Compliance September 26, 2022

Lawsuit For Wake Forest University Retirement Plan Proceeds

The judge has allowed the case to go forward and the ‘plaintiffs should be afforded an opportunity to conduct discovery.’

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A federal judge has allowed an Employee Retirement Income Security Act lawsuit to procced.

The lawsuit against the Wake Forest University Baptist Medical Center, the board of directors of the University Baptist Medical Center, the retirement benefit committee and 30 unnamed individuals survived the defendants’ motion to dismiss, according to the order from District Court Judge William Lindsay Osteen, Jr., of the U.S. District Court for the Middle District of North Carolina.

“This court finds Plaintiffs should be afforded an opportunity to conduct discovery” as to whether participants were harmed because of high-cost mutual funds, Osteen Jr. wrote.

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Defendants previously alleged—in the original and amended complaint—that the 403(b) university plan was mismanaged by plan fiduciaries because it was filled with excessive-fee investments, that the plan fiduciaries misused revenue sharing to pay for administrative expenses and that they failed to conduct periodic bids to the market to ensure that the recordkeeping and administrative costs remained competitive.

The defendants had sought to dismiss plaintiffs’ claims on the grounds of failure to state a claim and failure to state a claim upon which relief can be granted, according to the judge’s order.

The original complaint was filed in 2021 before the same court.

The plaintiffs are former plan participants, according to court documents. The plaintiffs have alleged that because of the size of the Wake Forest University Medical Center 403(b) plan in 2019—$1.8 billion in retirement plan assets for 19,000 participants—the plan qualifies as a “jumbo” plan and as such plan fiduciaries should have been able to secure lower-fee arrangements with service providers.

Plaintiffs alleged that many of the mutual funds in the Wake Forest Baptist Medical Center 403(b) Retirement Savings plan were more expensive than comparable funds common to similarly sized plans with more than $1 billion of assets. For example, the defendants stated that the plan’s investment expense ratios for funds were up to 280%, in one case, and 273%, in another—higher than median expense ratios for funds in the same investment category.

TIAA is the plan’s recordkeeper and Capital Group’s American Funds provided target-date investments for the 403(b) plan.

A request for comment to the Wake Forest University Baptist Medical Center was not returned.

Compliance September 26, 2022

ERISA Suit Against Exelon Dismissed

The plaintiffs had alleged that their employer maintained expensive and low-performing investment options for plan participants.

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The U.S. District Court for the Northern District of Illinois has dismissed an ERISA class action against utility company Exelon Corporation and related defendants, including the firm’s investment oversight committee and its board of directors.

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The plaintiffs, who are participants and beneficiaries of Exelon’s employee savings plan, initially brought the case in December 2021, alleging that Exelon maintained investment options that charged higher fees and underperformed relative to available alternatives. Exelon had over $1 billion in assets under management, and as such should not have been paying fees comparable to retail prices, plaintiffs claimed. They alleged that they were paying around $99.78 per participant per year, when there were market alternatives as low as $20 per year, and that this cost participants millions of dollars. 

Exelon moved to dismiss the case in February on the basis that merely offering choices with higher fees is not actionable under ERISA.

Plaintiffs responded in March that Exelon failed to continuously review the investment options’ cost and performance, and that fiduciaries that take an unreasonable amount of time to remove low-performing investments violate their fiduciary duties. The defendants also maintained proprietary actively managed funds, when passive funds tend to outperform actives over time. Plaintiffs claimed that the case should not be dismissed at the pleadings stage because evaluating the investments is a “fact-intensive process” and it is too early in the litigation process for that to have been completed.

Exelon countered in April, arguing that plaintiffs merely claimed that the plan could have been charged lower fees with passive funds, which according to the defendants is not an actionable claim because ERISA neither bans active funds nor requires fiduciaries to “scour the market” to find the cheapest and best-performing investments. Rather, the defendants said, plaintiffs must have specific factual claims to show the investments were “objectively imprudent.”

The defendants also argued that it is not imprudent to maintain lower-performing funds as part of a long-term investment strategy, and that the plaintiffs never established a fair benchmark to which Exelon’s plan could be compared. The higher fees charged were not unreasonable in light of the plan’s needs or the services rendered for those higher fees, argued the defendants, who also noted that merely identifying better funds is not automatic proof of fiduciary imprudence.

The defendants asked the court to take their gatekeeping responsibility seriously, and to dismiss the case without an opportunity to amend the complaint in the future. They accused the plaintiffs of bringing a frivolous suit to impose litigation costs on the defendants and extract a settlement regardless of the suit’s merit.

The U.S. Chamber of Commerce filed an amicus brief on behalf of the defendants. The brief says there has been a surge of ERISA litigation in the past two years, in which plaintiffs cherry-pick data points and time periods. It is always possible to identify bad plans in hindsight, the brief says, but if that were the only requirement for successful legal action, no plan would be immune to ERISA litigation. In the Chamber’s view, lawsuits of this kind only serve to increase litigation and insurance costs to fiduciaries, and therefore incentivize employers to reduce fund choices or not offer retirement plans at all, which would only hurt the people ERISA is designed to protect.

The Chamber’s brief also suggests that litigation concerning higher fees will disincentivize many of the services that higher fees can provide, such as financial literacy education and enhanced customer service.

The Chamber further argued that plaintiffs need direct allegations of wrongdoing, and not circumstantial evidence that is consistent with a prudent process.

The District Court’s dismissal, issued last week, says higher fees are often an indicator of superior services, and the court needs a rationale for believing that the comparators cited by the plaintiffs are similar to the funds offered by Exelon before a fair comparison in fee structure can be made.

The court did keep the door open on management costs, however. The ruling says that while the plaintiffs asserted that there were more affordable comparator funds with “similar investment mixes” and “underlying assets” for “the same or better performance” available, and that therefore higher fees were not justified by higher returns or better services, the plaintiffs need more facts to show that these rival funds are appropriate benchmarks.

The case was dismissed without prejudice, and the plaintiffs were given leave to amend their complaint by October 31.

Exelon has not yet responded to a request for comment about the lawsuit. 

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