United States District Court, D. Minnesota
REPORT AND RECOMMENDATION
Honorable Leo I. Brisbois United States Magistrate Judge
matter came before the undersigned United States Magistrate
Judge pursuant to an order of referral, [Docket No. 37], made
in accordance with the provisions of 28 U.S.C. §
636(b)(1)(B), and upon Defendants' Motion to Dismiss,
[Docket No. 21]. This Court held a Motion Hearing on July 25,
2017, and Defendants' Motion to Dismiss was taken under
advisement thereafter. (See, Minute Entry, [Docket
reasons set forth below, the Court recommends that
Defendants' Motion to Dismiss, [Docket No. 21], be
BACKGROUND AND STATEMENT OF ALLEGED
Essentia Health (“Essentia”) is a Minnesota
nonprofit corporation that owns and operates various medical
and medically related facilities throughout Minnesota, North
Dakota, Wisconsin, and Idaho. (First Amended Complaint
(hereinafter “FAC”), [Docket No. 17], 4). The
present case involves two defined contribution retirement
plans offered to employees of Essentia: the Essentia Health
Retirement Plan (“Retirement Plan”), a 401(k)
plan, and the Essentia Health 403(b) Plan (“403(b)
Plan”), collectively referred to herein as the Plans.
Plans provide opportunities for participating employees to
invest their earnings toward retirement on a pre-tax basis;
the contributions are held in trust and invested through the
Plans according to the participants' selections from a
menu of options determined by the Plans. (Id. at 8).
The Plans bear all administrative expenses not borne by
Essentia, including compensation of outside administrative
service providers for record keeping, trustee and custodial
services, accounting, etc. (Id. at 8-9, 15). These
administrative expenses may be paid directly by the Plans
and/or through a practice known as “revenue sharing,
” which is “a common method of compensation
whereby the mutual funds on a defined contribution plan pay a
portion of investor fees to a third party.”
See, Tussey v. ABB, Inc., 746 F.3d 327, 331
(8th Cir. 2014).
present case focuses on fees paid for recordkeeping services
for the Plans. Recordkeeping is a service necessary for any
defined contribution plan and the market for providers of
recordkeeping services is highly competitive. (FAC, [Docket
No. 17], 17). Such service providers often provide a service
package, which may include “claims processing, trustee
services, participant education, managed account services,
participant loan processing, QDRO processing, preparation of
disclosures, self-directed brokerage accounts, investment
consulting, and general consulting services.”
(Id. at 18). The majority of plans are billed for
recordkeeping on a per-participant basis, and plans with
large numbers of participants can negotiate a lower
per-participant recordkeeping fee. (Id.).
Retirement Plan is a 401(k) plan which was established and
became effective on December 22, 1965. (Id. at 7;
see, also, Mem. in Supp. of Motion to
Dismiss, [Docket No. 23], 2). Defendant St. Mary's Duluth
Clinic Health System (“SMDC”), a nonprofit
corporation and a subsidiary of Essentia, was identified by
the governing document of the Retirement Plan as its sponsor
and fiduciary, responsible for overall administration of the
Retirement Plan. (FAC, [Docket No. 17], 5). SMDC was also the
sponsor, the administrator, a named fiduciary, and a
functional fiduciary under the relevant statutory provisions
of the Employee Retirement Income Security Act of 1974
(“ERISA”). (Id. at 4-5). Diane T.
Davidson, who was SMDC's Senior Vice President of Human
Resources, served as the Retirement Plan administrator,
pursuant to the terms of the Retirement Plan's governing
document. (Id. at 6).
Harris was the recordkeeper for the Retirement Plan, which,
at the end of its 2009 plan year, had 5, 009 participants
with account balances. (Id. at 19). The number of
participants in the Retirement Plan stayed approximately the
same through the end of 2011. (Id. at 20). In plan
year 2009, the Retirement Plan paid $127 per participant in
recordkeeping fees. (Id. at 20). In addition, BMO
Harris received indirect compensation through revenue
sharing, but the amount and/or formula for determining the
revenue sharing was not publically disclosed. (Id.).
403(b) Plan was established and became effective on January
1, 2009. (Id. at 8). Essentia has always been
identified as the 403(b) Plan sponsor. (Id. at 8).
Lincoln National Corporation (“Lincoln”) was the
recordkeeper for the 403(b) Plan, which at the end of its
2009 plan year had 2, 731 participants. (Id. at 19).
