The 6th U.S. Circuit Court of Appeals has reversed parts of a prior ruling in an excessive fee lawsuit against TriHealth Inc and remanded the case for further litigation.
The new appellate ruling comes less than a year after the U.S. District Court for the Southern District of Ohio, Western Division issued its own order granting dismissal of the amended class action complaint, which was initially filed against TriHealth Inc in August of 2019.
The underlying complaint in the case alleged that, for every year between 2013 and 2017, the administrative fees charged to TriHealth retirement plan participants were greater than 90% of those charged to comparable plans. Case documents suggest that, as a total of plan assets, TriHealth’s plan cost 86 bps in 2017, compared with an alleged peer mean of 41 bps. The lawsuit also claimed that the TriHealth plan’s investment fees were excessive when held up against other comparable mutual funds not offered by the plan.
In pursuing their dismissal motion, the defendants presented two main arguments. First, that the plaintiffs’ claims are barred by the applicable statute of limitations, and second, that plaintiffs failed to adequately plead their breach of the duty of prudence and loyalty claims such that dismissal is required.
The District Court’s analysis of the statute of limitations arguments reflects other courts’ considerations of the matter, including the analysis by the U.S. Supreme Court of “actual” versus “constructive” knowledge and how these two types of knowledge affect the length of time an ERISA complainant can wait to file a lawsuit. As the District Court’s order summarized, the Supreme Court has determined that the mere provision of disclosure documents to a complainant does not necessarily establish their awareness of potential fiduciary wrongdoing. Practically speaking, this distinction matters because of the special (and much shorter) three-year statute of limitations period which begins when plaintiffs can be shown to have gained “actual knowledge” of an alleged fiduciary breach.
The new appellate ruling points out that new precedent has overtaken some of the debates in the case.
“Our recent decision in CommonSpirit largely resolves several of the plaintiffs’ claims that their employer TriHealth should not have offered its employees the option of investing their retirement money in actively managed funds, that the performance of several funds was deficient at certain points, and that the overall fees charged for the investment options were too high,” the ruling states.
The CommonSpirit ruling was itself issued by the 6th Circuit in June, and it is already having an impact on the ERISA litigation landscape within the 6th Circuit’s jurisdiction. One fiduciary insurance executive called the CommonSpirit ruling “the best decision ever written in an excessive fee case,” as it effectively rebuts the arguments of fiduciary imprudence asserted in most excessive fee lawsuits in which plaintiffs ask the court to infer fiduciary malpractice based on circumstantial evidence of what participants consider an undesirable outcome.
The 6th Circuit’s new ruling posits that the complaint in TriHealth contains one other claim not covered by CommonSpirit.
“The gist of it is this: Even if a prudent investor might make available a wide range of valid investment decisions in a given year, only an imprudent financier would offer a more expensive share when he could offer a functionally identical share for less,” the new ruling states. “The plaintiffs claim that TriHealth offered them more expensive mutual fund shares when shares with the same investment strategy, the same management team and the same investments were available to their retirement plan at lower costs. Because the plaintiffs in this last respect have stated a plausible claim that TriHealth acted imprudently, we affirm in part and reverse in part the district court’s dismissal of their complaint for failure to state a claim.”
The new appellate ruling offers additional analysis of the issues in the CommonSpirit ruling.
“Disappointing performance in the near term and higher costs do not by themselves show deficient decisionmaking, especially when we account for competing explanations and other common-sense aspects of long-term investments,” the order states. “Different services, investment strategies and investor preferences invariably lead to a spectrum of options—and in turn a spectrum of reasonable fee structures and performance outcomes. As a result, side-by-side comparisons of how two funds performed in a narrow window of time, with no consideration of their distinct objectives, will not tell a fiduciary which is the more prudent long-term investment option.”
Regarding the part of the case that has been remanded, which involves the offering of higher-cost share classes when lower-cost share classes were apparently readily available, the appellate ruling presents a cautious analysis of the issue at hand.
“The three employees separately complain that TriHealth violated the duty of prudence by offering them pricier retail shares of mutual funds when those same investment management companies offered less expensive institutional shares of the same funds to other retirement plans,” the order states. “Why, they complain, didn’t TriHealth take advantage of—indeed just ask for—these lower-priced mutual fund shares for the same investment team and same investment strategy when this retirement plan has nearly half a billion dollars in assets?”
The ruling continues as follows: “This failure to take advantage of the cheaper share classes in 17 of the 26 offered funds, they say, materially decreased the value of their retirement savings. Taken in their most flattering light, these allegations permit the reasonable inference that TriHealth failed to exploit the advantages of being a large retirement plan that could use scale to provide substantial benefits to its participants. Under the common law of trusts, which supplied the backdrop to ERISA when Congress enacted it in 1974, that would state a claim of imprudence.”
The order notes that “equally reasonable inferences” in the other direction could indeed exonerate TriHealth once all of the facts come in.
“Perhaps the fund is not large enough or does not have enough participants interested in a particular investment to qualify for the less expensive share class,” the order notes. “Perhaps the plan has revenue sharing arrangements in place that make the retail shares less expensive or that benefit plan participants on the whole. But at the pleading stage, it is too early to make these judgment calls. In the absence of further development of the facts, we have no basis for crediting one set of reasonable inferences over the other. Because either assessment is plausible, the Rules of Civil Procedure entitle the three employees to pursue their imprudence claim (at least with respect to this theory) to the next stage. Other courts of appeals have reached similar conclusions at this juncture and in this setting.”The full text of the appellate ruling is available here.