On June 21, 2022, CommonSpirit Health defeated a putative class action brought by former employees who alleged that the company mismanaged their 401(k) plan by offering higher-cost, actively managed investment options when lower-cost index funds with better returns were available. The plaintiffs also alleged that the plan’s recordkeeping and investment management fees were excessive when compared to industry averages.

The plaintiffs argued that CommonSpirit and its retirement plan committee were imprudent for offering actively managed funds instead of cheaper index funds in the plan’s investment lineup, noting that the actively managed funds trailed the three- and five-year returns of purportedly comparable index funds. The 3-judge panel disagreed and affirmed the district court’s dismissal, reasoning that “[m]erely pointing to another investment that has performed better in a five-year snapshot of the lifespan of a fund that is supposed to grow for fifty years does not suffice to plausibly plead an imprudent decision—largely a process-based inquiry—that breaches a fiduciary duty.” The Court clarified that comparing actively and passively managed funds, without consideration for each fund’s discrete objectives, “will not tell a fiduciary which is the more prudent long-term investment option.”

The Court also affirmed dismissal of the recordkeeping and management fee claims. The plaintiffs alleged that the plan’s recordkeeping fee, ranging between $30 and $34 per participant, was excessive compared to “industry average costs” totaling $35 per person in other plans. But the Court held that the plaintiffs failed to plead that the fees were excessive relative to the services rendered, noting that the plaintiffs failed “to give the kind of context that could move this claim from possibility to plausibility.” And as to the management fees, the Court opined that this claim was merely a recast of the active vs. passive fund claim, iterating that higher investment fees alone are insufficient to state a breach of fiduciary duty claim, a process-based inquiry.

The case is Smith v. CommonSpirit Health, et al., No. 21-5964 (6th Cir. 2022)

Tags: 6th Circuit
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Photo of Donald P. Sullivan Donald P. Sullivan

Donald P. Sullivan is a principal in the San Francisco, California, office of Jackson Lewis P.C. Donald has more than 20 years of experience defending and counseling employers, as well as fiduciaries, sponsors, and insurers of employee benefit plans, in state and federal…

Donald P. Sullivan is a principal in the San Francisco, California, office of Jackson Lewis P.C. Donald has more than 20 years of experience defending and counseling employers, as well as fiduciaries, sponsors, and insurers of employee benefit plans, in state and federal courts and before state and federal agencies, including the United States Department of Labor, the Equal Employment Opportunity Commission, and California’s Departments of Industrial Relations and Fair Employment and Housing.

In his employee benefits practice, Donald regularly advises and represents both pension and welfare benefit plans and their fiduciaries in class action and single-participant litigation. With respect to pension plans, Donald defends plans and fiduciaries against lawsuits alleging imprudent investments in employer securities, imprudent selection of investment options, excessive administrative fees, and entitlement to benefits. With respect to welfare plans, Donald defends plans, fiduciaries, and insurers of insured benefit plans in both ERISA and non-ERISA actions seeking the payment of short and long-term disability, life and medical benefits. Donald also frequently represents employee benefit plans and their fiduciaries in investigations conducted by the U.S. Department of Labor.

In his employment practice, Donald defends clients in cases alleging violations of the California Labor Code related to the payment of wages, as well as in lawsuits alleging discrimination on the basis of race, gender, age and disability in violation of California’s Fair Employment and Housing Act and federal statutes, including Title VII, the ADA, and the ADEA. He has extensive experience defending both single-plaintiff and class action ERISA and California wage and hour lawsuits. Integral to Donald’s practice are the privacy protections afforded to individuals under the Health Insurance Portability and Accountability Act (HIPAA).

Donald’s interest and commitment to the employment and employee benefits practice has very deep roots. In college, he worked for the Office of Labor Relations and Collective Bargaining for Washington, D.C. He worked for the U.S. Equal Employment Opportunity Commission while in law school. After law school, he began representing employers and management in employment and labor disputes, while developing a sub-specialty in employee benefits, ERISA, and healthcare. Donald was a law clerk for the Honorable Everett A. Martin, Fourth Judicial Circuit of Virginia, 1996-1997. Before joining Jackson Lewis, Donald practiced in the Chambers USA awarding-wining labor and employment group of a national Philadelphia-based law firm.

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Photo of James Wayne Barnett James Wayne Barnett

James Wayne Barnett is an associate in the New Orleans, Louisiana, office of Jackson Lewis P.C. As a former officer in the United States Air Force, Jim brings his experience overseeing high-level criminal and counterintelligence operations and investigations to his dedication in serving…

James Wayne Barnett is an associate in the New Orleans, Louisiana, office of Jackson Lewis P.C. As a former officer in the United States Air Force, Jim brings his experience overseeing high-level criminal and counterintelligence operations and investigations to his dedication in serving clients in his current practice.

Jim’s practice focuses on defending employers, fiduciaries, all types of plan sponsors, third-party administrators, managed care entities, and other ERISA actors in complex class-actions and individual plaintiff matters including 401(k) Plan and 403(b) Plan fee litigations, other claims for breach of fiduciary duties, ESOP disputes, withdrawal liability claims, multi-employer plan litigation and collection claims, and other benefits claims. Jim has experience on the retirement plan side, including multi-employer plans, and on the health and welfare plan side. He has litigated and helped resolve a myriad of sensitive employment-related matters for several high-profile employers in the entertainment, hospitality and retail industries.

Jim has litigated federal and state wage and hour claims, equal employment opportunity claims involving Title VII and the Americans with Disabilities Act, Family and Medical Leave Act claims, and breach of contract claims. In addition to litigating ERISA actions, Jim also represents employers in a wide variety of workplace legal matters, including preventive advice and counseling. He has experience practicing employment law in federal and state courts, arbitration tribunals, and before administrative agencies such as the Equal Employment Opportunity Commission and the DOL.

Prior to attending law school, Jim served his country for eight years including one combat tour in Afghanistan. During this time, he was a supervisory special agent in the Air Force Office of Special Investigations, where he honed his legal skills.

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