The number of participants in the 403(b) Plan stayed roughly
the same through the end of 2011. (Id.). For this
time period, the compensation agreement between the 403(b)
Plan and Lincoln for recordkeeping was based solely on
Lincoln's receipt of revenue sharing from the 403(b)
Plan's investments; the amount or formula used for
revenue sharing was not publically disclosed. (Id.
2010 plan year, BMO Harris received $142 per participant in
addition to the revenue sharing. (Id. at 21). The
payments to Lincoln for the 403(b) Plan in 2010 are unknown.
(Id.). Reasonable alternate recordkeeping services
were then available for plans the same size as the Plans for
$60-$80 per participant, and the fees were “trending
December 31, 2011, the Retirement Plan was paying BMO Harris
$146 per participant. (Id.).
January 1, 2012, the Retirement Plan and the 403(b) Plan were
administratively combined; Essentia became the sponsor for
both of the Plans, and SMDC was no longer the sponsor for the
Retirement Plan. (Id. at 1, 4, 7-8, 22). The
Plans' governing documents now identify Essentia as the
fiduciary of the Plans responsible for their overall
administration. (Id. at 4). Essentia is also the
sponsor, the administrator, a named fiduciary, and a
functional fiduciary under the relevant statutory provisions
of ERISA. (Id. at 4-5). Although Davidson is no
longer identified by the Retirement Plan as the plan
administrator, Plaintiffs allege that Davidson has continued
to “serve functionally as the individual
administrator of both Plans, with the authority to carry out
the duties assigned to Essentia by the Plans' governing
documents.” (Id. at 6). Davidson has continued
to maintain her authority to hire and monitor service
providers for the Plans. (Id.). Davidson is a named
fiduciary of the Plans as defined by ERISA's statutory
provisions. (Id. at 7).
through its Board of Directors, appointed employees of
Essentia to the Essentia Health Investment Committee
(“Investment Committee”), which is responsible
for oversight of the Plans, including the expenses of
administering the Plans. (Id. at 4-5). The
Investment Committee reports to Essentia's Board of
Directors and is a fiduciary of the Plans per ERISA.
(Id. at 5).
regard to the recordkeeping services, the Plans changed
recordkeepers in 2012, both switching to Diversified
Retirement Corporation (“Diversified”).
(Id. at 22). The Plans began to offer a single
investment lineup, and participants with balances in both
Plans began receiving a single statement. (Id.). By
the end of 2012, the Retirement Plan had over 14, 000
participants and the 403(b) Plan had approximately 3, 200
their 404a-5 disclosures, Defendants and Diversified
consistently represented to participants in the Plans that
the base recordkeeping fee was between $52 and $53 per
participant plus additional fees collected directly from the
participants' investments. (Id. at 22-23). In
2012, from the combined Plans, Diversified collected $65 per
participant in fees. (Id. at 23). For a plan the
size of the combined Plans at the time, however, comparable
services were then available from other recordkeeping service
providers for $45 to $55 per participant. (Id.).
2013 plan year, Diversified merged with Transamerica
Retirement Solutions (“Transamerica”) and was
rebranded as Transamerica. (Id. at 24). That year,
Transamerica collected $89 per participant in compensation.
end of 2014, the Retirement Plan had 16, 468 participants
with balances and it held approximately $982 million in
assets; the 403(b) Plan had 2, 836 participants with balances
and it held approximately $103 million in assets.
(Id. at 9). Transamerica collected $94 per
participant in 2014 and $88 per participant in 2015.
(Id. at 24-25). Between 2014 and 2016, comparable
recordkeeping services for a plan the size of the combined
Plans were available for between $35 and $45 per participant.
(Id. at 24). Transamerica continues to serve as the
Plans' recordkeeper. (Id. at 25).
December 29, 2016, Plaintiffs Mark Morin, Janet Hufnagel,
Diane Mesedahl, Shannon Lushine, Amy Palo, Tim Robinson, and
Jeanette Terhaar (“Plaintiffs”), all of whom are
or were participants in one or both of the Plans, initiated
the present action by filing their Complaint in this Court.
(Id., at 2-4; see, also, [Docket
No. 1]). They brought suit (on behalf of themselves and as
representatives of a putative class of others similarly
situated) against Defendants Essentia; SMDC; Davidson; the
Investment Committee; John Does 1-15, who are the as-yet
unidentified members of the Investment Committee; and John
Does 16-30, who are the as-yet unidentified
“committees, entities, and individuals” to whom
the other Defendants delegated their fiduciary
responsibilities with respect to the Plans. (Id. at
1-7). Because the December 2016, Complaint is no longer the
operative Complaint, the claims therein are not detailed
March 3, 2017, Defendants filed their initial Motion to
Dismiss, [Docket No. 11].
