Mator v. WESCO Distribution, Inc.

PITTSBURGH ROBERT MATOR AND NANCY MATOR, INDIVIDUALLY AND AS REPERESENTATIVES OF A CLASS OF PARTICIPANTS AND BENEFICIARIES IN AND ON BEHALF OF THE WESCO DISTRIBUTION, INC. RETIREMENT SAVINGS PLAN; Plaintiffs, v. WESCO DISTRIBUTION, INC., AND; THE ADMINISTRATIVE AND INVESTMENT COMMITTEE FOR WESCO DISTRIBUTION, INC. RETIREMENT SAVINGS PLAN, JOHN AND JANE DOES 1-30, Defendants,

No. 2:21-CV-00403-MJH

United States District Court, W.D. Pennsylvania, Pittsburgh

April 7, 2022

OPINION AND ORDER

MARILYN J. HORAN, United States District Judge.

Plaintiffs Robert Mator, and Nancy Mator, Individually and as Representatives of a Class of Participants and Beneficiaries in and on behalf of the Wesco Distribution, Inc. Retirement Savings Plan (Plan), bring claims for Breach of Duty under the Employee Retirement Income Security Act (29 U.S.C §§ 1001-1461) (ERISA) (Count I). In addition, at Count II, Plaintiffs set forth a claim for Failure to Adequately Monitor Other Fiduciaries Under ERISA (Count II). Both Counts are asserted against Defendants, Wesco Distribution, Inc., The Administrative and Investment Committee for Wesco Distribution, Inc. Retirement Savings Plan, and John and Jane Does 1-30. (ECF No. 44). Defendants moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(6). (ECF No 48). The matter is now ripe for consideration.

Upon consideration of Plaintiffs' Amended Complaint (ECF No. 44), Defendants' Motion to Dismiss (ECF No. 48), the respective briefs of the parties (ECF Nos. 49-51, 53-57), the Plaintiffs' Notices of Supplemental Authority and Defendants' responses to the same (ECF Nos. 58-61), and for the following reasons, Defendants' Motion to Dismiss Pursuant to Fed. R. Civ. 12(b)(6) will be granted. Plaintiffs' Amended Complaint will be dismissed; however, Plaintiffs will be granted leave to amend.

I. Background

Plaintiffs and their putative class bring claims against the Defendants, as ERISA fiduciaries, for not protecting participants and their retirement funds by failing to evaluate fees and monitor costs assessed to the Plan. (ECF No. 44 at ¶¶ 5-6, 8). Plaintiffs' Amended Complaint asserts two claims under ERISA: 1) Breach of Duty of Prudence by selecting a Retirement Plan Service (RPS) provider that charged imprudent and unreasonable fees, and offering share class funds with excessive expenses; and 2) Failure to adequately monitor other fiduciaries who were tasked with monitoring and evaluating RPS providers. Id. at ¶¶ 150-170.

Plaintiffs' Breach of ERISA duty Count I concerns breaches of Duties of Prudence. The Duty of Prudence claim avers two components, excessive RPS fees and excessive share class expenses. Plaintiffs aver that these fees and expenses can reduce of the value of defined contribution plan accounts and that the Plan's fiduciaries have control over these expenses. Id. at ¶¶ 42-43.

Defined contribution plans have two primary methods for payment of recordkeeping and administrative services: “direct” payments from plan assets, and “indirect” revenue sharing payments from plan investments, such as mutual funds. Id. at ¶ 67. In a direct payment arrangement, the fiduciary contracts with the recordkeeper to obtain services in exchange for a flat annual fee based upon the No. of participants for which the recordkeeper will be providing services. Id. at ¶ 68. In an indirect revenue sharing payment arrangement, the mutual fund pays the plan's recordkeeper for providing recordkeeping and administrative services for the fund. Id. at ¶ 72. However, because revenue sharing payments are asset-based, the fees can allegedly grow to unreasonable levels if plan assets grow while the No. of participants, and thus the services provided, has not increased at a similar rate. Id. Further, Plaintiffs aver that if plan assets decline, participants in revenue-sharing arrangements will not receive a sustained benefit of paying lower fees, because the recordkeeper will demand that the plan make up the shortfall through additional direct payments. Id.

As regards share class expenses, Plaintiffs allege that mutual funds offer their investors different share classes: retail and institutional. Id. at ¶ 60. Plaintiffs aver that retail share classes are marketed to individuals with small amounts to invest, while institutional share classes are offered to investors with large amounts to invest, as with large retirement plans. Id. Plaintiffs maintain that retail share classes incur higher fees, such that retail class investors receive lower returns. Id.

