Ramos v. Banner Health

1 F.4th 769

Lorraine M. RAMOS; Constance R. Williamson; Karen F. McLeod; Robert Moffitt; Cherlene M. Goodale; Linda Ann Heyrman; Delri Hanson, individually and as representatives of a class of plan participants, on behalf of Banner Health Employees 401(k) Plan, Plaintiffs-Appellants,

v.BANNER HEALTH; Banner Health Board of Directors; Banner Health Retirement Plans Advisory Committee; Laren Bates; Wilford A. Cardon; Ronald J. Creasman; Gilbert Davila; Peter S. Fine; Susan B. Foote; Michael J. Frick; Michael Garnreiter; Barry A. Hendin; David Kikumoto; Larry S. Lazarus; Steven W. Lynn; Anne Mariucci; Quentin P. Smith, Jr.; Christopher Volk; Cheryl Wenzinger; Brenda Schaefer; Charles P. Lehn; Colleen Hallberg; Dan Weinman; Dennis Dahlen; Ed Niemann, Jr.; Ed Oxford; Jeff Buehrle; Jennifer Sherwood; Julie Nunley; Margaret Dehaan; Patricia K. Block; Paulette Friday; Richard O. Sutton; Robert Lund; Thomas R. Koelbl, Defendants-Appellees.

No. 20-1231

United States Court of Appeals, Tenth Circuit.

FILED June 11, 2021

Sean E. Soyars (Jerome J. Schlichter, Troy A Doles, and Heather Lea with him on the briefs) Schlichter, Bogard & Denton, St. Louis, Missouri, for Appellants.

Michael B. Kimberly (Margaret H. Warner, Jennifer B. Routh, and Matthew A. Waring with him on the brief), McDermott Will & Emery, Washington, D.C., for Appellees.

Before TYMKOVICH, Chief Judge, KELLY, and PHILLIPS, Circuit Judges.

TYMKOVICH, Chief Judge.

A class of employees who participated in Banner Health, Inc.’s 401(k) defined contribution savings plan accused Banner and other plan fiduciaries of breaching duties owed under the Employee Retirement Income Security Act. Following an eight-day bench trial, the district court agreed in part, concluding that Banner had breached its fiduciary duty to plan participants by failing to monitor its recordkeeping service agreement with Fidelity Management Trust Company. This failure to monitor resulted in years of overpayment to Fidelity and corresponding losses to plan participants.

During the bench trial, the employees’ expert witness testified the plan participants had incurred over $19 million in losses stemming from the breach. But having determined the expert evidence on losses was not reliable, the court fashioned its own measure of damages for the breach. The court calculated damages of about $1.6 million and awarded prejudgment interest calculated at the Internal Revenue Service's underpayment rate. Also, despite finding that Banner breached its fiduciary duty, the district court entered judgment for Banner on several of the class's other claims: the court found that Banner's breach of duty did not warrant injunctive relief and that Banner had not engaged in a "prohibited transaction" with Fidelity as defined by ERISA.

The class appeals the district court's findings of fact and conclusions of law. The class argues the district court adopted an improper method for calculating damages and prejudgment interest, abused its discretion by denying injunctive relief, and erred in entering judgment for Banner on the prohibited transaction claim. We AFFIRM the district court in each instance.

I. Background

A. Factual Background

Banner is a large non-profit healthcare system, operating primarily in Arizona and Colorado. As a benefit of employment, Banner sponsors and administers a 401(k) individual account, defined contribution plan for its employees (the Plan). Employees who take part in the Plan are considered plan participants. During the period of time at issue,¹ plan participants could contribute to their individual retirement accounts and Banner would match these contributions up to 4% of each participant's salary. The Plan made various investment options available to plan participants. These ranged from more to less sophisticated options based on the level of involvement a participant wanted when investing his funds. The value of each participant's account is a function of contributions and investment performance, minus the expenses associated with the Plan.

The Plan states that Banner "shall control and manage the operation and administration of the Plan and make all decisions and determinations incident thereto." Aplt. App., Vol. II at 284. Banner then delegates these responsibilities to its CEO, who appoints and supervises a Retirement Plan Advisory Committee. The Committee oversees the Plan's administration.

