Smith v. CommonSpirit Health

YOSAUN SMITH PLAINTIFF v. COMMONSPIRIT HEALTH, et al. DEFENDANTS

Civil Action No. 20-95-DLB-EBA

United States District Court, E.D. Kentucky, Northern Division, Covington

September 8, 2021

MEMORANDUM OPINION AND ORDER

David L. Bunning, United States District Judge

Plaintiff Yosaun Smith is a former employee of Defendant CommonSpirit Health, a large, not-for-profit corporation that provides hospital services across the United States. As part of her employment with CommonSpirit, Smith paid into an employer-sponsored 401(k) plan. Acting on behalf of a putative class of similarly-situated individuals, Plaintiff brings this action under the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. (“ERISA”), alleging that the committee overseeing CommonSpirit's 401(k) retirement savings plan breached its fiduciary duty to its members by providing an inadequate selection of investment options and by allowing for unreasonable expenses to be charged for the administration of the plan. Defendants have moved to dismiss the Complaint in its entirety, arguing that Plaintiff lacks Article III standing as to one of her claims and that her Complaint as a whole fails to state a claim upon which relief may be granted. (Doc. # 38). Plaintiff has filed a response and Defendants have filed a reply. (Docs. # 43 and 49). In addition, the parties have filed multiple notices of supplemental authority along with responses. A telephonic oral argument was held on August 25, 2021. (Docs. # 75 and 76). Accordingly, the Motion to Dismiss is ripe for the Court's review. As discussed below, Plaintiff has not alleged facts from which the Court can infer imprudent conduct on the part of the Defendants. Thus, Plaintiff has failed to state a claim under ERISA and Defendants' Motion to Dismiss is granted.

I. FACTUAL AND PROCEDURAL BACKGROUND

CommonSpirit offers its employees the opportunity to invest in a retirement plan (“the Plan”), in which participants may direct their contributions (and employer matching contributions) into various investments options offered by the Plan, such as mutual funds and brokerage accounts. (Doc. # 1 ¶ 16). The Plan is a qualified tax-deferred, defined contribution plan under Internal Revenue Code § 401, 26 U.S.C. §§ 401(a)(k). (Id. ¶¶ 2, 16). With over 100, 000 thousand participants and total investments exceeding $3.2 billion, the Plan is one of the largest of its kind in the country. (Id. ¶ 4).

As the Plan Sponsor and fiduciary charged with administering the Plan, CommonSpirit assembled the Administration Committee (“the Committee”) and appointed its individual members to administer the Plan on CommonSpirit's behalf. (Id. ¶¶ 5, 10-12). During the relevant period, the Committee retained Fidelity Management Trust Company to hold the Plan's assets. (Id. ¶ 18). In exchange for its services, Fidelity charged recordkeeping fees that were paid by Plan participants through a deduction in investment income. (Id. ¶ 16). Each participant's account is charged with the amount of distributions taken and allocation of administrative expenses. (Id.).

Plaintiff is a former employee of CommonSpirit and a participant in the Plan. (Id. ¶ 9). The gravamen of her Complaint is that Defendants violated their fiduciary duties of prudence and loyalty under 29 U.S.C. § 1104(a) by (1) selecting investment funds with higher fees and subpar performance, (2) offering an investment menu that was more expensive than that of comparable plans, and (3) allowing the Plan to pay excessive recordkeeping fees to Fidelity. (Id. ¶¶ 19-49, 71). Plaintiff's allegations cover the time period from July 2, 2014 to the present. (Id. ¶ 56).

Plaintiff alleges numerous facts in support of her claims. For instance, Plaintiff claims that Defendants included actively managed mutual funds in the menu of funds for participants to invest in while excluding lower-cost and better-performing passively managed funds. In an actively managed fund, fund managers hand select stocks or bonds in an attempt to outperform the market. (Id. ¶ 26). In contrast passively managed funds do not make any independent investment choices and instead simply track a designated market benchmark or index. (Id. ¶ 25). Plaintiff identifies in particular the Fidelity Freedom Funds, a suite of thirteen funds that are actively managed by Fidelity fund managers (hereinafter referred to as the “Active Suite”). Given the active involvement of fund managers, the Active Suite naturally has higher operating costs as compared to Fidelity's passively managed index funds (hereinafter referred to as the “Index Suite”). (Id. ¶¶ 21 31). These operating costs, comprised of investment management fees and trading costs, “are generally expressed as an expense ratio: the amount of fees charged as a percentage of the total assets invested. The size of the expense ratio varies based on a host of factors unique to each investment, such as the size of the fund, the frequency of trading, and the complexity of its holdings.” Davis v. Washington Univ. in St. Louis, 960 F.3d 478, 482 (8th Cir. 2020) (citing Emp. Benefits Sec. Admin U.S. Dep't of Labor, Understanding Retirement Plan Fees and Expenses 4, 9 (Dec. 2011)). As alleged in the Complaint, while the expense ratio for the Index Suite was a mere 0.08%, the expense ratio for the funds in the Active Suite ranged from range from 0.42% to 0.65% for the K Share class, which the Plan used until 2018, and 0.37% to 0.49% for the K6 share class, which the Plan used thereafter. (Doc. # 1 ¶ 31). To illustrate the difference in costs, Plaintiff asserts that Plan participants who invested in the Active Suite would have collectively saved over $1.24 million in fees in 2018 alone had they invested in the Index Suite instead. (Id. ¶¶ 31-33).

