An ERISA action alleging breaches of fiduciary duty recently cleared the pleadings stage in Minnesota district court, narrowly avoiding a complete dismissal. See Schave v. CentraCare Health Sys., No. 22-cv-1555 (WMW/LIB), 2023 U.S. Dist. LEXIS 13786 (D. Minn. Jan. 27, 2023).

In Schave, a CentraCare employee challenged the healthcare provider’s handling of its 401(k) and 403(b) retirement plans. Specifically, Plaintiff accused CentraCare Health System, its board members, and retirement plan administrators of breaching their ERISA duties of prudence and loyalty by:

1. investing in funds charging excessive management fees;

2. failing to monitor and replace underperforming funds;

3. engaging in improper revenue sharing; and

4. failing to invest in less expensive share classes.

Although it dismissed three of the four claims, the court ultimately declined to dismiss the “share classes” cause of action, allowing the lawsuit to eke past the pleadings stage. 

Standing

As an initial matter, Defendants argued Plaintiff lacked standing to challenge investment options in which she did not enroll.  The Court, relying on Eighth Circuit precedent, took the position that an ERISA plaintiff has standing to challenge a defined contribution plan even if the relief sought is broader than the plaintiff’s own injury.

Failure to State a Claim

The court then turned to the adequacy of the complaint and dismissed three of Plaintiff’s four fiduciary breach claims.  Relying on Matousek v. MidAmerican Energy Co., 51 F.4th 274, 279 (8th Cir. 2022), the Court dismissed claims one-by-one for failure to provide adequate comparators.

Finding comparisons between actively managed and passively managed funds unpersuasive, the court dismissed Plaintiff’s breach-of-fiduciary-duty claim based on excessive management fees.

Plaintiff’s “investment performance” angle met a similar end. Plaintiff claimed that other, cheaper investments proved more successful over a 5-year term. But the complaint identified only a single comparator for each challenged fund. Without alleging how the comparators held “similar securities, [had] similar strategies, and reflect[ed] a similar risk profile,” Plaintiff could not show Defendants failed to replace underperforming funds with cheaper, higher performing alternatives. Schave, 2023 U.S. Dist. LEXIS 13786, at *14.

The court likewise dismissed Plaintiff’s breach-of-fiduciary-duty claim premised on “improper revenue sharing.” Here, the complaint contained only a single case-specific allegation: some of the funds in the challenged plans shared revenue with Fidelity, a service provider. Noting that the remainder of the allegations “merely describe[d] ‘revenue sharing’ in general,” the court dismissed the claim for failing to “connect the dots” that show imprudence. Id.

By contrast, Plaintiff’s “share class” claim survived the motion to dismiss.  Plaintiff alleged that several of the plans’ funds were invested in a more expensive “R5” share class, when a less expensive “R6” institutional share class was available.  Defendants argued that the R5 shares were, practically speaking, less expensive because Defendants negotiated rebates that offset the cost difference.  Still, the court held that the allegations were sufficient, notwithstanding Defendants’ plausible alternative explanation.  This claim proved just strong enough to hoist the complaint over a complete dismissal.

Takeaway

Although the Schave case will proceed to discovery, this decision reinforces the Eighth Circuit’s pleading standard in defined contribution fee class actions, which requires sound comparisons and meaningful benchmarks.