A federal magistrate judge on Tuesday recommended the dismissal of a lawsuit brought under the Employee Retirement Income Security Act against the Dish Network Corporation for its use of actively managed Fidelity Freedom Funds.
The recommendation by a magistrate judge—in this case, dismissal for failure to state a claim—is not binding until a U.S. district judge reviews and approves it, but recommendations of this kind are normally approved.
The lawsuit was brought in January in the U.S. District Court for the District of Colorado by four former employees of Dish represented by the Miller Shah law firm, one day after the same firm reached a settlement with Coca-Cola for challenging the same suite of target-date funds.
The Coca-Cola Company, which settled in its case, was represented by Alston and Bird, while Dish, for which dismissal is recommended, was represented by the Groom Law Group, Chartered. The same TDF suite was challenged in both cases.
The complaint against Dish alleges that the fees charged by the actively managed Fidelity Freedom Fund TDF suite were more than those paid by similar defined contribution plans and that they were not adequately monitored by Dish. It also alleges that the Fidelity TDFs underperformed comparable TDFs in the same time period.
According to the initial complaint, the Dish plan had 18,808 participants with $841 million in assets, as of December 31, 2020.
In April 2022, Dish moved to dismiss the case for lack of standing and failure to state a claim. Dish alleged that the plaintiffs were not personally invested in the TDFs, therefore were not injured by them, and thus had no standing. Dish also argued the plaintiffs’ complaint does not specify flaws in Dish’s fiduciary processes, nor prove that lower recordkeeping fees were available to Dish during the class period.
Magistrate Judge Scott Varholak recommended on Tuesday that the Dish case be dismissed without prejudice and that the plaintiffs should be given 14 days to amend and resubmit their complaint. That recommendation will be reviewed by a district judge.
Varholak accepted that the plaintiffs had standing and agreed with Dish that they failed to state a legally actionable claim.
According to the magistrate judge’s recommendation, the plaintiffs have standing because they allege a flawed process which damaged all of their investment portfolios. Also, even though each plaintiff did not invest in every TDF vintage available, they all invested in at least one and have the right to challenge the suite itself. Additionally, the inclusion of potentially imprudent menu options deprives the plaintiffs of prudent options, damaging them by way of opportunity cost, even if none had invested in the Fidelity suite.
When Varholak considered failure to state a claim, he recommended a dismissal. Varholak wrote that the plaintiffs must identify the fees that the plan in fact paid and compare them to the fees charged in similar plans. He also explained that actively managed TDFs are not, per se, imprudent, and the plaintiffs must identify process flaws in their complaint.
The magistrate judge also addressed the plaintiffs’ claim that 11 of the 32 underlying investment vehicles lacked a five-year track record and are therefore imprudent because they are untested. Varholak wrote that relatively new investment vehicles are also not, per se, imprudent, and the plaintiffs must still identify process flaws that resulted in the selection of imprudent investments.
“Thus, considering the totality of Plaintiffs’ allegations, the Court finds that Plaintiffs have failed to state an imprudence claim,” Varholak’s recommendation stated. “Plaintiffs make no direct allegations regarding Defendants’ process for selecting and retaining Plan options. Plaintiffs have further failed to adequately compare the Active Suite to a meaningful benchmark or otherwise allow a court to reasonably infer that the retention of the Active Suite was the result of an imprudent monitoring process. Accordingly, the Court RECOMMENDS that Plaintiffs’ imprudence claim regarding the Active Suite be DISMISSED.”
The Miller Shah law firm did not return a request for comment.