Litigation reform – administrative fees

On February 11, 2025, President Trump nominated Daniel Aronowitz to be Assistant Secretary of Labor heading up the Employee Benefits Security Administration (EBSA), the sub-agency which oversees ERISA regulation of retirement plans. Mr. Aronowitz is a lawyer and heads up Encore Fiduciary (f/k/a Euclid Fiduciary), a fiduciary insurance underwriting company.

Aronowitz is a vigorous critic of “excessive fee and imprudent investment lawsuits against plan sponsors that followed best fiduciary practices.” In his view, these lawsuits “have become a lucrative way for a small group of plaintiffs’ firms to monetize ERISA’s fiduciary provisions. The key problem is that many fiduciary breach cases are allowed to proceed into expensive discovery even when the plans follow fiduciary best practices.”

In this article we begin a series on the issues ERISA fiduciary litigation presents for plan sponsors. We start with what in some respects is the most straightforward issue – litigation over plan fees for plan administrative services, e.g., trust and recordkeeping services. In subsequent articles we’ll cover litigation with respect to investment-related fees and with respect to investment “underperformance.” After that (we hope), as Mr. Aronowitz takes charge of EBSA and as reform proposals emerge, we will discuss them.

We begin with a set of key preliminary issues that apply to ERISA fiduciary litigation: the ERISA prudence standard with respect to fees; who gets sued and why; and the importance of and rules with respect to the motion to dismiss, the key battleground for these issues.

The duty of prudence with respect to fees

Quoting the Seventh Circuit in its March 23, 2023, decision in Hughes v. Northwestern (on remand from the Supreme Court): “the duty of prudence includes a continuing duty to monitor plan expenses and ‘incur only costs that are reasonable in amount and appropriate’ [citing the Ninth Circuit in Tibble v. Edison] with respect to the services received.”

Questions still outstanding

Extent of the obligation: How rigid is the ERISA standard? Must a fiduciary get a “good enough” price or the cheapest price available?Early in the fee litigation saga the Seventh Circuit (in Hecker v. Deere (2009)) famously said “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund.”

The status of revenue sharing: While courts consistently say that nothing in ERISA prohibits paying for recordkeeping out of revenue sharing, doing so presents a number of issues. First, while asset-based fees are “allowed,” courts generally compare/evaluate them on a per capita/per participant basis, making the fiduciary’s job (at best) more complicated. Second, some courts see extent and effect of revenue sharing “rebates” (reducing net fees) as something that can only be raised after discovery.

What are “prudent process” best practices with respect to administrative fees? Plaintiffs often assert that fiduciaries must put recordkeeping services “out to bid” (“do an RFP”) on some regular basis (e.g., every three years).

Who gets sued and why

DC plan sponsor fiduciaries are the target of near all ERISA fiduciary litigation. Why is that?

Why DC plans and not DB plans? In DB plans, the sponsor generally must make up losses from bad judgements/overpayments, through additional funding. In DC plans, those losses drop to the participant’s bottom line – and that creates plaintiffs.

Why sponsor fiduciaries and not providers? Sponsors are fiduciaries (in all cases) and therefore subject to ERISA prudence and loyalty standards. Providers are generally not fiduciaries, although there have been attempts to re-characterize them as fiduciaries (most of which have failed).

The significance of the motion to dismiss

The motion to dismiss for failure to state a claim has generally been the battleground over which 401(k) prudence litigation has been fought. Defendants’ motion to dismiss is (basically) an attempt to throw plaintiffs’ claims out of court based simply on the pleadings. Many (if not most) cases in which the plaintiffs win the motion to dismiss (and thus, prevent dismissal on pleadings) are settled by defendants, who are reluctant to undertake the cost of discovery and trial.

The pleading standard

Again quoting the Seventh Circuit in its March 23, 2023, decision in Hughes v. Northwestern: “To plead a breach of the duty of prudence under ERISA, a plaintiff must plausibly allege fiduciary decisions outside a range of reasonableness.” That is probably the best one-sentence explanation of how to think about these issues.

More specifically, the court explained that a plaintiff must plead “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. … [P]laintiffs must have alleged enough facts to show that a prudent fiduciary would have taken steps to reduce fees.”

