Society management

Court of Appeal finds fiduciary claim ‘plausible’ in choice of share class

Noting that ‘precedent has overtaken some of the arguments in the case’, a federal appeals court has considered an excessive fees case, saying most, but not all, of the plaintiffs’ claims have been dismissed .

The case

The defendants in this case are the trustees of the Cincinnati-based TriHealth, Inc. pension plan – a relatively small plan ($457 million) – and the lawsuit brought on behalf of the plaintiff-participants by a relatively new law firm in this type of action. (Greg Coleman Law and Jordan Lewis PA), who nonetheless filed several other lawsuits against smaller plans (smaller than the multi-billion plans that usually get the plaintiffs’ bar attention, anyway) on behalf of the plaintiffs Danielle Forman, Nichole Georg and Cindy Haney, individually and as representatives of a class of participants and beneficiaries (some 12,168 members, according to the record).

The specific allegations made here are familiar – all about the fees paid, the inference being that the only explanation for the higher fees is recklessness. The lawsuit claims that for each year between 2013 and 2017, the administrative fees charged to plan participants were “greater than 90% of its comparator fees when the fees are calculated as a cost per participant or when the fees are calculated as a percentage.” of total assets”. and that “the total difference from 2013 to 2017 between TriHealth’s fees and the average of its comparators based on the total number of participants is $7,001,443.” That said, last October, Judge Matthew W. McFarland of the U.S. District Court for the Southern District of Ohio dismissed the lawsuit, ruling that the allegations made did not support a “plausible inference” that a fiduciary breach had happened.

CommonSpirit commonalities

“At issue in this case”, wrote the court of appeal[1] (Forman vs. TriHealth, Inc.., 6th Cir., No. 21-3977, 7/13/22), “are the various ways in which the duty of care applies to the investment options that a company offers its employees for their 401(k ) and other defined contribution plans.

The court here (the United States Court of Appeals for the Sixth Circuit) happens to be the same one that ruled in the recent CommonSpirit decision – a decision which, among other things, supported the dismissal of a lawsuit for excessive fees, rejecting the idea that the offer of actively managed funds – even those with disappointing performances – does not in itself justify the allegations of a fiduciary breach.[2] It is therefore perhaps unsurprising that this court found that this earlier judgment “largely resolved several of the plaintiffs’ claims: that their employer TriHealth should not have offered its employees the opportunity to invest their money funds in actively managed funds, that the performance of several funds lacked[3] at times, and that the overall fees charged for the investment options were too high.

The court, however, noted that this case contained an element not covered by CommonSpirit, namely that “even if a prudent investor could make available a wide range of sound investment decisions in a given year, only a reckless financier would offer a more expensive share when it could offer a functionally identical share for less. Here, the plaintiffs claim – as plaintiffs do in most of these excessive fee cases – that the TriHealth defendants were offering “more expensive mutual fund stocks when stocks with the same investment strategy, same management team and the same investments were available for their retirement plan at a lower cost.”

While finding these allegations “plausible,” the court acknowledged that “equally reasonable inferences the other way” could “exonerate TriHealth once all the facts are known.” Perhaps the fund is not large enough or does not have enough participants interested in a particular investment to qualify for the cheapest share class. Perhaps the plan has revenue-sharing agreements in place that make retail stocks cheaper or benefit plan participants overall.

“But at the pleading stage, it is too early to make these judgments. Absent further development of the facts, we have no basis for crediting one set of reasonable inferences over the other. Since either valuation is plausible, the Rules of Civil Procedure allow [the three employees] to chase [their imprudence] claim (at least as far as this theory is concerned) the next step.

And so, “because plaintiffs in this latter regard have set forth a plausible allegation that TriHealth acted recklessly”, the court reversed the lower court’s dismissal for failure to state a claim of this element, while upholding rejection of other elements.

What does that mean

Trustees can certainly take some comfort from this court’s acknowledgment that there are multiple factors that can go into a prudent decision – factors beyond price and performance (although those are certainly considerations). However, by essentially stating that the decision to offer what appears to be an identical fund in all flavors but price creates a “plausible” inference of a breach of fiduciary duty, it is clear that this (and d other similarly positioned suits) will get their day in court, if not a monetary settlement.

For plan trustees, this should serve as a warning that offering this seemingly identical fund, but at a higher price without further supporting justification is likely to be problematic, certainly at the pleading stage, if not. At the trial.


[1] Chief Justice Jeffrey S. Sutton wrote the opinion, joined by Justices Raymond M. Kethledge and Chad A. Readler.

[2] The court reiterated its reasons for decision in the CommonSpirit case thus: “With respect to the plan’s allegedly overpriced features over others, we have found that plaintiffs have offered nothing plausibly reckless about the process. of the trustee. The price differences reflected reasonable alternative services and strategies for different investors, for example for those who preferred active fund management to passive management. “Offering actively managed funds in addition to passively managed funds,” we said, “was only a reasonable response to client behavior” — and the wide variety of investment goals of a large group of of different ages, different risk profiles and existing wealth. The same is true with performance-based disparities. While ERISA does not allow trustees to simply offer a wide range of options and stop there, a show of recklessness cannot be reduced to simply pointing to a fund with better performance. In other words, the court noted that “disappointing short-term performance and higher costs do not in themselves show deficient decision-making, particularly when we take into account competing explanations and other aspects of common sense. long-term investments”.

[3] Comparing the decision here with its decisions in CommonSpirit, the court noted: “As significant as the significant referral hurdle is, it is most salient when a beneficiary challenges an investment choice in the void. The plaintiff in this context must do the homework of showing that the comparator investment has enough parallels to prove a breach of fiduciary duty. But if the plaintiff, as in this case, alleges that the trustee should have chosen a less expensive class of stock (with the same investment strategy, the same portfolio and the same management team), the significant reference accompanies the claim . Different ERISA claims have different requirements, of course. But this assertion contains a built-in comparator.