Salesforce Defeats ERISA Excessive Fee Litigation

A district court in California has proven to be skeptical of claims suggesting that active management funds are categorically imprudent retirement plan investments; the ruling also defends the use of revenue sharing. 

The U.S. District Court for the Northern District of California has ruled in favor of a motion by Salesforce to dismiss an Employee Retirement Income Security Act (ERISA) lawsuit filed against that commerce technology company in March.

The lawsuit sought class action status on behalf of a sizable group of Salesforce retirement plan participants and beneficiaries. Named as defendants were Salesforce itself, along with its board of directors and its retirement plan’s investment advisory committee.

According to the complaint, the Salesforce plan had more than $2 billion in assets at the end of 2018. The complaint, echoing numerous other excessive fee lawsuits filed under ERISA, stated that the size of the plan gives it substantial bargaining power to negotiate lower fees for both investment products and recordkeeping services. The plaintiffs accused the firm of failing to try to reduce the plan’s expenses or exercise appropriate judgment to scrutinize each investment option that was offered in the plan to ensure it was prudent. The complaint argued broadly that retirement plans simply should not utilize actively managed funds, because of their higher fees relative to passive funds’.

Facing these allegations, the Salesforce defendants filed a motion to dismiss the complaint on the basis of the Federal Rule of Civil Procedure 12(b)(6). As recounted in the pro-Salesforce ruling, a complaint’s dismissal under Rule 12(b)(6) can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. On the other hand, other procedural rules require that plaintiffs merely provide “a short and plain statement of the claim showing that the pleader is entitled to relief.”

“Consequently, a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations,” the ruling explains. “Nonetheless, a plaintiff’s obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.”

The ruling recalls how defendants have argued that passively managed funds “are not comparable to actively managed funds in any meaningful way.” The court agrees with this framing.

“Passively managed funds … ordinarily cannot serve as meaningful benchmarks for actively managed funds, because the two types of funds have different aims, different risks and different potential rewards that cater to different investors,” the ruling states. “Actively and passively managed funds have, for example, different management approaches, and analysts continue to debate whether active or passive management is a better approach. Further, actively managed funds can offer investors the chance to earn superior returns, access specialized sectors or take advantage of alternative investment strategies, while also allowing rapid turnover both in the funds’ holdings and the participants’ investments. Passively managed funds typically disallow new investments for a month or more following any withdrawal.”

In light of such differences, the ruling states, plaintiffs’ allegations that passively managed funds are available as alternatives to the actively managed funds offered in the plan “do not suffice to demonstrate imprudence.”

“In support of their asserted comparison, plaintiffs allege the passively managed funds have the same investment style or materially similar characteristics as certain actively managed funds offered in the plan,” the ruling states. “Such conclusory allegations, however, are not sufficient to state a claim for relief.”

The plaintiffs’ arguments about the use of more expensive share classes of certain investments in the Salesforce plan were met with equal skepticism, in part because the share classes in question involve revenue sharing that offsets some of the plan’s recordkeeping fees. Plaintiffs in this case and others have argued that such revenue sharing is inherently imprudent, essentially because of the extra layer of complexity involved in analyzing plan expenses.

“Known as ‘revenue sharing,’ this arrangement provides an obvious, alternative explanation for why the plan did not offer the lowest-cost share class for those funds,” the ruling concludes. “Plaintiffs fail to allege any facts to support their conclusory allegation that the plan did not receive any services or benefits based on its use of more expensive share classes.”

The full text of the ruling is available here. The plaintiffs have been granted leave to amend the flaws in their complaint, with a new filing deadline of October 23.