In addition to being more expensive, the Active Suite, as alleged in the Complaint, has significantly underperformed the Index Suite on a three-year and five-year trailing basis since 2014. (Id. ¶¶ 36-37). On top of this, Plaintiff alleges that the Active Suite has consistently been rated lower than the Index Suite by the rating agency Morningstar. (Id. ¶ 35). Plaintiff also cites a 2019 report purportedly showing rising investor demand for Fidelity's Index Suite and falling demand for the Active Suite. (Id. ¶ 34). Thus, in Plaintiff's view, “[a] simple weighing of the benefits of the two suites indicates that the Index suite is a far superior option, and, consequently, the more appropriate choice for the Plan.” (Id. ¶ 21).

The Complaint does not allege which fund(s), if any, Plaintiff herself invested in, but does claim that at least 76% of the Plan's assets were invested in the Active Suite. (Id. ¶ 24). Plaintiff therefore contends that Defendants' failure to adequately evaluate the investment options included in the Plan had significant class-wide impact. (Id.). In addition, Plaintiff's counsel at oral argument indicated that Plaintiff had invested in one of the funds in the challenged Fidelity Active Suite. (Doc. # 76 at 26). The Court granted Plaintiff leave to supplement the record with this information, which Plaintiff did in the form of an affidavit filed on August 25, 2021. (Doc. # 73-1 at 1).

Aside from the thirteen funds contained in the Fidelity Active Suite, Plaintiff takes aim at two other actively managed mutual funds offered by the Plan-the American Beacon Large Cap Value Fund and the AllianzGI NFJ Small Cap Value Fund. (Doc. # 1 ¶¶ 39, 42). Plaintiff alleges that the Beacon Fund severely trailed its market benchmark, and thus “Defendants' failure to replace this underachieving investment option with better performing alternatives was a breach of fiduciary duty.” (Id. ¶ 41). The Allianz fund was actually removed from the Plan's investment menu in 2018, but not before it had underperformed its market benchmark “for many consecutive years.” (Id. ¶ 42).

In addition to criticizing the inclusion of the specific funds discussed above, Plaintiff alleges that the total amount paid in investment management fees during the relevant period was far too high. (Id. ¶ 48). Plaintiff cites statistics showing that the management fees paid as a percentage of total assets was significantly higher for the CommonSpirit Plan than those of comparable plans. (Id. ¶¶ 48-49). In Plaintiff's view, “Defendants' failure to ensure that the Plan offered a lineup that charged participants reasonable and appropriate expenses represents a profound breach of fiduciary duty.” (Id. ¶ 49).

Finally, the Complaint alleges that the Plan paid excessive administrative fees to Fidelity and that Defendants' failure to defray these costs was a breach of fiduciary duty. The Complaint alleges that “[t]hroughout the Class Period, Fidelity has received compensation for its recordkeeping services as a flat fee charged at between $30 and $34 per person, ” which, according to Plaintiff, is higher than that of comparable plans. (Id. ¶ 45). Plaintiff contends that a plan as large as CommonSpirit's would have the bargaining power “to obtain a per-participant cost significantly lower than $30 per participant.” (Id.).

Count I of the Complaint sets forth Smith's breach of fiduciary duty claim in detail, including the challenges to individual investment offerings and the allegation that the Plan paid excessive investment management fees and recordkeeping fees. In Count II, Plaintiff asserts a theory of co-fiduciary liability under 29 U.S.C. § 1105(a), that is CommonSpirit failed to adequately monitor and oversee the conduct of the Committee, and the Committee failed to adequately monitor and oversee its members. (Id. ¶¶ 75-82). In addition, Plaintiff alleges that each of the Defendants “knowingly participated” and “enabled” the breaches of the other Defendants and “failed to...