Davis v. Wash. Univ. in St. Louis

• Decision Date: 22 May 2020
• Docket Number: No. 18-3345,18-3345
• Parties: Latasha DAVIS, Individually and as a Representative of a Class of Participants and Beneficiaries in and on Behalf of Washington University Retirement Savings Plan; Jennifer Elliott, Individually and as a Representative of a Class of Participants and Beneficiaries in and on Behalf of Washington University Retirement Savings Plan; Marla Aliece Sims-King, Individually and as a Representative of a Class of Participants and Beneficiaries in and on Behalf of Washington University Retirement Savings Plan, Plaintiffs - Appellants v. WASHINGTON UNIVERSITY IN ST. LOUIS; Washington University in St. Louis Board of Trustees, Defendants - Appellees
• Court: U.S. Court of Appeals — Eighth Circuit

960 F.3d 478

Latasha DAVIS, Individually and as a Representative of a Class of Participants and Beneficiaries in and on Behalf of Washington University Retirement Savings Plan; Jennifer Elliott, Individually and as a Representative of a Class of Participants and Beneficiaries in and on Behalf of Washington University Retirement Savings Plan; Marla Aliece Sims-King, Individually and as a Representative of a Class of Participants and Beneficiaries in and on Behalf of Washington University Retirement Savings Plan, Plaintiffs - Appellants

v.WASHINGTON UNIVERSITY IN ST. LOUIS; Washington University in St. Louis Board of Trustees, Defendants - Appellees

No. 18-3345

United States Court of Appeals, Eighth Circuit.

Submitted: September 25, 2019

Filed: May 22, 2020

Counsel who presented argument on behalf of the appellants and appeared on the brief was Todd S. Collins, of Philadelphia, PA. The following attorney(s) appeared on the appellant brief; John Fisher Edgar, of Kansas City, MO., James J. Rosemergy, of Saint Louis, MO., Eric Lechtzin, of Newtown, PA., Steven Alan Schwartz, of Haverford, PA., John J. Nestico, of Scottsdale, AZ., Todd Schneider, of Emeryville, CA., Dylan M. Long, of Kansas City, MO., Garrett W. Wotkyns, of Scottsdale, AZ., Andrew W. Ferich, of Haverford, PA., Ellen T. Noteware, of Philadelphia, PA., Robert Kriner, Jr., of Wilmington, DE., John J. Carey, of Clayton, MO., John F. Garvey, of Clayton, MO.

Counsel who presented argument on behalf of the appellees and appeared on the brief was Brian Thomas Ortelere, of Philadelphia, PA. The following attorney(s) appeared on the appellee brief; Christopher A. Smith, of Saint Louis, MO., Deborah Shannon Davidson, of Chicago, IL., Michael E. Kenneally, of Washington, DC., Matthew A. Russell, of Chicago, IL.

Before KELLY, MELLOY, and STRAS, Circuit Judges.

STRAS, Circuit Judge.

Three retirement-plan participants sued Washington University in St. Louis for breach of its fiduciary duties under the Employee Retirement Income Security Act, more commonly known as ERISA. The district court dismissed their complaint for failure to state a claim. We affirm in part, reverse in part, and remand for further proceedings.

I.

This case is just one in a series of actions filed against some of the nation’s largest universities for alleged mismanagement of their section 403(b) retirement-savings plans. See, e.g. , Divane v. Nw. Univ. , 953 F.3d 980 (7th Cir. 2020) ; Sweda v. Univ. of Pa. , 923 F.3d 320 (3d Cir. 2019) ; see also 26 U.S.C. § 403(b)(1)(A) (authorizing "educational organization[s]" to create these tax-sheltered "annuity" plans). Latasha Davis and the other plaintiffs in this case have alleged in their complaint that the plan offered to Washington University ("WashU") employees is just too expensive and offers too many poorly performing investment options. By mismanaging its plan in these two ways, the plaintiffs say, WashU has breached the fiduciary duties it owed to plan participants under ERISA.

With about 24,000 participants and $3.8 billion in assets, the WashU plan is one of the largest of its kind in the country. It is a defined-contribution plan, which is a type of retirement account funded by contributions from the employee, the employer, or both. The account’s value depends on the amount of those contributions, plus any earnings from the underlying investments, minus the fees charged. In this type of plan, participants retain the ability to select their own investments from a menu of options. The risk of loss, however, remains with them, meaning that underperformance or excessive fees will chip away at their returns. See John Downes & Jordan Elliot Goodman, Barron’s Dictionary of Finance and Investment Terms 175–76 (8th ed. 2010).

