Universal Health Services’ defendants asked the U.S. District Court for the Eastern District of Pennsylvania to partially dismiss a lawsuit against them, arguing that plaintiffs lacked standing to recover losses for investments in which they did not invest.
The court noted that Congress permits plan participants to sue if the retirement plan fiduciaries allow the plan to pay inappropriate management fees or otherwise lose value for reasons arguably within their control. But they typically cannot challenge losses to funds in which they did not invest. However, it noted that the 3rd U.S. Circuit Court of Appeals recently ruled that participants can challenge decisions which affect the value of the plan if they can allege specific extra costs affecting their funds and therefore imposed upon them.
The defendants argued the three plaintiffs only invested in seven of the plan’s funds during the putative class period and therefore lacked standing to bring claims about the remaining funds. However, the plaintiffs argued they have alleged injury with respect to each of their claims—which implicate “plan-level conduct”—and, therefore, have standing. The court agreed with the plaintiffs.
“Judge Edgardo Ramos recently evaluated—and denied—a similar argument in Falberg v. Goldman Sachs Group,” the court wrote in its opinion. “He declined to dismiss ERISA [Employee Retirement Income Security Act] breach of fiduciary duty claims even though the plan participant only invested in three of the five proprietary funds at issue. Judge Ramos found the plan participant had standing to bring his claims because he alleged ‘millions in losses to the plan resulting from defendants’ decision to maintain underperforming, high cost funds, which specifically affected him as a participant invested in several of them.’ He further found the allegation the fiduciaries acted in their own interest by offering a category of proprietary, high-cost funds applied to all participants who invested in any one of those funds.”
The court also cited Clark v. Duke University in which the judge found the claims relating to the fiduciaries’ overall decisionmaking processes affected all plan participants, including the named plaintiffs. The judge further found the plan participants had standing to bring their claims related to specific imprudent funds because at least one named plaintiff invested at least one of the funds at issue in the claims.
The first claim in the Universal Health Services lawsuit involves the plan’s inclusion of a suite of 13 Fidelity Freedom target-date funds (TDFs). The plaintiffs allege plan fiduciaries imprudently offered plan participants the high-cost, actively managed suite of funds even though index funds with much lower fees were available. The defendants concede that each plaintiff was invested in at least one of these funds. “As our Court of Appeals held in Sweda, this admitted fact is enough to link them to some of the underperforming funds and demonstrate individualized injury for standing,” the court said.
A second claim alleges Universal Health failed to monitor the plan’s recordkeeping and administrative costs, leading to the plan participants paying much higher fees than necessary. The court found this claim applies to all participants.
A third claim essentially alleges plan fiduciaries lacked a “prudent investment evaluation process.” The plaintiffs allege this imprudent process forced them, and all plan participants, to choose from an “expensive menu of investment options.” The court said it joins other courts in finding that claims relating to allegedly imprudent decisionmaking processes injure all plan participants.
The court found the plaintiffs have standing to move forward on their claims it and denied Universal Health’s motion for partial dismissal. However, it did not determine whether the named plaintiffs are appropriate proper class representatives to bring claims on behalf of all plan participants. “This inquiry may be appropriate at the class certification stage or in understanding their possible damages model,” the court said.