The U.S. Court of Appeals for the Sixth Circuit this week decided Smith v. CommonSpirit Health, No. 21-5964 (6th Cir. June 22, 2022), becoming the first court of appeals to issue a published opinion applying Hughes v. Northwestern University, 142 S. Ct. 737 (2022). Hughes held that courts deciding motions to dismiss in fee-and-expense cases under the Employee Retirement Income Security Act must engage in a “context-specific inquiry” that gives “due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” Since Hughes, the Ninth Circuit has issued two unpublished decisions reversing dismissals in fee-and-expense cases, but no court of appeals had issued a published opinion. The pro-defense decision in CommonSpirit reverses this trend and provides a roadmap for district court dismissals in future cases.
The plaintiffs in CommonSpirit were participants in a defined contribution plan sponsored by a predecessor of CommonSpirit Health. They claimed that the plan fiduciaries breached their duty of prudence by offering actively managed investment options instead of lower-cost, better-performing index options and allowing the plan to pay excessive recordkeeping and management fees.
On appeal from the dismissal of the case, the Sixth Circuit unanimously affirmed. The court made clear that whether an ERISA fee-and-expense claim is plausible “depends on a host of considerations, including common sense and the strength of competing explanations for the defendant’s conduct.”
The court recognized that actively managed funds cost more than passively managed funds, but that fact alone does not make active funds imprudent. Actively managed funds “represent a common fixture of retirement plans, and there is nothing wrong with permitting employees to choose them in hopes of realizing above-average returns over the course of the long lifespan of a retirement account,” the court observed. Nor was it enough to state a claim for plaintiffs to “simply point to a fund with better performance.” Instead, claims of imprudence “require evidence that an investment was imprudent from the moment the administrator selected it, that the investment became imprudent over time, or that the investment was otherwise clearly unsuitable for the goals of the fund based on ongoing performance.”
The court rejected the recordkeeping claims, too. Plausibly pleading an excessive fee claim, the court explained, requires “context,” including allegations that “the services that [the plan]’s fee covers are equivalent to those provided by” comparator plans and “excessive relative to the services rendered.” Plaintiffs failed to provide proper context for their claims, so the court affirmed dismissal of their excessive fee claims as well.
As a complete defense victory, CommonSpirit is a welcome development in that it carefully scrutinizes the generic allegations made in virtually every fee-and-expense case. It shows that the impact of the Supreme Court’s decision in Hughes is still in flux. And it suggests that, on balance, Hughes may ultimately provide more protection to plan sponsors and fiduciaries than originally thought by requiring courts to, in the Supreme Court’s words, “give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”
