Sigetich v. The Kroger Co.

• Decision Date: 09 March 2023
• Docket Number: 1:21-cv-697
• Parties: LISA SIGETICH, individually, and as representative of a Class of Participants and Beneficiaries of The Kroger Co. 401k Retirement Savings Account Plan, Plaintiff, v. THE KROGER CO., et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

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LISA SIGETICH, individually, and as representative of a Class of Participants and Beneficiaries of The Kroger Co. 401k Retirement Savings Account Plan, Plaintiff,
v.
THE KROGER CO., et al., Defendants.

No. 1:21-cv-697

United States District Court, S.D. Ohio, Western Division

March 9, 2023

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS

Timothy S. Black, United States District Judge.

This civil case is before the Court on Defendants' motion to dismiss (Doc. 40) and the parties' responsive memoranda (Docs. 42, 44). Also before the Court are two notices of supplemental authority (Docs. 46, 49) and the brief of amicus curiae Chamber of Commerce of the United States of America (Doc. 48).

I. ERISA BACKGROUND

This case concerns fees associated with administering a retirement plan under the Employment Retirement Income Security Act of 1974, otherwise known as ERISA. Some initial background on retirement plans and ERISA is helpful.

“Enacted in 1974, ERISA protects participants in employee benefit plans, including retirement plans, by establishing standards of conduct for plan fiduciaries.” Smith v. CommonSpirit Health, 37 F.4th 1160, 1164 (6th Cir. 2022) (citing 29 U.S.C. § 1001(b)). “The law requires that a plan administrator discharge his duties “with the

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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.'” Id. (quoting 29 U.S.C. § 1104(a)(1)(B)). “The obligation includes ‘a continuing duty to monitor trust investments and remove imprudent ones.'” Id. (quoting Tibble v. Edison Int'l, 575 U.S. 523, 529 (2015)).

A defined contribution plan is one type of retirement plan. “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.” Forman v. TriHealth, Inc., 40 F.4th 443, 446 (6th Cir. 2022) (citing 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.

One type of fee associated with retirement plans are fees for services provided by recordkeepers. “Recordkeepers help plans track the balances of individual accounts, provide regular account statements, and offer informational and accessibility services to participants.” Hughes v. Nw. Univ., 211 L.Ed.2d 558, 142 S.Ct. 737, 740 (2022). The two primary methods for retirement plans to pay for recordkeeping services are through indirect revenue sharing or by direct payment. Stated differently, “recordkeeping fees

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may be calculated as a percentage of the assets for which the recordkeeper is responsible; alternatively, these fees may be charged at a flat rate per participant account.” Id.

Recordkeeping fees impact the amount of money a participant will have saved for retirement. Id.; Forman, 40 F.4th 446. Thus, when selecting a recordkeeper, plan fiduciaries must do so “with the care, skill, prudence, and diligence under the circumstances then prevailing.” 29 U.S.C. § 1104(a)(1)(B)). An excessive recordkeeping fee may plausibly state a duty of prudence claim if the recordkeeping fees were excessive relative to the services rendered. CommonSpirit, 37 F.4th at 1169 (Young v. Gen. Motors Inv. Mgmt. Corp., 325 Fed.Appx. 31, 33 (2d Cir. 2009) (per curiam)).

II. FACTS AS ALLEGED BY PLAINTIFF

A. The Parties

Plaintiff Lisa Sigetich was a Customer Service Representative at Kroger in Wisconsin and is currently on disability leave. (Doc. 32 at ¶ 17). She has been a participant in The Kroger Co. 401(k) retirement Savings Accounts Plan (the “Kroger Plan”), since November 5, 2015. (Id. at ¶¶ 5, 16). Defendant The Kroger Co. (“Kroger”) acted through its officers, including the Defendants, the Board of Directors of Kroger and other appointed fiduciaries, to perform Kroger Plan-related fiduciary functions (collectively, “Defendants”). (Id. at ¶ 23). Kroger is both the Kroger Plan sponsor and administrator. (Id. at ¶ 24). Defendants are fiduciaries of the Kroger Plan.

B. The Kroger Plan

The Kroger Plan is a 401(k) defined contribution plan. (Doc. 32 at ¶ 4). The Kroger Plan is considered a “mega” 401(k) plan, having over $500 million in assets. (Id. at ¶ 21).

