Untimely Small Plan Excessive Fee Suit Dismissed
An excessive fee suit that had alleged “astronomical” fees in a $25 million plan has been dismissed.
The suit, filed in 2016 in the U.S. District Court for the Southern District of Ohio against payday lender CheckSmart Financial LLC’s 401(k) plan by plan participant Enrique Bernaola, claims that the plan fees were “…four times or more the cost of passively managed mutual funds, with absolutely no justification for this concentration in the Plan on actively managed and extremely expensive mutual funds, which rarely add value or can be justified as investment options, especially in the absence of a broad array of passively managed index funds being also made available.” Oh, and the suit had categorized as “astronomical” the 104 basis points it said was the average expense ratio weighted by the plan’s assets.
U.S. District Court Judge James L. Graham began his ruling by noting that Bernaola was a participant – along with 1,700 other participants – in a retirement plan for employees of Checksmart Financial, and that Bernaola, “displeased with the retirement plan’s returns and fees, sued all those who might be responsible” on his behalf, and that of the $25 million Checksmart Financial 401(k) plan. That list of defendants was, indeed, rather lengthy, including:
- Checksmart (in its capacities as plan sponsor and administrator, designated fiduciary of the Checksmart Plan, and a fiduciary under ERISA);
- Checksmart Financial LLC Plan Committee;
- Pagle Helterbrand (the only member of the Checksmart Plan Committee and a fiduciary of the Checksmart Plan); and
- Cetera Advisor Networks, LLC (a co-fiduciary of the Checksmart Plan that provided investment advice to the plan administrator).
The Checksmart Plan offered a variety of investment options, but as it turns out, the plaintiff here (and 70% of the participant assets) was invested in “Lifestyle Portfolios,” and Bernaola specifically was invested in the “JH LS Growth Active Strategy Portfolio,” which the court described as the second riskiest investment option among the Lifestyle Portfolio options. He claimed that he didn’t know the costs and performance of his investments “as compared with other options,” and that expenses associated with the investments in the [Checksmart] Plan “are grossly excessive, because the investment options made available to the [Checksmart] Plan’s participants, at all pertinent times, have been focused upon expensive and unsuitable actively-managed mutual funds without an adequate or appropriate number of passively managed and less expensive mutual fund investment options.”
However, Judge Graham didn’t feel the need to consider the particulars of the plaintiff’s arguments, noting that they were “foreclosed by ERISA’s statute of limitations.” That statute of limitations is either:
- three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation; or
- six years after either (a) the date of the last action which constituted a part of the breach or violation, or (b) in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation.
The defendants successfully argued that the three-year timeframe applied in this instance. In determining when the “clock” began to run, Judge Graham wrote that the question came down to “did Defendants disclose how much each investment option charged in fees before July 14, 2016” – three years before Bernaola filed this lawsuit. Following discovery limited to one issue – whether the expense ratios for the various investment options offered by the Checksmart Plan were disclosed to Bernaola before 2015 – he explained that, “as it turns out, Defendants did disclose the expense ratios for the various investment options offered by the Checksmart Plan in 2012,” going on to outline disclosures in the plan enrollment kit (which included a signed acknowledgement by the plaintiff of the “fees and risks that relate to the various investment options,” a separate mailing of the Summary Annual Report Notices, quarterly statements (with a summary of charges and fees), which referenced a website that had “detailed fee information and past performance data for each investment option, including the expense ratios for each investment option.”
Now, there was some question as to whether the plaintiff actually saw, or read those disclosures, but Graham reminded that, “Although Bernaola disputes whether he read the documents sent to him, for purposes of determining ‘actual knowledge’ it doesn’t matter whether he actually saw or read the documents that disclosed the information that forms the basis for his Complaint. What triggers the statute of limitations is the plan’s disclosure of that information to Bernaola.”
Judge Graham noted that the Checksmart Plan disclosed to Bernaola the expense ratios for all the investment options by Aug. 28, 2012, and that “At that point, Bernaola had actual knowledge of the underlying conduct that gave rise to his alleged violations,” and that meant that “the three-year statute of limitations on any potential excessive-fee claims ran by August 28, 2015, but Bernaola didn’t file his claim until July 14, 2016. Bernaola’s claim is late, and it’s foreclosed by the statute of limitations.”
Graham concluded by noting that while 70% of the plan’s assets were in actively managed John Hancock funds, “the Checksmart Plan offered a wide array of investment options from financial entities like T. Rowe Price, Oppenheimer, Vanguard, and Franklin Templeton,” and that “participants were free to put their money where they wanted.”
Judge Graham made short work of an alternative claim that the plaintiff had made a “process-based” claim “for which he still lacks actual knowledge,” and that it was a claim that an ERISA fiduciary didn’t act prudently, which “requires consideration of both the substantive reasonableness of the fiduciary’s actions and the procedures by which the fiduciary made its decision.” But Graham said that recognizing this as a process-based claim “…would essentially erase the statute of limitations for all breach-of-fiduciary-duty plaintiffs – none would be likely to have insider knowledge of their plan’s decision-making process.”
The plaintiff then argued if his wasn’t a “process-based” claim that he “could not have actual knowledge of Defendants’ underlying conduct until 2016, when it became clear to him that certain funds had underperformed and overcharged.” Judge Graham acknowledged that point, but noted that “the same goes for Defendants, and that’s why this argument fails… Neither side is expected to predict the future.”