By Pension and Benefits Editorial Staff
Allegations by former employees that Trader Joe’s breached its fiduciary duty of prudence by paying unreasonable fees to its 401(k) plan’s recordkeeper, failing to seek competitive recordkeeping bids, choosing higher cost investor class mutual fund shares, and allowing the recordkeeper to retain excess fees were too conclusory and lacking in factual basis to survive a motion to dismiss, according to a federal trial court in California. However, the former employees were allowed leave to amend their complaint.
Alleged breach of duty of prudence in recordkeeping arrangement. Trader Joe’s maintains a 401(k) plan that, as of December 31, 2018, covered 46,602 participants and held over $1.6 billion in total assets. The plan was administered by an internal investment committee. Through the December 20, 2013- December 31, 2018 period, Trader Joe’s retained Capital Research and Management Company to serve as the plan’s recordkeeper. The recordkeeper was paid a flat fee and an additional per plan-participant fee.
Former employees brought a proposed class action suit, alleging that Trader Joe’s breached its fiduciary duty of prudence with respect to the plan by: (1) paying the recordkeeper unreasonable fees; (2) failing to seek competitive recordkeeper bids every three years; (3) choosing higher cost, investor class mutual fund share classes over less expensive institutional class shares; (4) allowing the recordkeeper to temporarily collect and invest excessive fees from plan participants; and (5) failing to adequately monitor the investment committee members.
Trader Joes’ moved to dismiss the claims as unfounded speculation. The court granted the motion to dismiss, but allowed the former employees leave to amend.
Charge of excess recordkeeping fees without factual basis. The former employees alleged that the recordkeeper charged excessive recordkeeping fees, and that Trader Joe’s breached its fiduciary duty of prudence by failing to monitor and control the amount of asset-based revenue sharing fees the recordkeeper received. The former employees conceded that Trader Joe’s has not disclosed the precise amount of fees and/or income Capital Research collects from the Plan. While discovery was needed to determine the exact amount Capital Research was collecting, the former employees estimated that, over the past six years, the plan paid recordkeeping fees of nearly $140 per participant. By contrast, a reasonable recordkeeping fee, the class averred would be $40 per participant.
The Court, stressing that the former employees’ “guess” that the plan pays $140 per participant had no factual basis, concluded that the allegations of excessive recordkeeping fees were insufficient to survive a motion to dismiss. Absent any facts pertaining to the alleged unreasonable fees, the court further explained, all that remained was the conclusory and rejected assertion that fees under a revenue-sharing arrangement are necessarily excessive and unreasonable.
Competitive bids not required. The former employees next argued that prudent fiduciaries are required to put the plan’s recordkeeping and administrative services out for competitive bidding at regular intervals of approximately three years and to monitor recordkeeping costs regularly within that period. The failure of the committee and Trader Joe’s to seek competitive bids and negotiate proper rebates of unreasonable fees, the class charged, was a breach of their duty of prudence to the plan and caused the plan to pay excessive recordkeeping fees.
Initially, the court explained that the charge that plan fiduciaries are required to solicit competitive bids on a regular basis is without legal foundation, as ERISA does not compel competitive bidding. Moreover, the court stressed, the former employees did not proffer any facts suggesting that a competitive bid would have benefitted the plan or the plan participants, as they did not allege any facts supporting an inference that the same services were available for less on the market and could have been obtained through competitive bidding.
High cost mutual fund shares did not indicate fiduciary breach. It was next alleged that Trader Joe’s chose higher cost investor class shares of mutual funds, instead of institutional share classes that had lower operating costs. In addition, Capital Research allegedly kept the difference between the operating costs of the higher cost investor class shares and the lower cost institutional shares.
Noting that mere allegations that a plan offered retail rather than institutional share classes is insufficient to sustain a claim for fiduciary breach, the court ruled that the former employees alleged no specific facts that would suggest Trader Joe’s breached its fiduciary duty of prudence by allegedly failing to offer institutional class shares as opposed to investor class shares. For example, the court stressed, the former employees failed to make any specific allegations as to whether the investor class share offered by Trader Joe’s actually did cost more than an institutional class share in the same fund, or whether the investor class share offered other benefits that may have offset any additional cost.
Retention of excess fees. The court found the allegation that the recordkeepers’ repayment of money to plan participants demonstrated an admission of excessive fees and, in turn, a breach of the duty of prudence, to be without factual support. The bare recitation of legal conclusions, the court emphasized, is insufficient to survive a motion to dismiss.
Duty to monitor claim dismissed as derivative. Finally, the court dismissed the former employees’ failure to monitor claim as derivative of the dismissed fiduciary breach claims. As the former employees failed to plead sufficient facts with respect to the previously alleged breach of the duty of prudence, they could not maintain that Trader Joe’s failed to monitor the fiduciaries.
Source: Marks v. Trader Joe’s Company (DC CA).
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