Nov. 17, 2022 – A complaint alleging that a company violated the Employee Retirement Income Security Act of 1974 (ERISA) by authorizing the payment of excessive recordkeeping and investment managed fees failed to state a claim, the U.S. Court of Appeals for the Seventh Circuit has ruled.

In Albert v. Oshkosh Corp., No. 21-2789 (Aug. 29, 2022), the Seventh Circuit Court of Appeals also held that Divanne v. Northwestern University, 953 F.3d 980 (7^th Cir. 2020) remains good law despite a recent U.S. Supreme Court decision remanding that case.

Defined Contribution Plan

From January 2018 to April 2020, Andrew Albert worked for a subsidiary of the Oshkosh Corporation (Oshkosh). Albert participated in the company’s defined contribution retirement plan.

Oshkosh is the sponsor for the Oshkosh Corporation and Affiliates Tax Deferred Investment Plan (the Plan), which is managed by an administrative committee. The Plan, in which 12,000 Oshkosh employees participate, manages $1.1 billion in assets.

Oshkosh chose Fidelity Management Trust Company (Fidelity) as the Plan’s record keeper, and chose Strategic Advisors, Inc. (SAI) as the plan’s investment advisor. SAI is a subsidiary of Fidelity.

Claims of Imprudence

In June 2020, Albert sued Oshkosh in the U.S. District Court for the Eastern District of Wisconsin under ERISA. Albert filed the suit in both his individual capacity and as a representative of a putative class of Plan participants and beneficiaries.

In his complaint, Albert claimed that Oshkosh, its board of directors, and the Plan’s administrative committee breached fiduciary duties owed to Plan participants and beneficiaries under ERISA by:

• authorizing the Plan to pay unreasonably high recordkeeping and investment management fees;

• failing to review the Plan’s investment portfolio to make sure the cost of each of 29 investment options was prudent; and

• keeping certain funds in the Plan even though identical or similar investments with lower costs or a history of better performance were available.

Albert also claimed that Oshkosh violated its fiduciary duty by selecting actively managed funds instead of index funds, because the index funds offered the same or better performance with lower costs.

Additionally, Albert claimed that administrative fees that Plan participants were charged were greater than the fees charged by most comparable 401(k) plans.

In September 2021, the district court granted Oshkosh’s motion to dismiss for failure to state a claim. Albert appealed.

Recordkeeping Fees

Writing for a three-judge panel, Judge Amy St. Eve explained that 29 U.S.C. section 1104(a)(1)(B) requires plan fiduciaries to act with prudence when managing an employee benefit plan.

However, she pointed out, under Divanne, ERISA does not require plan fiduciaries to act as personal investment advisers to plan participants.

Albert argued that the Plan acted imprudently by failing to regularly solicit quotes and or competitive bids. He pointed to nine other plans with a similar number of participants with an average annual fee of $32 to $45 per participant, while the Plan had an average annual fee of $87 per participant.

St. Eve explained that in Divanne, the Seventh Circuit held that a plan’s failure to solicit quotes or competitive bids does not amount to a breach of the duty of prudence.

How Broad is Hughes?​

Albert argued that the U.S. Supreme Court’s decision in Hughes v. Northwestern University, 142 S. Ct. 737 (2022) undermined the precedential value of Divanne.

In Hughes, the U.S. Supreme Court vacated Divanne and remanded the case for reevaluation of the complaint.

Judge St. Eve concluded that Albert’s argument was not persuasive.

“Albert overstates the significance of Hughes on this point,” St. Eve wrote. “Hughes did not hold that fiduciaries are required to regularly solicit bids from service providers … Hughes merely rejected this court’s assumption that the availability of a mix of high-cost and low-cost investment options in a plan insulated fiduciaries from liability.”

Judge St. Eve concluded that the district court was right to dismiss Albert’s claim about recordkeeping fees because the claim lacked the context sufficient to make it plausible, rather than merely possible.

Investment Management Fees

St. Eve came to a similar conclusion on Albert’s claims that the Plan paid unreasonably high investment management funds to Fidelity.

Those claims, Judge St. Eve explained, were not detailed enough to state a legally sufficient claim.

“The fact that actively managed funds charge higher fees than passively managed funds is ordinarily not enough to state a claim because such funds may also provide higher returns,” St. Eve wrote.

Investment Advisor Fees

Judge St. Eve concluded that Albert’s claim regarding the investment advisor fees the Plan paid was “particularly thin.”

St. Eve noted that Albert did nothing more than claim that SAI provided almost no value to some Plan participants and a negative value to others compared to other services and options available to Plan participants, and cited Fidelity Freedom Funds as one example of such an option.

“Other than this brief reference to Fidelity Freedom Funds, Albert does not explain why the fees SAI charged were excessive and unreasonable in comparison to other service providers,” Judge St. Eve wrote.

Duty of Loyalty Argument

Albert also argued that Oshkosh violated its duty of loyalty because the Plan acceded to Fidelity’s request that it choose SAI as the Plan’s investment advisor.

That choice, Albert argued, allowed Fidelity to make extra revenue from SAI services with a high profit margin. The Plan should have solicited bids from other investment advisors, Albert argued.

St. Eve pointed out three flaws in that argument:

• Albert hadn’t alleged that Fidelity gave anything of value to Oshkosh in exchange for choosing SAI;

• even if there was something wrong with Fidelity pushing the Plan to choose SAI, Albert hadn’t named Fidelity as a defendant;

• Albert failed to identify any investment advisors to function as a comparator.

“Without allegations suggesting that the fees SAI charged are unreasonable in light of available alternatives, Albert has failed to state a claim for breach of the duty of loyalty,” Judge St. Eve wrote.