Forman v. TriHealth, Inc.

• Decision Date: 13 July 2022
• Docket Number: 21-3977
• Citation: 40 F.4th 443
• Parties: Danielle FORMAN, Nichole Georg, and Cindy Haney, individually and as representatives of a Class of Participants and Beneficiaries on behalf of TriHealth Inc. Retirement Plan, Plaintiffs-Appellants, v. TRIHEALTH, INC. and TriHealth 401(k) Retirement Savings Plan Retirement Committee, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

40 F.4th 443

Danielle FORMAN, Nichole Georg, and Cindy Haney, individually and as representatives of a Class of Participants and Beneficiaries on behalf of TriHealth Inc. Retirement Plan, Plaintiffs-Appellants,

v.TRIHEALTH, INC. and TriHealth 401(k) Retirement Savings Plan Retirement Committee, Defendants-Appellees.

No. 21-3977

United States Court of Appeals, Sixth Circuit.

Argued: June 29, 2022

Decided and Filed: July 13, 2022

ARGUED: Benjamin Kaplan, CRUEGER DICKINSON LLC, Whitefish Bay, Wisconsin, for Appellants. Jennifer Orr Mitchell, DINSMORE & SHOHL LLP, Cincinnati, Ohio, for Appellees. ON BRIEF: Benjamin Kaplan, Charles Crueger, CRUEGER DICKINSON LLC, Whitefish Bay, Wisconsin, Jordan M. Lewis, JORDAN LEWIS P.A., Ft. Lauderdale, Florida, for Appellants. Jennifer Orr Mitchell, R. Samuel Gilley, DINSMORE & SHOHL LLP, Cincinnati, Ohio, for Appellees.

Before: SUTTON, Chief Judge; KETHLEDGE and READLER, Circuit Judges.

SUTTON, Chief Judge.

Under ERISA, short for the Employee Retirement Income Security Act of 1974, those who invest other peoples’ retirement money must do so "with the care, skill, prudence, and diligence" that a reasonable professional in the area would use. 29 U.S.C. § 1104(a)(1)(B). At issue in this case are the various ways in which the duty of prudence applies to the investment options that a company offers to its employees for their 401(k) and other defined-contribution plans. Precedent has overtaken some of the debates in the case. Our recent decision in CommonSpirit largely resolves several of the plaintiffs’ claims: that their employer TriHealth should not have offered its employees the option of investing their retirement money in actively managed funds, that the performance of several funds was deficient at certain points, and that the overall fees charged for the investment options were too high. But the complaint contains one other claim not covered by CommonSpirit . The gist of it is this: Even if a prudent investor might make available a wide range of valid investment decisions in a given year, only an imprudent financier would offer a more expensive share when he could offer a functionally identical share for less. The plaintiffs claim that TriHealth offered them more expensive mutual fund shares when shares with the same investment strategy, the same management team, and the same investments were available to their retirement plan at lower costs. Because the plaintiffs in this last respect have stated a plausible claim that TriHealth acted imprudently, we affirm in part and reverse in part the district court's dismissal of their complaint for failure to state a claim.

I.

Defined-contribution plans allow employees to save for retirement, often through a tax-advantaged account like a 401(k) plan, sometimes with matching contributions from their employers. John Downes & Jordan Elliot Goodman, Barron's Dictionary of Finance and Investment Terms 168 (6th ed. 2003). Employees choose how to invest their accounts from a menu of investment options offered by the plans. Id. The initial contributions and any growth or decline over time (minus fees charged) determine the eventual post-retirement payouts from these accounts—along with any interest and dividends generated by the investments. Id.

Defined-contribution plans generally give employees a range of investment options. Some may involve actively managed funds, in which the professionals try to maximize returns in a variety of ways. Among them: buying and selling shares in companies based on predictions about future performance; identifying companies with long-term value; and hedging risk by determining the right balance of equities, bonds, and cash in the portfolio. At any given time, there can be bullish actively managed funds and bearish actively managed funds. In recent decades, another option has become prevalent for employee investors: passively managed funds. These funds simply track the stocks in, say, the S&P 500 or some other stock or bond index. "Little surprise, actively managed funds, which require considerable judgment and expertise, charge more than passively managed funds, which require little judgment and expertise." Smith v. CommonSpirit Health , 37 F.4th 1160, –––– (6th Cir. 2022). TriHealth offered both types of options to its employees.

