ZOBEL, S.D.J.
I. Background
ERISA requires that fiduciaries act "solely in the interest of the participants and beneficiaries,"
Plaintiff is a former employee of defendant Massachusetts Financial Services Company ("MFS). During the relevant period, MFS offered eligible employees two tax-deferred retirement plans: the employee-funded Massachusetts Financial Services Company MFSavings Retirement Plan ("Employee Plan"), and the employer-funded Massachusetts Financial Services Company Defined Contribution Plan ("Employer Plan"), (together, the "Plans"). Under the Employee Plan, employees could elect to contribute anywhere from one to 85 percent of their salary to their plan account, whereas MFS contributed an amount equal to 15 percent of participants' salary to the Employer Plan.
Plaintiff participated in the Employer Plan until 2014, but asserts claims on behalf of both Plans and a putative class comprised of "[a]ll participants and beneficiaries of the [Plans] at any time on or after July 7, 2011 ...." Compl. ¶¶ 8-9, 125. She alleges essentially that instead of acting in the best interest of the Plans and their participants, defendants used the Plans as an opportunity to promote their own mutual fund business to participants' detriment. MFS funds comprised "the vast majority" - up to 98 percent - of the investment options in both Plans since at least 2011. Compl. ¶¶ 24, 26, 67. Even the Plans' nonproprietary funds are alleged to have benefited MFS in that the alternatives, known as Russell Funds, were managed by various subadvisors including MFS affiliates.
Both Plans used the same processes for selecting and monitoring investments, and both used the same recordkeepers, compensated the same way. Accordingly, plaintiff alleges that "the two plans operated functionally as though they were a single plan." Compl. ¶ 24. Combined, the Plans had $515,246,820 in assets as of the end of 2012. For both Plans, MFS was a Plan sponsor and named fiduciary, and had authority to appoint and remove members to the advisory committees. All such members
MFS delegated a portion of its fiduciary responsibilities for investing Plan assets to the Investment Committee, which was charged with maintaining and monitoring the Plans' investments. MFS similarly delegated a portion of its fiduciary responsibilities for administering Plan assets to the Retirement Committee, which selected recordkeepers and determined their compensation. During the relevant period, the Investment Committee removed no MFS funds from the Plans, though plaintiff alleges the funds contained many duplicative investments. She complains as well of duplicative additions of high-fee Russell funds "generally rejected by other defined contribution plans" during the relevant period. Compl. ¶ 74. Indeed, by the end of 2015, "the Plans were the only two defined contribution plans (out of over 3,000 with more than $200 million in assets) to offer any of the Russell funds included within the Plans at the time."
Due in part to defendants' failure to remove expensive, under-performing proprietary funds, plaintiff alleges the Plans' expenses were significantly higher than those of comparable retirement plans. Specifically, "estimated total Plan costs for 2012 were approximately $4,416,791, or 0.86% of the more than $515 million in assets within the Plans." Compl. ¶ 79. By contrast, the median total cost in 2012 for plans with between $500 million and $1 billion in assets was 0.45%; for plans in the $250-$500 million asset range, 0.47%; and for plans in the $100-$250 million range, 0.57%. For 2014, $5,366,667 in costs represented 0.80% of the more than $670 million in combined plan assets, whereas the median cost for plans of that size was then 0.44%. Plaintiff thus alleges that "in 2012 the Plans were approximately 91% more expensive than the median similarly sized plan, and in 2014 they were 82% more expensive." Compl. ¶ 80. Less expensive nonproprietary alternatives - both actively and passively managed - offered similar or better performance, but defendants failed to use them because to do so would have been contrary to their business interests.
Plaintiff further alleges that defendants failed to obtain the lowest-cost share class of numerous mutual funds in the Plans, even though lower-cost share classes are routinely available to institutional investors with over $1 million in assets and attendant increased bargaining power, and even though more expensive share classes offer no additional value. For example, the Committees retained institutional shares of the MFS Growth and Value Funds with expense ratios of 0.87% and 0.71% despite the availability of identical R5 shares with expense ratios of 0.78% and 0.60%. As a result, MFS collected higher fees for the same services it would have provided had the Plans owned the cheaper R5 shares of the Growth Fund; the same was true of at least 38 other funds in the Plans.
Also reflected in the Plans' high costs are excessive recordkeeping fees. The cost of recordkeeping services depends on the number of participants in a plan, and
Another factor contributing to high Plan costs was defendants' failure to invest in non-mutual fund alternatives like separate accounts and collective trusts, which carry significantly lower fees, despite offering them to shareholders in other plans.
Finally, in addition to failing to remove duplicative funds as alleged above, defendants failed to monitor and remove poorly performing funds. Plaintiff cites the Plans' money market funds specifically, which returned 0.01% or less from 2011 through 2015 but featured expense ratios over 0.60%. In contrast, stable value funds offer the same protection of principal with reliably better returns. Defendants did offer a stable value fund for a time, but liquidated it without replacement in 2014 after years of underperformance.
