Society management

Trustees fend off another excessive fee lawsuit — for now

A Federal Court ruling establishing a new, higher burden of proof in excessive expense suits has — for now — given fiduciary defendants another victory.

Victory in this case – Baumeister v Exelon Corp., ND Ill., No. 1:21-cv-06505, 9/22/22 – was an action brought by participant-plaintiffs Fred Baumeister, Kenneth Berkeihiser, Dwayne Clauser, John Conlin, Carl S. Lehman, Greg Mattioni , and William Riale[1] against the defendants trustees of the employee savings plan of Exelon Corporation. These fiduciary defendants moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6).


In the United States Court of Appeals for the Seventh Circuit, Judge John Robert Blakey noted that the plaintiffs’ complaint set out a single count of breach of fiduciary duty, along with two derivative counts. one alleging lack of supervision and the other alleging co-fiduciary responsibility. “Inexplicably, the plaintiffs have decided to lump all of the alleged violations together on a single count” – but, nonetheless, Judge John Robert Blakey noted that “…a review of the complaint as a whole confirms that the allegations do not meet not meet the threshold of plausibility required to state a claim.”

Justice Blakey then referred to the standard of plausibility as set out in cases of Bell Atlantic Corp. c.Twombly and Ashcroft vs. Iqbal which he said were applicable in cases of breach of ERISA’s fiduciary duty through context-specific investigation. This inquiry, in turn (“as the parties’ opinions of additional authority point out”) has been further shaped by recent developments, in particular the United States Supreme Court’s decision in Hughes v. Northwestern University, which he said “questions the Seventh Circuit’s precedent in this area, believing that the court had placed too heavy a burden on the plaintiffs. But he then noted that the Seventh Circuit (recently) “has interpreted Hughes narrowly in his recent decision in Albert vs. Oshkosh, however, reaffirming the precedent of the Prior Circuit and further clarifying the applicable pleading standard. And “since the assertions presented in Albert closely parallel those asserted here, Albert squarely governs the context-specific inquiry required”.

Oshkosh Priority

Justice Blakey went on to cite the facts in this Albert vs. Oshkosh case, commenting that Plaintiff Albert pleaded three counts of breach of fiduciary duty by Oshkosh Corporation’s 401(k) plan trustees: the first based on excessive record-keeping costs, the second based on excessive investment management expenses and the third based on the costs of advisory services for plan participants – and noting that all three counts were based on comparisons between the costs and fees associated with Oshkosh’s plan and the costs and fees of other purportedly comparable 401(k) plans – and that, ultimately, “the Seventh Circuit affirmed the District’s court dismissal of Albert’s three claims for breach of fiduciary duty.”

Turning to the specifics of this case, Judge Blakey recalled that Albert’s complaint included a series of tables comparing the expenses and fees of the Oshkosh plan to the rates paid by selected comparison plans – tables which, according to plaintiff, created a reasonable inference that the plan trustees breached their duty of care and loyalty in spending the comparators. However, Judge Blakey noted that the plaintiff “did not provide the court with any rationale as to how it selected the comparator funds” and did not “explain whether the funds operated in a similar manner, if relied on similar strategies or otherwise resembled challenged Oshkosh Funds so that a fee comparison would be appropriate. Additionally, the Seventh Circuit “pointed out that higher fees are often justified by better services. quality and therefore, without more, the court could not reasonably infer a breach of fiduciary duty from the cost comparisons alone”.

Substantially similar

Judge Blakey then observed that in this case, the plaintiffs have developed “three substantially similar theories of violation and offer tables of comparison almost identical to those used in Albert”, that “like Albert, the plaintiffs do not allege facts to plausibly state an infringement claim based on the selected comparison data. With respect to record-keeping costs, the Claimants do not cite any fact to demonstrate whether the selected comparators receive record-keeping services of a nature and quality similar to those offered by the Plan’s record-keeper. Similarly, with respect to investment advisory services, the Claimants do not cite any facts demonstrating that the services offered by the comparator plans are comparable to those offered by the service provider selected by the Plan. Thus, Albert orders that any claims based on these theories be dismissed.

Judge Blakey noted that the plaintiffs here “come close to a fund management fee claim”, in that, alongside tables comparing the fund management fees of Exelon’s plan with other plans selected, the complainants claim that the comparison funds are more affordable. than Exelon’s challenged funds, and they also exhibit “substantially similar investment mixes”, “same or better performance” and “substantially similar investment strategies and underlying assets”.

“Factual Similarities”

“These types of factual similarities,” writes Blakey, “if supported by more than conclusive remarks, would provide the necessary context for plaintiffs’ claims. Plaintiffs further provide performance data over periods of 1, 5, and 10 years to illustrate that the higher fee funds offered by Exelon were not justified by outperforming comparators over time. That said, however, he said that “in the absence of facts demonstrating that the comparator funds are appropriate benchmarks, the comparative performance data remains insufficient to make a claim.”

Noting that the “Plaintiffs do not plead any fact showing a conflict of interest or other unfair conduct” and commenting (as the Seventh Circuit explained in Albert), “Plaintiffs must do more than restate the alleged violations of the ‘fiduciary duty in disloyal acts’ – Judge Blakey found that the plaintiffs here had failed to plead a plausible allegation of breach of duty of loyalty by any defendant. And because the other claims (lack of control and co-fiduciary liability) arise from the claim he just dismissed, those claims also failed.

That said, Judge Blakey also noted that the dismissal was “without prejudice” and gave the plaintiffs an opportunity to resume their case to meet the standards set out in what he called the “Required Albert Standard” – to here on October 31.

What does that mean

Well, if it seems like all of a sudden the tides have changed in these cases, well, it sure does. While Oshkosh was the precedent cited here, the genesis of this new standard appears to come from the CommonSpirit case in another jurisdiction. That said, this “new” determination of a standard of plausibility—whereby determining the reasonableness of charges requires an understanding of the services rendered for those charges—seems to apply primarily to recordkeeping services. Investment management fees have a different threshold.

But note that in this case, while Judge Blakey ruled that the suit was not sufficiently designed to meet this threshold, he left the door open for plaintiffs to remedy this shortcoming. So stay tuned.


[1] Plan participants were represented by Berger Montague PC, Edelson Lechtzin LLP and the law offices of Michael M. Mulder.