March 24, 2017, Plaintiffs filed their First Amended
Complaint, [Docket No. 17], bringing claims against the same
Defendants, based upon what Plaintiffs deem excessive
recordkeeping fees. In Count I, Plaintiffs allege that
Defendants Essentia, the Investment Committee, Davidson, and
John Does 1-30 breached their fiduciary duties of prudence
and loyalty to the Plans by failing to prudently investigate
and select a reasonable recordkeeping arrangement, and in
doing so, they cost the Plans' participants
“millions of dollars in excessive recordkeeping
fees.” (FAC, [Docket No. 17], 29-31). In Count II,
Plaintiffs allege that Essentia and SMDC, as fiduciaries of
the Plans, breached their fiduciary duties to monitor the
individuals or committees to which fiduciary duties were
further delegated. (Id. at 32-33). Specifically,
Plaintiffs allege a monitoring failure with regards to the
performance of Davidson and the Investment Committee; the
processes by which the Plans' recordkeeping arrangements
were investigated, approved, and monitored; and failure to
remove inadequately performing fiduciaries, thereby allowing
further loss. (Id. at 33). Plaintiffs seek class
certification; declaratory judgment that Defendants breached
their fiduciary duties; actual monetary damages; an
accounting; surcharges; equitable restitution; permanent
removal of Defendants from fiduciary positions of the Plans;
injunctive relief; appointment of an independent
administrator for the Plans for a set time period, who will
require competitive bidding for recordkeeping services for
the Plans; creation of a constructive trust for disgorged
funds; and attorney's fees, costs, and interest.
(Id. at 34-35).
April 28, 2017, Defendants filed their Motion to Dismiss the
First Amended Complaint, [Docket No. 21], which is now before
this Court. Plaintiffs filed their Memorandum in Opposition,
[Docket No. 32], on June 12, 2017, and on July 3, 2017,
Defendants filed their Reply Memorandum, [Docket No. 39].
Court held a Motion Hearing on July 25, 2017, and
Defendants' Motion to Dismiss was taken under advisement
thereafter. (See, Minute Entry, [Docket No. 40]).
DEFENDANTS' MOTION TO DISMISS, [Docket No. 21]
Standards of Review
considering a motion to dismiss under Rule 12(b)(6), courts
“look only to the facts alleged in the complaint and
construe those facts in the light most favorable to the
plaintiff.” Riley v. St. Louis Cty. of Mo.,
153 F.3d 627, 629 (8th Cir. 1998) (citing Double D
Spotting Serv., Inc. v. Supervalu, Inc., 136 F.3d 554,
556 (8th Cir 1998)), cert. denied 525 U.S. 1178
(1999). Courts must accept as true all of the factual
allegations in the complaint and draw all reasonable
inferences in the plaintiff's favor. Aten v.
Scottsdale Ins. Co., 511 F.3d 818, 820 (8th Cir. 2008).
Although the factual allegations in the complaint need not be
detailed, they must be sufficient to “raise a right to
relief above the speculative level, ” which
“requires more than labels and conclusions, and a
formulistic recitation of the elements of a cause of action
will not do.” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555 (2007).
complaint must “state a claim to relief that is
plausible on its face.” Id. at 570. “A
claim has facial plausibility when the plaintiff pleads
factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct
alleged, ” and “[w]here a complaint pleads facts
that are ‘merely consistent with' a defendant's
liability, it ‘stops short of the line between
possibility and plausibility of ‘entitlement to
relief.'” Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009) (quoting Twombly, 550 U.S. at 556-57).
When courts undertake the “context-specific task”
of determining whether a plaintiff's allegations
“nudge” its claims against a defendant
“across the line from conceivable to plausible, ”
they may disregard legal conclusions that are couched as
factual allegations. See, Iqbal, 556 U.S.
the Employee Retirement Income Security Act of 1974
(“ERISA”), as amended:
[A] fiduciary shall discharge his [or her] duties with
respect to a plan solely in the interest of the participants
and beneficiaries and-
(A) for the exclusive purpose of:
(i) providing benefits to participants and their
beneficiaries; and (ii) defraying reasonable expenses of
administering the plan;
(B) 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 ...