In Singh v. Deloitte LLP, et al., No. 23-1108, 2024 WL 5049345 (2d Cir. Dec. 10, 2024), the Second Circuit Court of Appeals upheld a district court’s dismissal of a complaint alleging that plan fiduciaries caused an ERISA-governed 401(k) plan to pay excessive recordkeeping fees. This article discusses the Singh case and its impact on excessive-fee claims.
As more and more employers face lawsuits alleging that their 401(k) plans paid excessive recordkeeping and administrative fees, courts continue to grapple with the standard required for plaintiffs to plead plausible claims that survive motions to dismiss. The Second Circuit is the most recent Court of Appeals to adopt the “meaningful benchmark” pleading standard for claims alleging excessive recordkeeping or administrative fees, and it is among the most stringent pleading standards yet.
In Singh, former employees sued plan fiduciaries, alleging that the fiduciaries caused participants in the 401(k) plan to pay too much in recordkeeping fees. Such claims are, at their core, challenges to the fiduciary process involved in evaluating and approving recordkeeping fees; a fiduciary who prudently assesses fees and approves fees that are “reasonable” complies with their fiduciary responsibilities. At the pleading stage, however, courts permit plaintiffs to plead facts to suggest that the fiduciary process must have been flawed. Thus, plaintiffs often try to allege that a plan’s fees were so significantly in excess of reasonable amounts that a court should infer, at the pleading stage, that the fiduciaries were asleep at the wheel.
To support their claims, the plaintiffs in Singh cited a number of supposedly similar plans that paid less for recordkeeping services, alleging that had the defendants acted as prudent fiduciaries, then they would have obtained recordkeeping services for about the same price paid by these supposedly similar plans. The court first held that comparisons between the defendants’ plan and other plans can be used to state plausible claims of unreasonable recordkeeping fees. But in order to rely on comparators, the court required sufficient similarity between the defendants’ plan and the comparators.
Such sufficient similarity was missing from the Singh plaintiffs’ complaint. First, the complaint compared both the direct and indirect costs of the plaintiffs’ plan’s recordkeeping services to only the direct costs of the alleged comparator plans. Next, the complaint compared the plaintiffs’ plan’s fees from 2015-19 to the fees other plans paid in just 2019. Finally, and perhaps most importantly, the court took issue with the fact that the complaint provided “next to nothing” about the “type and quality” of the services provided to any of the plans at issue.
The requirement that plaintiffs plead sufficient similarity between the subject plan and other supposedly similar plans is referred to generally as the “meaningful benchmark” standard, which the Eighth and Tenth Circuits require. The Second Circuit adopted the meaningful benchmark standard and articulated specific requirements beyond those identified in other circuit court cases. At the outset, plaintiffs must compare the total amount of fees the plan at issue paid to the total fees of the comparator plans. Plaintiffs cannot “disingenuously” (as the trial court put it) compare both the direct and indirect fees of their plan to just the direct fees of other plans. Next, a complaint cannot compare average fees one plan paid over the course of five years to the fees other plans paid in just one year. Finally, plaintiffs can no longer compare administrative costs without factual allegations about the “nature and quality” of the services being provided. Without these contextual allegations, there can be no meaningful comparison between the challenged plan and other plans. These requirements ensure that plaintiffs can no longer state a claim merely by alleging that recordkeeping services are fungible and the same for all plans of similar size.
It is important to recall why courts require this level of specificity at the pleading stage. As we explained above, ERISA does not micromanage characteristics of benefit plans. It requires fiduciaries to act prudently, which is a standard of conduct. At the pleading stage, plaintiffs often claim to know nothing about the fiduciaries’ process because they are not privy to those facts prior to discovery. Courts have allowed plaintiffs in ERISA cases to plead facts about the plan that might give rise to an inference that the fiduciaries acted imprudently. In order to infer that the fiduciaries acted imprudently, plaintiffs must allege that similarly sized plans paid less for services of the same nature and quality over the same time period. If, for example, one plan paid less but received fewer or lower quality services, that would explain the difference in price. By requiring a meaningful benchmark, courts are demanding a true apples-to-apples comparison that plausibly suggests that fiduciaries acted imprudently.
Although multiple circuits require the meaningful benchmark standard, there are differences. For example, the Sixth Circuit previously adopted the “meaningful benchmark” standard but recently announced that a meaningful benchmark may not be necessary in all cases. Compare Smith v. CommonSpirit Health, 37 F.4th 1160 (6th Cir. 2022) with Johnson v. Parker-Hannifin, No. 24-3014, 2024 WL 4834717 (6th Cir. Nov. 20, 2024). After Parker-Hannifin, it is unclear when a meaningful benchmark is required in the Sixth Circuit. Despite the differing standards, practitioners should be aware of these cases and the underlying ERISA standards.
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