Retirement plans often allow individual employees to access investment options available only to large institutional investors. See Karen Wallace, How to Access Funds with High Minimum Investments , Morningstar (Aug. 30, 2017), https://www.morningstar.com/articles/823640/how-to-access-funds-with-high-minimum-investments. Mutual fund providers frequently offer different classes of shares. The classes have distinct minimum investment amounts and a range of expenses, the latter often based on a percentage fee of, say 0.50% or 50 basis points, that each fund charges for managing the investment. Id. "Retail" share classes are readily accessible to individual investors. "Institutional" share classes, by contrast, often have a high minimum-balance requirement of $100,000 or more. For those eligible for institutional shares, the providers will waive commissions for selling shares and charge a lower expense ratio. Id. All share classes of a fund typically employ the same investment strategy, portfolio, and management team. Id.

Institutional share classes typically cost less. Wholesale discounts permit the funds to charge a lower expense ratio when the total investment—say tens of millions of dollars—will be greater. Large institutional investors also cover many of the administrative expenses that the mutual fund would have to pay for retail shares aimed at individual investors, such as marketing and recordkeeping fees. See Galla Salganik, The ‘Smart Money’ Effect: Retail versus Institutional Mutual Funds , 3 J. Behav. Fin. & Econ. 21, 28 (2013). The institutional share class as a result "[i]nvariably" offers "the lowest expenses in the mutual fund universe." Morningstar Rsch. Servs., Descriptions of Share Class Types , https://morningstardirect.morningstar.com/clientcomm/Share_Class_Types.pdf (last visited July 11, 2022).

Headquartered in Ohio, TriHealth provides healthcare in a range of settings. Danielle Forman, Nichole Georg, and Cindy Haney have participated in TriHealth's 401(k) plan since at least 2013. The company appointed a Retirement Committee to manage its 401(k) plan. As of 2017, the plan served more than 12,000 participants and managed $457 million in assets. It offered 26 different investment choices.

The three employees sued TriHealth and the plan's administrative committee under ERISA, invoking its remedial provision for breach of a fiduciary duty. 29 U.S.C. § 1132(a)(2). Seeking to represent a class of similarly situated employees covered by the plan, they claim that TriHealth breached its duty of prudence and acted disloyally by failing to monitor the plan's investments. They allege that eight investment options offered by the fund charged higher fees than "available alternatives in the same investment style." R.15 at 14. They claim that the subpar selection of investment options led to administrative fees that were too high for the plan as a whole. And for seventeen of the offered mutual funds, they claim that the plan failed to offer cheaper institutional shares instead of more expensive retail shares. The claimants contend that "holders of different share classes held the same investments and were subject to the same restrictions concerning deposits and withdrawals." Id. at 11.

TriHealth moved to dismiss the complaint. See Fed. R. Civ. P. 12(b)(6). The district court granted the motion, concluding that the three employees failed to allege facts from which a factfinder could plausibly infer that TriHealth acted imprudently. R.42 at 1.

II.

A.

ERISA protects participants in employee benefit plans, including retirement plans, by establishing standards of conduct for plan fiduciaries. 29 U.S.C. § 1001(b). A fiduciary must fulfill his or her duty "with the care, skill, prudence, and diligence" that a professional "acting in a like capacity and familiar with such matters" would use. Id. § 1104(a)(1)(B). Derived from the law of trusts, the duty of prudence requires plan administrators to select initial investment options with care, to monitor plan investments, and to remove imprudent ones. Tibble v. Edison Int'l , 575 U.S. 523, 528–29, 135 S.Ct. 1823, 191 L.Ed.2d 795 (2015). The focus is on each administrator's real-time decision-making process, not on whether any one investment performed well in hindsight. Pfeil v. State St. Bank & Tr. Co. , 806 F.3d 377, 384–85 (6th Cir. 2015). When judging a trustee's prudence, we look to "the circumstances as they reasonably appear to him at the time when he does the act and not at some subsequent time when his conduct is called in question." Restatement (Second) of Trusts § 174 cmt. b (Am. L. Inst. 1959).

In assessing the prudence of a plan administrator's decision-making process, context often is destiny. The various "circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise." Hughes v. Nw. Univ. , ––– U.S. ––––, 142 S. Ct. 737, 742, 211 L.Ed.2d 558 (2022). A "careful, context-sensitive scrutiny of a complaint's allegations" provides "one important mechanism for weeding out meritless claims." Fifth Third Bancorp v. Dudenhoeffer , 573 U.S. 409, 425, 134 S.Ct. 2459, 189 L.Ed.2d 457 (2014).

Civil Rules 8 and 12 frame the inquiry. To test the heft of the employees’ complaint, we start with Civil Rule 8, which requires "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). If "we can ‘draw the reasonable inference that the defendant is liable for the misconduct alleged’ " in the complaint, the claim should "survive a motion to dismiss" under Civil ...