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Morin v. Essentia Health

United States District Court, D. Minnesota

September 13, 2017

Mark Morin, et al., Plaintiffs,
v.
Essentia Health, et al., Defendants.

          REPORT AND RECOMMENDATION

          The Honorable Leo I. Brisbois United States Magistrate Judge

         This 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 No. 40]).

         For the reasons set forth below, the Court recommends that Defendants' Motion to Dismiss, [Docket No. 21], be DENIED.

         I. BACKGROUND AND STATEMENT OF ALLEGED FACTS[1]

         Defendant 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.

         The 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).

         The 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.).

         The 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).

         BMO 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.).

         The 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. at 20).

         In the 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 downward.” (Id.).

         By December 31, 2011, the Retirement Plan was paying BMO Harris $146 per participant. (Id.).

         Effective 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).

         Essentia, 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).

         With 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 participants. (Id.).

         In 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.).

         For the 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. (Id.).

         At the 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).

         II. PROCEDURAL HISTORY

         On 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 here.

         On March 3, 2017, Defendants filed their initial Motion to Dismiss, [Docket No. 11].[2]

         On 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).

         On 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].

         This 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]).

         III. DEFENDANTS' MOTION TO DISMISS, [Docket No. 21]

         A. Standards of Review

         When 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).

         The 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. at 678-81.

         Under 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 ...

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