In 1999, the Committee hired Fidelity to provide recordkeeping and administrative services to the Plan. In this role, Fidelity tracked participant contributions, maintained investment options for participants, made service representatives available to participants, and filed reports on the Plan's performance with participants, Banner, and the government. Until 2017, after this litigation began, Banner compensated Fidelity for its services through an uncapped, revenue-sharing arrangement. Because the agreement was based on revenue-sharing, Banner paid Fidelity based upon the total number of assets in the plan. The more assets in the plan, the more Fidelity would make. And because the agreement was uncapped, the arrangement did not set an upper limit on how much Fidelity could make for providing services to the Plan.

Such uncapped, revenue-sharing arrangements are uncommon among Banner's peers. While uncapped, revenue-sharing arrangements are not unheard of in compensating service providers, they are much less common than flat, per-participant fees—agreements in which the compensation does not fluctuate based on the value of the assets in a plan. Banner's Plan is considered a "mega" plan—one with over $1 billion in assets and 10,000 participants.² Typically, such large plans are able to negotiate very favorable per-participant fees. This is because the costs associated with servicing a plan are primarily associated with the number of individual accounts rather than total assets. And the overhead costs of servicing individual accounts levels off when a plan has many participants. Thus, the market for service providers for mega plans was, and continues to be, very competitive.

Given this level of competition in the market, it is customary for plan fiduciaries to test the market for service providers to ensure a plan is not overpaying for recordkeeping and administrative services. This is traditionally done through a "request for proposals," essentially a gathering of bids from prospective service providers. One of the committee members overseeing the Plan acknowledged that such market pricing should be done at least every five to seven years. And yet, from 1999 onward, Banner never performed a request for proposals or used any other market analysis tool to evaluate Fidelity's service fee. Rather, Banner kept the same uncapped, revenue-sharing arrangement with Fidelity for almost two decades despite a significant increase in Plan assets and participants. Between 2009 and 2016, the recordkeeping and administrative fees under the revenue-sharing arrangement ranged between $52.45 and $108.29 when calculated on a per-participant basis.

In 2012, Fidelity offered to establish a revenue credit account. This account would be funded by reimbursements from Fidelity's revenue-sharing proceeds and could be used by Banner to pay expenses related to the Plan. Banner accepted this arrangement and established the account within the next year. Fidelity and Banner agreed the amount of the revenue credit would be "based on the Plan characteristics, asset configuration, net cash flow, fund selection and number of participants." Aplt. App., Vol. VIII at 2034. Fidelity selected the initial revenue credit amount, with at least some input from Banner. See id. , Vol. IV at 978 ("[Fidelity] had offered 350,000 and we wound up getting [700,000], so apparently we asked something."). Fidelity's payments to the revenue credit account continued until 2017, when Banner reached a new fee arrangement with Fidelity at an annual rate of $42 per participant.

B. District Court Proceedings

The named plaintiffs represent a class of current and former participants in the Plan who sued Banner and other fiduciaries of the Plan, claiming violations of ERISA, 29 U.S.C. § 1101 et seq . After bringing the initial complaint, plaintiffs sought and obtained certification of the following class: "All participants and beneficiaries of the Banner Health Employees 401(k) Plan from November 20, 2009 through the date of judgment, excluding the Defendants." Id. , Vol. II at 272–73. Relevant to this appeal, the class alleged that Banner had breached its duty of prudence by allowing Fidelity to collect excessive recordkeeping and administrative fees, see 29 U.S.C. § 1104(a), and had engaged in prohibited transactions with Fidelity, see id. § 1106(a). The class sought damages for Plan losses and appropriate injunctive relief to prevent any further violations of ERISA.

Before trial, the class presented the proposed testimony of an expert witness, Martin Schmidt. Schmidt was to testify regarding the excessive recordkeeping fees and also offer an estimate of corresponding losses to the Plan. Banner filed a motion to exclude Schmidt's testimony, which the district court denied. But the district court explained it was retaining the ability to exclude Schmidt's evidence later. See Aplt. App., Vol. II at 336 ("The Court declined to exclude Schmidt's testimony under Rule 702, given that it retained the ability to effectively arrive at the same place after receiving all the evidence relevant to this question at trial.").

The class's claims proceeded to an eight-day bench trial. After hearing from witnesses and experts, the district court issued its findings of fact and conclusions of law. The court concluded that Banner's uncapped, revenue-sharing agreement with Fidelity did not constitute a prohibited transaction under ERISA. The court did determine, however, that Banner had breached its duty of prudence by failing to monitor Banner's service agreement with Fidelity and that this...