Plaintiff sues defendants for breach of the fiduciary duties of loyalty and prudence (Count I), failure to monitor fiduciaries (Count II), prohibited transactions with a party in interest (Count III), prohibited transactions with a fiduciary (Count IV), and equitable restitution of ill-gotten proceeds (Count V). She lacked knowledge of material facts necessary to understand the alleged ERISA violations until she filed her complaint, and continues to lack actual knowledge of the specifics of defendants' decision-making processes. Defendants move to dismiss. In addition to arguing that plaintiff has failed to state a cognizable claim, they contend that any such claims are time-barred and that she lacks standing to bring claims on behalf of a plan in which she did not participate.
II. Legal Standard
"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.' " Ashcroft v. Iqbal,
III. Analysis
A. Threshold Issues
1. Standing
Defendants argue that plaintiff lacks standing to bring claims on behalf of a plan in which she was never enrolled and for the period after which she closed her account. This position "erroneously conflate[s] the requirements of Article III ... with the procedural requirements of Rule 23[.]" In re Nexium Antitrust Litig.,
2. Statute of Limitations
The limitations period for all claims arising under ERISA is six years after the date of the last action or omission constituting a part of the breach or violation, or three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation.
the availability of less expensive alternative investments, the costs of the Plans' investments compared to those in similarly-sized plans, investment performance versus other available alternatives, the excessiveness of the Plans' recordkeeping costs compared to alternative service providers, the availability of less expensive share classes of investments held by the Plans, the availability of less expensive separate accounts and collective trust alternatives, and comparisons of the Plans' overall costs to the costs of other similarly-sized plans.
Compl. ¶ 123. This allegation is accepted as true on a motion to dismiss, and courts have declined at this stage to find that plan document disclosures confer actual knowledge where plaintiffs allege, as here, "a deficient selection process or fees that are excessive in comparison to a benchmark." Wildman v. Am. Century Servs., LLC,
B. Breach of Fiduciary Duty and Failure to Monitor (Counts I and II)
Counsel for both sides have routinely faced each other in similar ERISA litigation across the country, and each relies on a line of fiduciary duty cases in its favor. Plaintiff cites heavily to Eighth Circuit precedent, see, e.g., Tussey v. ABB, Inc.,
ERISA's duty of loyalty requires a fiduciary to "discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries."
"Courts often look to the common law of trusts '[i]n determining the contours of an ERISA fiduciary's duty." Patterson v. The Capital Grp. Cos., Inc., No. 17-CV-4399,
The test of prudence is one of process rather than ultimate investment performance and cannot be measured in hindsight. Bunch v. W.R. Grace & Co.,
It is certainly true that "nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund." Hecker,
Here, plaintiff alleges not only that defendants collected excessive fees for high-cost proprietary funds, but also that they failed to shed those funds in favor of cheaper similar alternatives because to do so "would have cost [them their] profits." Compl. ¶ 119. This sufficiently states a claim for breach of fiduciary duties. See Wildman,
Count II alleges that defendants failed to adequately monitor the Plans' managers and that they are liable for the breaches of their co-fiduciaries pursuant to
C. Prohibited Transactions (Counts III and IV)
In Counts III and IV, plaintiff alleges that the investment of Plan assets in affiliated mutual funds constitutes prohibited transactions in violation of
Defendants emphasize that the use of affiliated funds is specifically permitted under ERISA's Prohibited Transaction Exemption 77-3 ("PTE 77-3"). PTE 77-3 allows plans sponsored by investment fund advisors to invest in affiliated investment funds if the plan does not:
(a) pay any fees to the investment adviser except via the investment company's payment of its standard advisory and other fees;
(b) pay a redemption fee to any party other than the investment company itself;
(c) pay a sales commission; and
(d) have dealings with the investment company on terms less favorable than dealings between the investment company and other shareholders.
At least at this stage, that requirement is satisfied by plaintiff's allegation that defendants failed to offer Plan participants the separate account options and less expensive share classes available to other investors, indicating that the exemption's fourth condition is not met. Compl. ¶¶ 86-91. See Brotherston v. Putnam Inv. LLC, No. 15-CV-13825,
D. Equitable Relief (Count V)
Plaintiff's final count seeks equitable relief under
IV. Conclusion
For the foregoing reasons, defendants' motion to dismiss (Docket # 23) is denied as to Counts I, II, and III, and allowed as to Counts IV and V.
Notes
The facts are recited as alleged in plaintiff's complaint, Ocasio-Hernández v. Fortuño-Burset,
MFS Service Center, Inc., ("MFSC") is a wholly-owned subsidiary of MFS. MFSC provided shareholder servicing functions, including as transfer and dividend-paying agent, for which it was compensated. This makes it, too, a statutory "party in interest."
Plaintiff argues that the transfers at issue are indirect and may thus still implicate Plan assets after In re Fidelity. The Brotherston court also considered and rejected this argument.