Judge Kevin McNulty of the U.S. District Court for the District of New Jersey has denied the dismissal of an Employee Retirement Income Security Act (ERISA) lawsuit against Barnabas Health and various retirement plan committees and individuals alleged to be fiduciaries of the health care system’s 401(k) and 403(b) defined contribution (DC) retirement plans.
In the original complaint, the plaintiffs alleged that the plan fiduciaries chose high-cost investments when lower-cost alternatives were available by selecting and maintaining funds with high expense ratios. They also suggested plan fiduciaries selected higher-cost share classes for funds when lower-cost share classes were available. The plaintiffs also allege that there were lower-cost alternative funds that performed better over the long-term. Finally, the lawsuit alleged that the fiduciaries failed to monitor or control the plans’ recordkeeping expenses.
In their motions to dismiss the case, the plan fiduciaries argued that the plaintiffs—participants in the plans—invested in only some of the funds cited, and that they lacked standing to press claims based on the funds in which they did not invest. McNulty found that the participants have alleged an injury to their own investments by virtue of the fiduciaries’ mismanagement, which is sufficient to create a case or controversy for Article III purposes. ERISA then grants them a cause of action to sue on behalf of the plans. “So it follows that ‘a plaintiff with Article III standing’ may sue on behalf of the plan and ‘may seek relief under Section 1132(a)(2) that sweeps beyond [that plaintiff’s] own injury,’” McNulty said, citing a section of ERISA.
“The fiduciaries misconstrue the complaint,” McNulty wrote in his opinion. “The participants allege that the fiduciaries mismanaged the plans. The participants thus allege plan-wide injuries, and as participants in the plans, they may sue to course-correct the plans’ management. For those reasons, I find that the participants have standing to challenge the plans’ management and thereby bring their ERISA claims.”
The judge next turned to whether the plaintiffs have plausibly pleaded a breach of duty of prudence. Because participants usually do not have direct evidence of how fiduciaries reached their decisions, he said the complaint need only provide an inference of mismanagement by “circumstantial evidence,” rather than direct allegations of matters observed firsthand. “The complaint need only plausibly plead that the fiduciary could have reduced costs, and the court will leave to a later day whether the fiduciary should have done so, considering all the circumstances. The necessary allegations are present,” McNulty found.
He said the complaint’s allegations—taken together—create an inference of mismanagement, so he found that the participants have stated a claim for breach of the duty of prudence. McNulty denied the fiduciaries’ motion to dismiss the duty of prudence claim.
Turning to the breach of duty of loyalty claims, McNulty found there are enough allegations to show that the participants could have saved costs had the fiduciaries chosen a different recordkeeper or compensation plan. “This need not imply that the fiduciaries were not acting solely in the participants’ interests, but it could,” he wrote in his opinion. “The fiduciaries may well be able to show why using Fidelity was reasonable; but as allegations, these suffice.”McNulty denied the fiduciaries’ motion to dismiss the duty of loyalty claim.