A new decision from the U.S. Court of Appeals for the 7th Circuit in a so-called “excessive fee” case is good news for plan sponsors, particularly following the Supreme Court’s ruling earlier this year in Hughes v. Northwestern University, 142 S. Ct. 737 (2022).

With that case still on remand before the 7th Circuit, the appellate court decided to narrowly apply the holding from Hughes in Andrew Albert v. Oshkosh Corporation et al and allow for past precedent to continue to apply.

Some Background

Last month, the 7th Circuit dismissed claims brought by Andrew Albert against Oshkosh Corporation alleging the defendants breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA).

Plaintiff is a former employee and participant in the defendants’ defined contribution plan, which has 12,000 participants and $1.1 billion in plan assets. The plan’s recordkeeper is Fidelity Management Trust Company (Fidelity), and its investment advisor is Strategic Advisors, Inc. (SAI)(a subsidiary of Fidelity).

The complaint alleged, in part, that the plan’s fiduciaries breached their duties of prudence under ERISA by:

• Allowing the plan to pay high fees to Fidelity for its recordkeeping services as compared to other comparable plans.
• Selecting and failing to remove investments that charged excessive investment fees.
• Offering too many actively managed funds that tend to charge higher investment fees than passively managed investments.
• Authorizing the plan to pay excessive investment advisory fees to SAI, when the plan could have hired similar advisors with lower costs and better performance records.

The appellate decision came after the district court dismissed all of plaintiff’s claims. The district court’s opinion heavily cited the 7th circuit decision in Hughes, which provided favorable precedent for plan sponsors. After Hughes was overturned and remanded back to the 7th Circuit, the plaintiff decided to appeal.

In Hughes, the Supreme Court unanimously held that an ERISA fiduciary cannot insulate itself from allegations of imprudence by offering an investment menu made up of both low-cost and high-cost investments since ERISA requires fiduciaries to monitor all plan investment options. The Supreme Court reiterated the standard set forth in Tibble v. Edison Int’l, 575 U.S. 523 (2015) which is for fiduciaries to conduct a regular, independent evaluation of each investment to determine whether that investment should prudently be included in the menu of investment options. (For more information on the Hughes v. Northwestern decision, please read our full alert here.

The Oshkosh Decision

In regard to the excessive recordkeeper fees claim, the court rejected plaintiff’s argument that the 7th Circuit cases relied on by Northwestern University should also be called into question following the Supreme Court’s decision in Hughes. The 7th Circuit reads Hughes as to just reject the assumption that offering an array of high- and low-cost investment options insulates fiduciaries from liability. Further, the 7th Circuit stated that plaintiff has overstated the significance of Hughes, ruling that Hughes does not require plans to regularly go out to bid for services.

“Nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund (which, might, of course, be plagued by other problems)” Hecker v. Deere & Co., 556 F.3d 575, 586 (7th Cir. 2009). This proposition also applies to recordkeeping fees. As such, plaintiff’s claim that defendant paid excessive fees based on the fees paid by similarly sized plans is without merit since the comparison does not consider the quality or type of services provided by Fidelity. In addition, the 7th Circuit acknowledged that the 6th Circuit inSmith v. CommonSpirit Health, 37 F. 4th 1160 (6th Cir. 2022), has also recently held that no claim exists when the allegations in the complaint failed to allege fees were excessive in relation to the services rendered.

In regard to the investment management fees claim, the court bifurcated plaintiff’s claim into two theories: (i) the “net-expense ratio”; and (ii) actively managed funds. Plaintiff gathered data from the Annual Form 5500s and argued that the investment funds that make up the plan’s investment menu paid too much in revenue sharing to Fidelity compared to investments held in similarly size plans. Briefly, revenue sharing is an indirect expense that is passed-thru a fund’s expense ratio to the recordkeeper for their services in the form of profits, which may also be passed to the plan participants. Defendants point out that the Form 5500s do not disclose how exactly the revenue sharing is allocated. As a result, the court found that plaintiff did not allege sufficient facts to support his claim, nor did he cite to any authority supporting his theory.

As for the actively managed funds theory, the court found that the fact that the actively managed funds charge higher fees than index funds is not enough to state a claim since the actively managed funds may produce higher returns. Again, the court referred to the 6th Circuit in Smith, which stated that failing to offer actively managed funds to those participants eager to take on more or less risk may be imprudent. In dismissing the claim, the court held that allegations that the defendants failed to consider materially similar or less expensive investment options are not detailed enough to provide a sound basis for comparison.

Finally, regarding the investment advisor fees claim, the court found that plaintiff’s claim was “paper thin.” In doing so, the court explained that plaintiff did not explain why SAI’s fees were excessive and unreasonable as compared to other service providers. Again, the court found that plaintiff failed to make any allegations that the fees were excessive relative to the services rendered and therefore dismissed this claim as well.

Summary

The Oshkosh decision appears to create favorable precedent for plan sponsors in the 7th Circuit since it narrowly applies the holding in Hughes. From the 6th and 7th Circuit, it appears that allegations have to compare the fees being charged with the quality and/or type of services being provided. The DOL has laid out this standard in Advisory Opinion 2002-08A, explaining that a fiduciary has to “assess the qualifications of the provider, the quality of services offered, and the reasonableness of the fees charged in light of the services provided.”

Plan sponsors should review their investment lineup, compare investments under this standard, and maintain minutes of the deliberation process. Having a process-driven policy should mitigate fiduciary risk. Plan sponsors should also review their service agreements with their recordkeepers to fully understand how recordkeepers are compensated. And as usual, we recommend reviewing your fiduciary liability policy to assess whether there is adequate coverage to fend off these claims.

[View source.]