Terraza v. Safeway Inc.

• Decision Date: 13 March 2017
• Docket Number: Case No. 16–cv–03994–JST
• Citation: 241 F.Supp.3d 1057
• Parties: Maria Karla TERRAZA, Plaintiff, v. SAFEWAY INC., et al., Defendants.
• Court: U.S. District Court — Northern District of California

241 F.Supp.3d 1057

Maria Karla TERRAZA, Plaintiff,

v.SAFEWAY INC., et al., Defendants.

Case No. 16–cv–03994–JST

United States District Court, N.D. California.

Signed March 13, 2017

Kolin Tang, Ronald Scott Kravitz, Shepherd, Finkelman, Miller & Shah, LLP, San Francisco, CA, James Edward Miller, Laurie Rubinow, Shepherd Finkelman, Miller & Shah, LLP, Chester, CT, Monique Olivier, Duckworth Peters Lebowitz Olivier LLP, San Francisco, CA, Nathan Curtis Zipperian, Shepherd Finkleman Miller & Shah, LLC, Fort Lauderdale, FL, Sahag Majarian, II, Law Office of Sahag Majarian II, Tarzana, CA, for Plaintiff.

R. Bradford Huss, Angel Lin Garrett, Dylan Daniel Rudolph, Joseph Charles Faucher, Trucker & Huss, a Professional Corporation, San Francisco, CA, for Defendants.

ORDER DENYING MOTION TO DISMISS

Re: ECF No. 46

JON S. TIGAR, United States District Judge

Before the Court is Defendant's motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. ECF No. 46. The Court will deny the motion.

I. BACKGROUND

For the purpose of deciding this motion, the Court accepts as true the following allegations from Plaintiff's First Amended Complaint, ECF No. 37. See Navarro v. Block , 250 F.3d 729, 732 (9th Cir. 2001).

A. Parties

Plaintiff Maria Karla Terraza was a participant in Safeway's 401(k) plan ("the Plan"). ECF No. 37 ¶ 7. Defendants Safeway, Inc. and Safeway Benefit Plans Committee (collectively "Safeway Defendants") sponsor and administer the Plan, respectively. Id. ¶¶ 8–9. Defendants, Does 1–10, are members of the Benefit Plans Committee. Id. ¶ 10.

B. Recordkeepers

JP Morgan Retirement Plan Services was the record-keeper for the Plan until September 2014. ECF No. 54–1 at 8. At that point, Great–West Financial RPS LLC d/b/a Empower Retirement ("Great–West") acquired JP Morgan Retirement Plan Services and began to provide recordkeeping services to the Plan. ECF No. 54–1 at 20. In July 2016, Vanguard became the new record-keeper for the Plan. ECF No. 47–16.

C. Master Services Agreement

Pursuant to the master services agreement, which was executed in January 2009, the Plan agreed to compensate the record-keeper through a "Contingent Per Participant Fee" of $67 per year. ECF No. 47–17 at 22. This fee was lowered to $65 per year in 2011. ECF No. 47–18 (amendment to master services agreement).

Under this arrangement, the record-keeper would initially receive a percentage of the fees charged for each investment as a credit toward record-keeping services. ECF No. 47–17 at 22, 30.¹ If the service fees that the record-keeper received for a particular quarter fell below one-quarter of the annual per-participant fee, Safeway was required to "make a lump sum payment to [the record-keeper] ... in an amount equal to the difference between the foregoing amount and the amount of the actual annual service fees received by [the record-keeper]." Id. at 22. Conversely, "[i]n the event the annual service fees received by [the record-keeper] exceed $65.00 per Participant at the end of the Plan Year, [the record-keeper] shall accumulate accruals under the Plan Expense Arrangement ("PEA") in accordance with the terms and conditions of the PEA Addendum to the Agreement." ECF No. 47–18 at 2–3; see also ECF No. 47–17 at 42 ("Accruals will be calculated and attributed to the PEA at the end of each calendar quarter for all service fees received by [the record-keeper] related to ... investments in the Plan in excess of the applicable Contingent Per Participant Fee ...").

The excess funds in the PEA account, which was created and maintained by the record-keeper, could only be used at the direction of the Safeway Defendants to reasonably compensate third-party service providers, in accordance with ERISA. ECF No. 47–17 at 38–40. The PEA addendum provides that any accruals in the PEA account "expire at 3:00 p.m. Central Time on the last business day, as determined by JPMorgan RPS, of each subsequent Plan Year, or upon the termination of the Agreement or this Addendum." ECF No. 47–17 at 38. The addendum does not explain what happens to the expired funds. See id.

The Defendants and the record-keeper entered into an amendment on November 1, 2013 to create an "ERISA spending account" to replace the PEA. ECF No. 47–19 at 2. Pursuant to that amendment, if revenue-sharing fees exceed the annual per-participant fee at the end of the year they will be attributed to the ERISA spending account. Id. The ERISA spending account addendum materially differs from its PEA predecessor because (1) the accruals do not expire and (2) it provides that "[i]n the event Plan Sponsor does not exhaust the Account for a given calendar quarter, Plan Sponsor may allocate such eligible unused amounts, held in the Account to Participant accounts." Id. at 5.