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The Kroger Plan is the largest plan in the Kroger Defined Contribution Master Trust. (Id. at ¶ 44). In 2019, the Kroger Plan had about $5,901,895,000 in assets and 92,210 participants. (Id. at ¶ 29). At that time, the Kroger Plan had more assets than 99.98%, and more participants than 99.99%, of all defined contribution plans in the United States that filed Form 5500's for the 2019 plan year. (Id.)

Re Recordkeeping Services for ERISA Plans

Fiduciaries of large 401(k) plans hire service providers, generically referred to as “recordkeepers,” to deliver a retirement plan benefit to employees. (Doc. 32 at ¶ 37). Recordkeepers provide all essential recordkeeping and related administrative (“RK&A”) services through standard bundled offerings of the same level and quality. (Id. at ¶ 38). There are two types of “essential” recordkeeping services: “Bundled RK&A” and “Ad hoc RK&A.” (Id. at ¶ 39-40).

For large plans with substantial bargaining power (like the Kroger Plan), Bundled RK&A services are provided “buffet-style,” meaning these services are charged on an “all-you-can-eat” basis. (Id. at ¶ 39). Bundled RK&A services typically include, but are not limited to, the following standard services:

a. Recordkeeping

b. Transaction Processing (which includes the technology to process purchases and sales of participants' assets as well as providing the participants the access to investment options selected by the plan sponsor);

c. Administrative Services related to converting a plan from one recordkeeper to another recordkeeper;

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d. Participant communications (including employee meetings, call centers/phone support, voice response systems, web account access, and the preparation of other communications to participants, e.g., Summary Plan descriptions and other participant materials);

e. Maintenance of an employer stock fund (if needed);

f. Plan Document Services which include updates to standard plan documents to ensure compliance with new regulatory and legal requirements;

g. Plan consulting services including assistance in selecting the investments offered to participants;

h. Accounting and audit services including the preparation of annual reports, e.g., Form 5500 (not including the separate fee charged by an independent third-party auditor);

i. Compliance support which would include, e.g., assistance interpreting plan provisions and ensuring the operation of the plan follows legal requirements and the provisions of the plan (which would not include separate legal services provided by a third-party law firm); and j. Compliance testing to ensure the plan complies with Internal Revenue nondiscrimination rules.

(Id.).

“Ad Hoc RK&A” services are provided based on the conduct of individual participants, and charged based on usage. (Id. at ¶ 40). Ad Hoc RK&A services typically include, but are not limited to, the following services:

a. Loan processing;

b. Brokerage services/account maintenance;

c. Distribution services; and d. Processing of Qualified Domestic Relations Orders (QDROs).

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(Id.).

Recordkeepers quote fees for Bundled RK&A services on a per participant basis, without any regard for any individual differences in services requested. (Id. at ¶ 42). According to Plaintiff, recordkeepers quote fees without any regard to differences in services requested because minor variations in the level and quality of services are inconsequential and immaterial. (Id. at ¶¶ 41-42.) Most fees earned by recordkeepers typically come from the bundled fee for providing Bundled RK&A services. (Id. at ¶ 43).

Because recordkeepers offer the same bundles and combinations of services, the market for recordkeeping services has become increasingly price competitive, particularly for large defined contribution plans. (Id. at ¶ 46). Recordkeepers are willing, and competitively required, to accept lower and more competitive fees because of competitive pressures created by publicly available information and the reduction of opaque fee structures. (Id. at ¶ 47).

A recordkeeper's costs are primarily dependent on the number of participants. (Id. at ¶ 49). As a plan gains more participants, the reasonable market rate for RK&A services declines. (Id.) Recordkeepers collect their fees through: (1) direct payments from the plan; (2) “indirect compensation,” also known as “revenue sharing;” or (3) some combination of direct and indirect compensation. (Id. at ¶¶ 50-52).

Regardless of how a recordkeeper is compensated, prudent plan fiduciaries must ensure that a plan is paying reasonable recordkeeping fees. (Id. at ¶ 53). According to Plaintiff, prudent plan fiduciaries ensure reasonable fees by engaging in an independent evaluation and soliciting competitive bids from other recordkeepers to perform the same

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level and quality of services. (Id. at ¶ 62). By obtaining competitive bids, prudent plan fiduciaries may evaluate the reasonableness of current fees, negotiate a...