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Sixth Circuit Addresses Imprudent Investment and Excessive Fee Claims


On June 21, 2022, in Smith v. CommonSpirit Health, et. al, the Sixth Circuit affirmed the district court’s dismissal of ERISA imprudent investment claims against a 401(k)-plan sponsor. In the opinion, the Sixth Circuit emphasized that ERISA does not give federal courts broad authority to second-guess retirement plan investment decisions. Rather, the allegations must infer an ERISA fiduciary breach.

In this case, plaintiff Yosaun Smith was a 401(k) participant who brought a putative class action suit against the plan sponsor, CommonSpirit Health, and the plan’s administrative committee (collectively, CommonSpirit). She claimed that CommonSpirit breached its duty of prudence by offering several actively managed investment funds when passive index funds offered higher returns and lower fees. To demonstrate this point, she highlighted the three-year and five-year performance of several of the plan’s actively managed funds, which trailed the performance of related index funds. She also alleged that the plan’s recordkeeping and management fees were excessive. The district court dismissed her complaint for failure to allege facts supporting an ERISA fiduciary breach by CommonSpirit.

On appellate review, the Sixth Circuit focused on the fiduciary decision-making process. First, the court explained that the inclusion of actively managed funds as plan options is not necessarily imprudent because these funds may be appropriate for certain participants based on their risk tolerance. Additionally, the CommonSpirit plan offered passive index funds.

Next, the court noted that Smith’s claim failed to satisfy the required pleading standard because it did not allege that a particular actively managed fund was imprudent when selected, became imprudent over time, or was otherwise clearly unsuitable based on ongoing performance. The court emphasized that comparatively poor historical fund performance does not conclusively point to deficient fiduciary decision-making, especially when funds have different goals and risk profiles.

The court disagreed with Smith’s assertion that “red flags”, such as fund outflows and outside analysts’ evaluations, should have alerted the plan fiduciaries that the chosen actively managed funds were imprudent. The court noted that the actively managed fund ratings were above average or better, and the assets still exceeded those of the passive index funds.

Finally, the court determined that Smith failed to allege that administrative and investment management fees were excessive relative to the services rendered or fund types. The decision explained that the pleading standard for an excessive fee claim requires a showing of context and equivalent services when comparing the plan’s administrative fees to those of another plan.

Employers that sponsor defined contribution plans should be aware of this opinion, which provides a framework for determining whether an imprudent investment or excessive fee claim will survive the pleading stage. The case follows the recent US Supreme Court decision in Hughes v. Northwestern University, which also addresses imprudent investment claims. Please see our article on the Hughes case: SCOTUS on Imprudent Fiduciary Decisions | NFP

Smith v. CommonSpirit Health, et. al »