37 F.4th 1160
6th Cir.2022Background
- Plaintiff Yosaun Smith participated in CommonSpirit Health’s defined-contribution 401(k) plan, which offered 28 funds (including low-cost index funds) and used actively managed Fidelity Freedom target‑date funds as the plan default.
- Smith sued under ERISA § 1132(a)(2), alleging plan fiduciaries acted imprudently by offering higher‑fee actively managed funds (claiming they underperformed comparable index alternatives) and by charging excessive recordkeeping and management fees; she sought class relief.
- The district court dismissed under Fed. R. Civ. P. 12(b)(6) for failure to plead a plausible breach of the fiduciary duty of prudence; Smith appealed.
- The Sixth Circuit affirmed, holding that offering actively managed funds alongside index funds is not per se imprudent and that short‑term performance comparisons do not, by themselves, plausibly plead an imprudent selection or monitoring process.
- The court also rejected Smith’s fee claims for lack of contextual allegations showing fees were excessive relative to services rendered, and deemed her loyalty claim forfeited and leave to amend improperly requested.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether offering actively managed funds (vs. only passive/index funds) breaches ERISA duty of prudence | Offering actively managed funds was imprudent because index funds have lower fees and better returns | Offering both active and passive options is a reasonable plan design that permits participant choice and caters to diverse risk preferences | Offering actively managed funds is not per se imprudent; plan may offer both options |
| Whether underperformance of specific actively managed funds (3–5 year windows) plausibly shows imprudent selection or monitoring | Fidelity Freedom, American Beacon, and AllianzGI funds trailed comparable index funds over certain periods, showing imprudent choices | Short‑term underperformance is an ordinary market outcome and may have non‑culpable explanations; plaintiffs must plead process defects, not just results | Performance snapshots alone, without process‑based allegations showing imprudence at selection or monitoring, are insufficient |
| Whether recordkeeping and management fees were excessive | Plan paid $30–$34 per participant for recordkeeping and average management fees ~0.55%; these exceed benchmarks and thus were imprudent | Fees fall within market ranges for the plan’s size and mix; plaintiff did not plead services rendered or comparators to show excessiveness | Fee challenges fail for lack of contextual facts tying costs to services or showing imprudence relative to market alternatives |
| Whether the loyalty claim and denial of leave to amend were erroneous | Plan fiduciaries acted disloyally by favoring affiliated funds (raised in reply) and plaintiff should be allowed to amend | Loyalty claim was raised too late; amendment request was procedurally deficient | Loyalty claim forfeited; denial of leave to amend was proper because amendment request was not properly made |
Key Cases Cited
- Thole v. U.S. Bank N.A., 140 S. Ct. 1615 (Supreme Court decision on DB plan participants’ claims tied to investment losses)
- Tibble v. Edison Int’l, 575 U.S. 523 (ERISA fiduciary duty includes continuing duty to monitor and remove imprudent investments)
- Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (plausibility standard and context‑sensitive scrutiny in ERISA duty‑of‑prudence claims)
- Hughes v. Northwestern Univ., 142 S. Ct. 737 (courts must respect range of reasonable fiduciary judgments)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for pleading; explain obvious alternative explanations)
- Ashcroft v. Iqbal, 556 U.S. 662 (plausibility pleading principles applied to factual allegations)
- Davis v. Washington Univ. in St. Louis, 960 F.3d 478 (8th Cir. holding that offering both active and passive funds is not per se imprudent)
- Meiners v. Wells Fargo & Co., 898 F.3d 820 (8th Cir. on necessity of process‑based allegations beyond mere underperformance)
- Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. rejecting duty to offer the cheapest possible funds; market forces govern fees)
- Pfeil v. State St. Bank & Trust Co., 806 F.3d 377 (6th Cir. discussing trust‑law prudence standard and hindsight bias)