D. The Plan's Investment Options

During the relevant time period, the Plan offered a menu of between eighteen and twenty-two investment options to help eligible Safeway employees save for retirement. ECF No. 37 ¶¶ 14, 18. Those options consisted of mutual funds, separately managed accounts, Safeway common stock,² common collective trusts, and a stable value fund.

According to Terraza's complaint, "[m]utual funds are publicly-traded investment vehicles consisting of a pool of funds collected from many investors for the purpose of investing in a portfolio of equities, bonds, and other securities." Id. ¶ 19. In addition, because mutual funds are registered with the Securities and Exchange Commission ("SEC"), they "are subject to SEC regulation, and are required to provide certain investment and financial disclosures and information in the form of a prospectus." Id. As of December 31, 2014, four of the Plan's sixteen investment options were mutual funds. Id. ¶¶ 36–39.

Unlike mutual funds, which are pooled, separately managed accounts ("SMAs") offer a portfolio of assets that is unique to the individual investor and that is managed by a professional investment firm. Investopedia, http://www.investopedia.com/articles/mutualfund/08/managed-separate-account.asp. Although these investment firms operate under the purview of the SEC, SMAs do not issue registered prospectuses. Id. As of December 31, 2014, two of the Plan's sixteen investment options were SMAs. ECF No. 37 ¶ 36–39.

Common trusts, which are operated by banks or trust companies, "group assets from individuals and organizations to develop a larger, diversified portfolio." Investopedia, http://www.investopedia.com/terms/c/collective-investment-fund.asp. "The primary objective of a collective fund is, through economies of scale, to lower costs with a combination of profit-sharing funds and pensions." Id. "By combining different fiduciary assets in a single account, the bank is typically able to substantially decrease its operational and administrative expenses." Id. Common trusts, like SMAs, are not subject to SEC regulation. Id. As of December 31, 2014, nine of the Plan's sixteen investment options were common trusts, and "over a third of the Plan's $1.9 billion in assets were placed in the opaque Common Trusts." ECF No. 37 ¶ 36–39, 42 (emphasis in original). When combined, common trusts and SMAs accounted for over forty-eight percent of the Plan's assets as of December 31, 2014. Id. ¶ 42. The Plan's default retirement investment options, the JP Morgan Chase Bank target date funds, were common trusts. Id. ¶ 43; ECF No. 47–13 at 12.

Lastly, the Plan offered the Interest Income Fund, which is a stable value fund. ECF No. 37 ¶ 23. A stable value fund is "a managed portfolio of highly rated corporate or government, short-term and intermediate-term bonds with a principal protection wrapper provided by a life insurance company." Investopedia, http://www.investopedia.com/terms/s/stable-value-fund.asp.

E. Participant Disclosure Notices

The Plan provided Participant Disclosure Notices to Plan participants throughout the relevant time period. ECF Nos. 47–10, 47–11, 47–12, 47–13, 47–14.

Those notices disclose that "[e]ach investment has a fee associated with it to cover the cost of managing the investments." ECF No. 47–13 at 5. They go on to explain that "[t]he fee is generally taken as a percentage of money invested and is shown as a gross expense ratio," which "is shown as a percentage of assets in the fund and reduces the rate of return of the fund." Id. The notices explain that "[t]hese fees cover the cost of administering and servicing the plan, which could include recordkeeping, auditing, legal and trustee/custodial expenses." Id. The notices also provide that "J.P. Morgan Retirement Plan Services LLC and its affiliates and agents may receive compensation with respect to plan investments, including, but not limited to, sub-transfer agent, recordkeeper, shareholder servicing, 12b–1 or other revenue-sharing fees." ECF No. 47–10 at 5; see also ECF No. 47–13 at 13 ("GWFS Equities, Inc., or one or more of its affiliates, including Great–West Financial Retirement Plan Services, LLC, may receive a fee from the investment option provider for providing certain recordkeeping, distribution and administrative services."). The notices list the gross expense ratio next to each individual investment option. See, e.g. , ECF No. 47–13 at 7–9. During the relevant time period, the expense ratios for all of the Plan's investment options ranged from .15–1.42. See ECF Nos. 47–10, 47–11, 47–12, 47–13, 47–14.

F. 2013–2014 Financial Statement

According to the 2013–2014 financial statement for the Plan, "[p]ayment for Plan administrative expenses is paid in part by the investment funds based on revenue sharing agreements between the Plan and the investment funds." Id. That statement discloses the amount of administrative fees paid to JP Morgan Retirement Plan Services for its recordkeeping services as $759,556 in 2014 and $1,144,220 in 2013. ECF No. 54–1 at 20.

The 2013–2014 financial statement also discloses that "[t]he Master Trust investments at December 31, 2014, include a mutual fund with a year-end fair value of...