In a case alleging fiduciaries of Kaleida Health’s 403(b) and 401(k) plans failed to take advantage of the plans’ bargaining power by only offering actively managed retail mutual funds as investment options instead of identical investor class mutual funds with lower operating expenses, a federal court judge has denied motions to dismiss.
According to the decision by U.S. District Judge Elizabeth A. Wolford of the U.S. District Court for the Western District of New York, the defendants’ first motion to dismiss is denied as moot. After the defendants filed the motion, the plaintiffs filed an amended complaint, which alleges significantly more facts than the initial complaint. Woldford cited case law in saying, “Where plaintiffs have substantially bolstered their factual allegations through amendments to the complaint, it makes little sense for the Court to assess those claims based on briefing that does not consider the additions.”
Secondly, the defendants contend that neither Susan Vallance, the director of Employee Benefits at Kaleida, nor the plans’ retirement committee are fiduciaries with respect to the alleged conduct at issue. The plaintiffs allege that Vallance has numerous responsibilities with respect to the plans, including to “[r]esearch, design, develop, negotiate, communicate and implement new or enhanced benefit programs, including retirement and pension plans.” Wolford said someone who had the responsibility of negotiating the plans could very well have played a role in deciding which share class to invest in. Plaintiffs also allege that Vallance signed the plans’ Form 5500s from 2014 to 2017 on the line labeled “signature of plan administrator.” Wolford found that these are statements about Vallance’s job description that sufficiently allege Vallance exercises “discretionary authority or discretionary control respecting management” and/or administration of the plans.
The defendants argue that the plans do not explicitly identify Vallance as an administrator or a fiduciary for the plans. But, Wolford cited Mertens v. Hewitt Assocs., which states “ERISA, however, defines ‘fiduciary’ not in terms of formal trusteeship, but in functional terms of control and authority over the plan, thus expanding the universe of persons subject to fiduciary duties.” Wolford concluded that the amended complaint sufficiently alleges that Vallance has functional control and/or authority over the plans so as to fall within the scope of an Employee Retirement Income Security Act (ERISA) fiduciary.
Additionally, Wolford found the plaintiffs’ allegations regarding the retirement committee’s status as a fiduciary are also sufficient at this stage of the proceedings. The amended complaint alleges that the retirement committee “has discretionary authority … to fix omissions, to resolve ambiguities regarding the plans and to construe terms of the plans,” as well as “to approve or disapprove funding vehicles under the plans.”
The defendants argue the retirement committee should not be considered a fiduciary because the Charter of the Kaleida Health Retirement Plan Committee “carved out responsibility” for the plans’ funding and oversight of the plans’ investments from being delegated to the retirement committee. “Defendants’ arguments do not persuade the Court; if anything, they create an issue of material fact that would be inappropriate to resolve in a ruling on a motion to dismiss,” Wolford wrote in her decision.
In addition, Wolford noted that Section 1.03 of the Charter states; “The purpose of the [Retirement] Committee is to serve as the plan administrator of the plans and, as a named fiduciary, to exercise authority and control over the management of the plans, excluding responsibilities for funding and investment of plan assets that have been delegated to the [Investment Committee.]”
Wolford wrote, “It is not clear at this point in the litigation that a failure to properly minimize administrative fees falls exclusively within the scope of funding and oversight responsibilities of the plans that the Charter delegated to the Investment Committee, or that such a claim is not within the scope of the Retirement Committee’s other administrative and managerial responsibilities.” However, she noted that Department of Labor (DOL) regulations provide that the performance of trustees and other fiduciaries should be reviewed regularly to “ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan.”
In other words, Wolford explained, even though the Charter does delegate the responsibilities of funding the plans and oversight of plan investments from the Retirement Committee to the Investment Committee, it does not relieve the retirement committee of its fiduciary duty to monitor the investment committee. “Therefore, the Court will not dismiss Vallance or the Retirement Committee at this stage of the litigation,” she wrote.
The defendants argue the amended complaint fails to state a breach of fiduciary duty claim because the retail funds at issue are part of a wide range of options, and the fees associated with those retail funds fall within ranges permitted by the courts. Wolford said courts in her court’s circuit have found allegations that the “defendants breached their fiduciary duties by selecting specific retail funds over lower-cost, but otherwise identical, institutional funds … are sufficient to survive the motions to dismiss.”
Wolford also noted the 2nd U.S. Circuit Court of Appeals has found that “ERISA plaintiffs generally lack the inside information necessary to make out their claims in detail unless and until discovery commences,” and accordingly an omission in the complaint of the fiduciary’s “knowledge, methods, or investigations at the relevant times … is not fatal to a claim alleging a breach of fiduciary duty.” Instead, “a claim for a breach of fiduciary duty under ERISA may survive a motion to dismiss … if the complaint alleges facts that, if proved, would show that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident.”She denied the defendants motion to strike without prejudice.