The major issue: the inference of imprudence from per-participant cost comparisons with other plans

ERISA prudence is, axiomatically, about process, e.g., a plan fiduciary committee’s deliberations concerning recordkeeper fees. But, because plaintiffs generally do not have access to committee minutes/proceedings, many courts have allowed plaintiffs “to draw [a] reasonable inference” of imprudence from a comparison of the target plan’s per capita/per participant recordkeeping fees with fees paid by plans of a similar size. E.g., in Tussey v. ABB, in denying defendants’ motion to dismiss, the court allowed an inference of imprudence to be drawn from a comparison of the per capita recordkeeping fees paid by the ABB plan to those paid by participants in the “Texa$aver Plan,” the employee retirement system for employees of the State of Texas.

This strategy of comparing the cost of the target plan to the cost of allegedly comparable plans has become a standard feature of plaintiffs’ complaints in fee cases (and, as in a subsequent article we’ll see, there is a similar comparison of fund returns in fund performance cases). Some courts (e.g., the Ninth Circuit in White v. Chevron) have been skeptical of this approach, but most courts have (like the Tussey court) accepted it.

Treatment of “alternative explanations”

One issue that, in 401(k) prudence litigation, often comes up is the possibility of an “alternative explanation” for the higher fees in the target plan. Defendants will assert that, rather than fiduciary imprudence, there is another, perfectly prudent reason why the fiduciary, e.g., selected a particular recordkeeper or agreed to a particular revenue sharing arrangement. Thus, in Northwestern, the defendant argued that comparisons to other, lower-cost recordkeeping arrangements do not, e.g., take into account the differing quality of services provided.

The courts are all over the place on this issue. In the Seventh Circuit decision in Hughes that we’ve been discussing, the court stated that “something ‘more’ … is necessary to survive dismissal when there is an obvious alternative explanation that suggests an ERISA fiduciary’s conduct falls within the range of reasonable judgments a fiduciary may make based on her experience and expertise. … [W]hether a claim survives dismissal necessarily depends on the strength or obviousness of the alternative explanation that the defendant provides.” (Emphasis added.)

Other courts have viewed defendant’s assertion of an “alternative explanation” as (in effect) an issue of fact, to be handled after discovery. This issue is currently before the Supreme Court in Cunningham v. Cornell University, a case in which (among other things) the plaintiff claims the defendant(s) have committed a prohibited transaction, and defendants assert the availability of an exemption. To avoid dismissal, does the plaintiff have to “plausibly allege facts reasonably showing” that the exemption is unavailable? Or is that an issue to be taken up after discovery.

Finally, we note that one version of this “alternative explanation” defense may simply be presented as an assertion that the “comparator” does not provide an appropriate comparison – that the extent and quality of services provided by the recordkeeper of the comparator plan are not comparable to those provided to the target plan. This argument was a feature of, e.g., the Hughes v. Northwestern litigation.

What’s really going on here?

Allowing claims to survive a motion to dismiss based simply on an inference imprudence from an A-B cost-per-participant comparison, while appealing in its data-based scientific-ness, may not be suitable for the complexities of the relationship between a plan and its administrative services provider. Differences in quality and innovative fee arrangements (which may in fact benefit participants) are not tracked, and the entire issue is reduced to a per-participant cost. At least at the motion to dismiss stage. With the reality nearly universally acknowledged that if the case cannot be dismissed, the cost of discovery and litigation generally mean the sponsor will settle.

Would you please just tell us what to do?

With respect to administrative fees (if not the entire area of litigation targeting sponsor fiduciaries), what is really missing is clarity about what the law requires – even after 20 years of litigation. If the fiduciary is expected to, e.g., do a recordkeeping RFP every three years, then whatever (some would view excessive) cost that entails can be taken out of participant accounts.

On the other hand, if fiduciaries are expected to – throughout the fee evaluation process – use their judgment rather than conform to a rigid standard in all cases, then shouldn’t they be allowed a wide latitude in making that judgment. E.g., shouldn’t the test be “is it possible that some prudent fiduciary might agree to this fee arrangement?” rather than “is there some other fiduciary somewhere in the world that got a better deal?”

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We will continue to follow this issue.