WashU’s plan includes approximately 115 options from two investment firms, the Teachers Insurance and Annuity Association of America-College Retirement Equities Fund ("TIAA") and Vanguard. Both firms receive compensation for their services through the fees they charge, which fall into two major categories. The first are investment-management fees, which cover the operating costs of the individual investments in a participant’s portfolio. See Emp. Benefits Sec. Admin., U.S. Dep’t of Labor, Understanding Retirement Plan Fees and Expenses 4 (Dec. 2011). Along with any trading costs, these are generally expressed as an expense ratio: the amount of fees charged as a percentage of the total assets invested. The size of the expense ratio varies based on a host of factors unique to each investment, such as the size of the fund, the frequency of trading, and the complexity of its holdings. See id. at 4, 9.

The other category of fees is different. Administrative or record-keeping expenses pay for the day-to-day operations of the plan itself, id. at 3, which in this case used to be the responsibility of both firms, though today only TIAA provides those services across the entire plan. Some plans charge a flat fee to cover these expenses. Under this model, participants pay the same amount regardless of how much money they have invested in the plan. Id. Others, including WashU, bundle investment-management and administrative fees together. In this type of arrangement, called a "revenue sharing" model, participants effectively pay a pro rata share of administrative expenses based roughly on how much they have invested. See id.

The plaintiffs’ complaint contains two separate breach-of-fiduciary-duty claims. The first alleges that WashU allowed both types of fees to get out of control. The second asserts that it kept several underperforming investments in the plan for too long. The district court granted WashU’s motion to dismiss both claims. See Fed. R. Civ. P. 12(b)(6).¹

II.

We review the dismissal de novo, "accepting as true the allegations ... in the complaint and drawing all reasonable inferences in favor of the nonmoving party." Star City Sch. Dist. v. ACI Bldg. Sys., LLC , 844 F.3d 1011, 1016 (8th Cir. 2017). To survive a motion to dismiss, a complaint must contain "sufficient factual matter" to state a facially plausible claim for relief. Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

ERISA imposes certain duties on fiduciaries like WashU. One is that they must act "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." 29 U.S.C. § 1104(a)(1)(B). This statutory duty of prudence establishes "an objective standard" that focuses on "the process by which" decisions are made, "rather than the results of those decisions." Braden v. Wal-Mart Stores, Inc. , 588 F.3d 585, 595 (8th Cir. 2009) (citations omitted). A prudently made decision is not actionable, in other words, even if it leads to a bad outcome. Id.

It is important to keep in mind, however, that this case is only at the pleading stage. At this point, the complaint only needed to give the district court enough "to infer from what is alleged that the process was flawed." Id . at 596 (emphasis added). It did not have to go further and "directly address[ ] the [actual] process by which the [p]lan was managed." Id. (emphasis added). "[C]ircumstantial allegations about [the fiduciary’s] methods" based on the "investment choices a plan fiduciary made" can be enough. Meiners v. Wells Fargo & Co. , 898 F.3d 820, 822 (8th Cir. 2018).

A.

The first claim clears this pleading hurdle. It alleges that fees were too high and that WashU should have negotiated a better deal.

Perhaps the clearest example is Vanguard’s "mixed" lineup of funds. By mixed, we mean that there were different share classes in its lineup, including "institutional" and "retail" shares. For some investments, Vanguard offered lower-cost institutional shares, which have higher initial investment requirements. Instead of offering these shares across its entire lineup, however, it offered retail shares for other funds, even though minimum investment requirements are "routinely waived" for individual investors in large retirement-savings plans. The failure to replace these shares with their lower-cost counterparts breached WashU’s fiduciary duty, in the plaintiffs’ view, because higher fees led to lower overall returns. They believe, in other words, that WashU’s lack of diligence cost them money.

We allowed similar allegations to proceed in Braden . Braden involved a retirement-savings plan filled with retail shares despite "a very large pool of assets" and a "highly competitive" marketplace. 588 F.3d at 595. Taken together, we concluded that these facts were enough to create an inference of a "flawed" process, even if the complaint itself did not "directly address[ ]" how the plan made its selections. Id. at 596.

We reach the same conclusion here. The complaint alleges that the marketplace for retirement plans is competitive, and with $3.8 billion invested, WashU’s "pool of assets" is large. From these facts, two inferences of mismanagement are plausible from WashU’s failure to offer more institutional shares. The first is that it failed to gain access to them because, as the complaint alleges, it did not negotiate aggressively enough with Vanguard. The second is that it was asleep at the wheel: it failed to pay close enough attention to available lower-cost alternatives. Either way, a "failure of effort [or] competence" is enough to state a claim for breach of the duty of prudence. Id .

WashU has two responses. One is that a plan without retail shares would not have covered the plan’s costs because, according to WashU, institutional shares do not make large enough revenue-sharing payments. The other is that, with a more competitive marketplace and growth in the plan’s total assets, it has demonstrated diligence by shifting into more institutional shares over time. Taken together, it says, the only plausible inference is...