An Employee Retirement Income Security Act (ERISA) lawsuit challenging CommonSpirit Health’s use of the Fidelity Freedom Funds target-date fund (TDF) series and its recordkeeping fees has been dropped.
The U.S. District Court for the Eastern District of Kentucky granted the defendant’s motion to dismiss the complaint after agreeing that the plaintiff did not allege facts that proved imprudent conduct on the part of the defendants.
CommonSpirit Health, a not-for profit corporation that provides hospital services, was facing litigation from a former employee of the company and participant of the plan, who alleged the company had provided an “inadequate selection of investment options” in the employer-sponsored 401(k) plan and allowed for “unreasonable expenses to be charged for the administration of the plan.”
The plaintiff claimed the company’s administration committee had violated its fiduciary duties of prudence and loyalty under ERISA after retaining Fidelity Management Trust Co. as the plan’s recordkeeper from July 2, 2014, to the present day. In exchange for its services, Fidelity charged recordkeeping fees that were paid by plan participants through a deduction of investment income.
The plaintiff had claimed that the committee selected investment funds with higher fees and subpar performance; offered an investment menu that was more expensive than that of comparable plans; and allowed the plan to pay excessive recordkeeping fees to Fidelity.
The complaint named the Fidelity Freedom Funds, a suite of 13 funds that are actively managed by Fidelity fund managers, as having higher operating costs compared with Fidelity’s passively managed index funds. As alleged in the complaint, while the expense ratio for the passive index suite was 0.08%, the expense ratio for funds in the active suite ranged from 0.42% to 0.65% for the K Share class, which the plan used until 2018. The plan now uses the K6 share class, with expense ratios ranging 0.37% to 0.49%.
As a result, the plaintiff alleged that plan participants who invested in the active suite would have collectively saved more than $1.24 million in fees in 2018 alone, had they invested in the index suite instead.
The plaintiff also claimed the active suite funds consistently underperformed compared with the passive index suite, citing lower rates by Morningstar and a 2019 report that showed rising investor demand for Fidelity’s index suite and falling demand for the active suite.
The defendants had filed a motion to dismiss the lawsuit, arguing that the plaintiff lacked Article III standing regarding her claim that the company imprudently chose investment vehicles that underperformed. Additionally, they stated that the plaintiff’s complaint, as a whole, “fails to state a claim upon which relief may be granted.”
Regarding the Article III issue, the court said that “contrary to the defendants’ contention, the plaintiff’s investment in one of the challenged funds is sufficient to confer standing to sue on behalf of plan members who invested in the remaining challenged funds.” It noted, however, that “standing is not dispensed in gross and a plaintiff must demonstrate standing for each claim he seeks to press and for each form of relief that is sought.”
In its dismissal, the court said the plaintiff had failed to “allege facts showing that the recordkeeping fees exceeded those of comparable plans or were excessive in relation to the service provided.” The court also stated that the plaintiff had “failed to identify another recordkeeper that would have been willing to conduct the same service as Fidelity,” at a reasonable rate.
On the claim that CommonSpirit Health had breached its duty of loyalty, the court found that the complaint did not differentiate between the defendant’s alleged violations of the duties of prudence and loyalty, as required when alleging disloyalty under ERISA. As a result, this claim was also dismissed by the court.
Other lawsuits challenging the use of the Fidelity Freedom Funds TDF suite have seen some success. In July, a federal district court judge denied the dismissal of two claims in a lawsuit against Prime Healthcare Services.