Plaintiffs allege that Wells Fargo, N.A., the Plan's recordkeeper from 2009 to 2020, was responsible for holding the Plan's assets in trust, tracking participants' contributions, earnings and investment accounts and executing trades as requested by Plan participants. Id. at ¶ 94. As recordkeeper, Wells Fargo allegedly offered the following services: Internet access to accounts, transaction processing, quarterly participant statements, participant communications-including Plan investments disclosures and periodic participant newsletters, retirement education services-including various tools, such as Plan website retirement income calculators, telephone support to answer questions or give assistance to Plan participants, and a brokerage window to enable Plan participants to invest in securities outside the Plan. Id. at ¶ 95. Plaintiffs allege that Wells Fargo charged the Plan direct and indirect fees for the recordkeeping and administrative services and that said fees were excessive compared to other similar-sized plans for similar services. Id. at ¶ 96. During the Class Period, Plaintiffs aver they paid between $82 and $50 per year for direct recordkeeping and administrative fees. Id. at ¶ 98. Those fees are summarized as follows:

Direct Recordkeeping and Administrative Services Compensation Per-Participant Cost (source: Forms 5500)

Plan Year

2015

2016

2017

2018

2019

Average

Participants

8, 486

9, 043

8, 179

8, 232

8, 870

8, 562

Direct Fees

$614, 032

$651, 150

671, 304

$539, 003

$443, 714

$583, 840

Direct Per-Participant Fee

$72

$72

$82

$78

$50

$68

Id. Plaintiffs aver that mutual fund companies paid indirect fees to Wells Fargo as follows during the Class Period:

Year

Indirect Fees Paid to Wells Fargo by Mutual Fund Companies

2015

$752, 446

2016

$773, 658

2017

$840, 637

2018

$731, 513

2019

$917, 662

Total

$4, 015, 916

Id. at ¶ 99. During the Class Period, Plaintiffs and Plan participants each paid between $153 and $185 per year in total retirement plan services expenses as follows:

Direct and Indirect Recordkeeping and Administrative Services Compensation Per-Participant Cost (source: Forms 5500)

Plan Year

2015

2016

2017

2018

2019

Average

Per-Participant Fee

$161

$157

$185

$154

$153

$162

Id. at ¶ 102. Plaintiffs allege that the Plan's per-participant average fee expense of $154 exceeded the NEPC $40-$60 average per participant fee for similarly sized plans.^[1] Id. at ¶ 104. Plaintiffs allege that other similarly sized plans maintained an average per-participant fee of $41, provided the same services as Wells Fargo, and that Wells Fargo's services were not so unique as to justify paying more than four times such average fees. Id. at ¶ 109. On July 1, 2020, the Plan allegedly switched from Wells Fargo to Fidelity Investments which charges a per participant fee of $53. Id. at ¶ 112.

As regards excess share class expense claims, Plaintiffs aver that the Defendants consistently chose mutual fund share classes with higher operating expenses (retail shares) when identical lower-cost shares (institutional shares) of the same funds were available. Id. at ¶ 130. Plaintiffs allege that the selection of higher cost, retail share classes to pay for Plan administrative expenses was not justified in this case, because Wells Fargo was charging higher direct recordkeeping service fees. Id. at ¶ 134.

Accordingly, Plaintiffs aver that Defendants breached their Duty of Prudence to Plan participants, including Plaintiffs, by failing to employ or follow a prudent process to critically or objectively evaluate the availability of lower RPS fees and lower cost, institutional, share classes of certain mutual funds available to the Plan. Id. at ¶¶ 158-159.

In their Motion to Dismiss, Defendants argue that Plaintiffs fail to state a viable claim under ERISA. (ECF No. 49). In particular, Defendants maintain that Plaintiffs fail to state claims for breach of ERISA's Duty of Prudence, and for derivative Failure-to-Monitor claims. Id.

After the parties had briefed the issues in Defendant's Motion to Dismiss, the United States Supreme Court issued its decision in Hughes v. Nw. Univ., 142 S.Ct. 737 (2022). Defendants had previously moved to stay this case pending resolution of Hughes, which this Court denied. Because of the perceived importance of the Hughes decision, the Court invited the parties to submit supplemental briefs. (ECF No. 52). Plaintiffs and Defendants submitted supplemental briefs and responses. (ECF Nos. 53-57). After this Court's review of the Hughes decision and the parties' submissions, the Supreme Court's holding neither shifts the pleading standards in Plaintiffs' ERISA claims nor changes this Court's prior or current analysis of Plaintiff's Complaint or Amended Complaint.

Following the close of briefing, Plaintiffs also filed a Notice of Supplemental Authority (ECF Nos. 58, 60) to which Defendants responded (ECF Nos. 59, 61). Plaintiffs' first submission includes six cases, all out of circuit and out of district. Upon review of the same, the Court is not persuaded that these cases change the legal standards and applications from its decision on Defendant's first Motion to Dismiss (ECF No. 27). Plaintiffs' second submission includes...