporations, individuals, multiemployer pension plans, insurers, benefit plan committees and independent fiduciaries.  Dan also advises clients on plan administration, benefits restructuring, risk assessment and government investigations.

Dan has coauthored multiple articles in the Benefits Law Journal and is a frequent contributor to Proskauer’s Employee Benefits & Executive Compensation Blog.

Dan earned his B.A. from Northeastern University and his J.D. from Georgetown University.  He was a member of the Georgetown Journal on Poverty Law and Policy.  During his first summer at law school and the following semester, he served in the Division of Plan Benefits Security at the United States Department of Labor in Washington D.C., where he was a Gary S. Tell ERISA Litigation Fellow.