Smith v. CommonSpirit Health
| Decision Date | 21 June 2022 |
| Docket Number | 21-5964 |
| Citation | 37 F.4th 1160 |
| Parties | Yosaun SMITH, individually and as a representative of a class of similarly situated persons and on behalf of Catholic Health Initiatives 401(k) Plan, Plaintiff-Appellant, v. COMMONSPIRIT HEALTH a/k/a Catholic Health Initiatives; Catholic Health Initiatives Retirement Plans Subcommittee; Does 1–10, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
ARGUED: Alec J. Berin, MILLER SHAH LLP, Philadelphia, Pennsylvania, for Appellant. Lars C. Golumbic, GROOM LAW GROUP, CHARTERED, Washington, D.C., for Appellees. ON BRIEF: Alec J. Berin, James C. Shah, Kolin C. Tang, MILLER SHAH LLP, Philadelphia, Pennsylvania, James E. Miller, MILLER SHAH LLP, Chester, Connecticut, Mark K. Gyandoh, CAPOZZI ADLER, P.C., Merion Station, Pennsylvania, Jeffrey S. Goldenberg, GOLDENBERG SCHNEIDER, LPA, Cincinnati, Ohio, for Appellant. Lars C. Golumbic, Sean C. Abouchedid, Meredith F. Kimelblatt, Nathaniel W. Ingraham, GROOM LAW GROUP, CHARTERED, Washington, D.C., Jennifer Orr Mitchell, DINSMORE & SHOHL LLP, Cincinnati, Ohio, for Appellees. Elizabeth L. McKeen, O'MELVENY & MYERS LLP, Newport Beach, California, Brian D. Boyle, Deanna M. Rice, O'MELVENY & MYERS LLP, Washington, D.C., Jaime A. Santos, GOODWIN PROCTER LLP, Washington, D.C., for Amici Curiae.
Before: SUTTON, Chief Judge; KETHLEDGE and MURPHY, Circuit Judges.
Yosaun Smith claims that her retirement plan should have offered a different mix of fund options, in particular that it should have replaced actively managed mutual funds with passively managed mutual funds. But the Employee Retirement Income Security Act, ERISA for short, does not give the federal courts a broad license to second-guess the investment decisions of retirement plans. It instead supplies a cause of action only when retirement plan administrators breach a fiduciary duty by, say, offering imprudent investment options. Because Smith has not alleged facts from which a jury could plausibly infer that CommonSpirit breached any such duty and because Smith's other claims do not get off the ground, we affirm the district court's dismissal of her complaint.
Retirement plans have changed over the years. When Congress enacted ERISA in 1974, 29 U.S.C. § 1001 et seq. , a defined-benefit plan was the order of the day. Such plans generally provide benefits based on the years of service and salary levels of employees and guarantee a fixed periodic payment from retirement to death. So long as the beneficiaries receive their regular distribution checks under these plans, they tend not to worry about the investment decisions made by the plan administrators even if the company—which carries the pension obligation—attends to those decisions assiduously. See Thole v. U.S. Bank N.A. , ––– U.S. ––––, 140 S. Ct. 1615, 1618, 207 L.Ed.2d 85 (2020).
More common today are defined-contribution plans, the most familiar being 401(k) plans. They allow participants to direct pre-tax income to a tax-advantaged account. 26 U.S.C. § 402(g). Employers often match employee contributions to the account with contributions of their own. Id. § 404(a). The ultimate value, and potential payout, of a defined-contribution plan is tied to the value of the assets in the account during the employee's retirement—and any dividends and interest generated by those assets. Thole , 140 S. Ct. at 1618. A beneficiary's payout thus may "turn on the plan fiduciaries’ particular investment decisions." Id. Under ERISA, participants in defined-contribution plans may bring a breach of fiduciary duty claim arising from imprudent investment options supplied by the plan. 29 U.S.C. § 1132.
