Second Circuit Deloitte Case Sets Clear 401(k) Pleading Standard

An appeals court decision dismissing fiduciary breach claims workers brought against Deloitte LLP sets one of the clearest standards yet for comparing the cost of workplace 401(k)s, paving a new way for employers to defend against lawsuits alleging excessive fees.

The US Court of Appeals for the Second Circuit on Dec. 10 affirmed a lower court’s dismissal and denial of leave to file an amended complaint. The appeals court ruled workers alleging they’re charged too much for plan administration costs must demonstrate clear, “apples-to-apples” comparisons to other plans.

“This decision demonstrates mainly that you can’t just compare cost in a vacuum,” said Elizabeth Jonas, counsel at Miller & Chevalier Chartered. “You need to allege facts sufficient to understand the nature and quality of the services provided.”

Workers have filed hundreds of similar lawsuits against large employer 401(k) sponsors in recent years alleging excessive fees or poor investment performance in plans governed by the Employee Retirement Income Security Act of 1974. But courts hearing these cases have generally not gone as far as the Second Circuit did in articulating a pleading standard.

The new ruling lays out a successful defense strategy at the dismissal phase for emphasizing meaningful, comparative benchmarks between plans.

Deloitte workers compared the direct and indirect costs of their 401(k) plan only to the direct costs six other similar sized plans charged, according to the majority opinion. They focused on a range of fees Deloitte and its plan recordkeeper Vanguard charged between 2015 and 2019 comparing them only to the fees the similar plans paid only in 2019, it said.

The complaint lacks “the context that might move this recordkeeping claim ‘from the possible to the plausible,’” the court said, citing a similar Eighth Circuit ruling.

“If you’re challenging recordkeeping fees, you need to show that other plans that pay for similar recordkeeping services pay less,” said Joe Clark senior counsel at Proskauer Rose LLP. “What the plaintiffs did here was they only focused only on one component of the recordkeeping fees that this plan paid without accounting for the other components. The court said that’s not a meaningful benchmark that’s going to create an inference of imprudence and survive a motion to dismiss.”

Mixed Results

The Second Circuit decision has commonalities with Sixth, Seventh, Eighth, Tenth, and D.C. circuit courts, which have dismissed excessive ERISA fees cases in the wake of the US Supreme Court’s 2022 decision in Hughes v. Northwestern. The high court ruled that ERISA fiduciaries have a duty to monitor all the investments in a plan and must remove any imprudent ones. It’s not an adequate defense to point to some investment funds with inexpensive fees in a plan that otherwise offers expensive ones.

In Hughes, the high court bypassed the opportunity to set a clear pleading standard for bringing a fiduciary imprudence claim—which benefits advisers hoped could put an end to near-constant fees-related ERISA disputes. The Third, Fifth, and Ninth circuits revived lawsuits against employers citing Hughes.

Second Circuit judges took an approach that focused on the totality of services provided when setting a benchmark for plaintiffs to compare. In doing so, the court made clear that its 2009 standard for Investment Company Act fees comparisons in Young v. Gen. Motors Inv. Mgmt. Corp. applies to ERISA cases the same way. The court highlighted a “conclusory, helpful difference” between the Hughes standard and what the plaintiffs plead against Deloitte, said Jonas.

Writing for the panel majority, Judge Debra Ann Livingston went further, saying plans also must take into account the value of services provided to plans under comparison and that it isn’t enough to simply compare costs alone. In a concurring opinion, Judge Beth Robinson split with the majority on that point, saying a values-based comparison would put an “unwarranted burden” before discovery on retirement savers “seeking to protect their rights” under federal benefits law.

Those differences are less important than the conclusions they reached, Jonas said. The plaintiffs relied too much on assumptions that the size of an employer should inherently lower the costs they pay for recordkeeping services, without examining closely what those costs buy. Plaintiffs claimed much of that information wasn’t available to them before discovery, but the court didn’t buy it.

“There’s an awful lot of public information out there about ERISA plans, and you should do your homework first,” said Grant Shuman, a partner at Hall Benefits Law LLC. “Once you’ve lost the court’s trust on something like that, you’re sunk.

The case is Singh v. Deloitte LLP, 2d Cir. App., No. 23-01108, 12/10/24.