Just as the kinds of retirement plans available to employees have changed over the last few decades, so have the investment options available to them. In the past, most investment options, whether for defined-benefit or defined-contribution plans, turned on active management, in which "the portfolio manager actively makes investment decisions and initiates buying and selling of securities in an effort to maximize return." John Downes & Jordan Elliot Goodman, Barron's Dictionary of Finance and Investment Terms 9 (6th ed. 2003). Investors today have the option of using index funds, which create "a fixed portfolio structured to match the overall market or a preselected part of it," which require little to no judgment, and which have grown in popularity as an alternative to active management. Id. ; see Burton G. Malkiel, A Random Walk Down Wall Street 359 (9th ed. 2007). Little surprise, actively managed funds, which require considerable judgment and expertise, charge more than passively managed funds, which require little judgment and expertise. Charles D. Ellis, Winning the Loser's Game 7, 28 (4th ed. 2002). In the past thirty years, some financial experts have questioned how much value active management adds. In a world in which roughly half the actively managed mutual funds beat their benchmark—say the S&P 500—and in which one can buy passive funds that mirror the same benchmark at far less cost, some experts have questioned the cost-benefit tradeoffs of active management. See id. at 28–31; Sam Mamudi, Active vs. Passive: The Debate Heats Up , Wall St. J., Aug. 24, 2009. The attractiveness of active funds varies based on the goals of the funds, the markets on which they concentrate, the risk tolerance of the investor, the strategy of the investment manager—and the suitability of any one fund for any one pensioner, a complex inquiry that has the capacity to vary as much as human DNA from one individual to another. See Hsui-Lang Chen et al., The Value of Active Mutual Fund Management: An Examination of the Stockholdings and Trades of Fund Managers , 35 J. Fin. & Quantitative Analysis 343, 343–68 (2000).
One feature of the active/passive management debate deserves focus. It is easy for investors at a given time to preoccupy themselves with the present-day or year-to-year value of their portfolio—the part of a financial statement usually placed most squarely in view. But just as compounding can dramatically increase the value of a mutual-fund investment over time, so the costs of that investment can dramatically eat into that investment over time. Fixed management fees imposed annually on the value of a fund, ranging from 10 to 100 basis points (or .1% to 1%), can erode or at least undercut growth. In one year, a one percent management fee would reduce a 5% increase in a fund to 4%, and it would increase a 5% loss in a fund to 6%. For example, $100,000 invested at a 5% growth rate would generate $265,330 in 20 years, but with a 1% management fee it becomes $219,112, 83% of what it would have been without the fees. Over time, management fees, like taxes, are not trivial features of investment performance.
Yosaun Smith once worked for Catholic Health Initiatives, now known as CommonSpirit Health, one of the largest healthcare providers in the United States. Starting in 2016, she participated in CommonSpirit's defined-contribution 401(k) plan. CommonSpirit appointed an administrative committee to administer the plan. The plan serves more than 105,000 people and manages more than $3 billion in assets. It offers 28 different funds in which employees may invest their contributions. These include several index funds with management fees as low as 0.02% and several actively managed funds with management fees as high as 0.82%. The actively managed Fidelity Freedom Funds are the default investment if employees do not choose to place their contributions in a different fund instead. The Freedom Funds are a suite of "target date fund[s]," which means that the managers change the allocation of the underlying investments that they hold over time, say by selling funds that hold stocks to buy a greater proportion of funds that hold bonds or cash. R.1 at 7. Sometimes called a fund's "glide path," this reallocation of asset types allows managers to protect an employee's investment gains and spare her the unpredictability of market fluctuations as she approaches retirement. Other target date funds, such as the Fidelity Freedom Index Funds, include only index investments in their glide path and as a result have lower costs.
Smith sued CommonSpirit and the plan's administrative committee under ERISA's remedial provision for breach of fiduciary duty. 29 U.S.C. § 1132(a)(2). She seeks to represent a proposed class of similarly situated participants in the plan. She claims that CommonSpirit breached its duty of prudence by offering several actively managed investment funds when index funds available on the market offered higher returns and lower fees. In particular, she points to three-year and five-year periods in which three actively managed funds (the Fidelity Freedom Funds, American Beacon Fund, and AllianzGI Fund) trailed related index funds in their rates of return. In addition, she separately alleges that the plan's recordkeeping and management fees were excessive.
CommonSpirit moved to dismiss the complaint. See Fed. R. Civ. P. 12(b)(6). The district court granted the motion, concluding that Smith failed to allege facts from which it could plausibly infer that CommonSpirit acted imprudently in violation of ERISA.
Enacted in 1974, ERISA protects participants in employee benefit plans, including retirement plans, by establishing standards of conduct for plan fiduciaries. 29 U.S.C. § 1001(b). The law requires that a plan administrator discharge his duties "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." Id. § 1104(a)(1)(B). The obligation includes "a continuing duty to monitor trust investments and remove imprudent ones." Tibble v. Edison Int'l , 575 U.S. 523, 529, 135 S.Ct. 1823, 191 L.Ed.2d 795 (2...
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