Essentia Health ERISA Suit Survives Motion to Dismiss

Participants allege the company should have allowed a single recordkeeper to service its traditional DC plan and its 403(b) plan—and that it permitted excessive fees by paying for distinct administrative services for each.

The U.S. District Court for the District of Minnesota has tossed Essentia Health’s motion to dismiss an Employee Retirement Income Security Act (ERISA) lawsuit accusing plan fiduciaries of various failures related to both 401(k) and 403(b) plan administration.

Plaintiffs, in their original complaint, suggest their employer should have allowed a single recordkeeper to service its traditional defined contribution (DC) plan and its 403(b) plan—and that it permitted excessive fees by paying for distinct administrative services for each.

The complaint contains many of the elements that have become wearingly familiar to PLANSPONSOR readers; participants claim their employer failed to negotiate fair fees from a variety of service providers during the class period, and that excessive fees paid by participants were effectively used to subsidize the employer’s own costs in offering/running the plans. But it also is distinct because of the history of the two retirement plans described in detail in the text of the complaint, including a 403(b) plan that has some important distinctions from a typical 401(k).

 “Though the plans were operated as two separate entities, this should not have diminished their combined bargaining power, as defendants had control of both plans,” plaintiffs suggest. “A prudent fiduciary would have offered service providers the ability to service both plans as a way to attract their business and ultimately demand lower rates.”

Turning to the decision on the motion to dismiss, it is important to acknowledge this is still only a preliminary step towards a resolution. 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.” Against that standard, the court examined the defendants’ contention that no claims are adequately stated in the compliant, finding the various arguments wanting.

Specifically, defendants contend that plaintiffs’ claims of breach rest solely on allegations that the plans paid more in recordkeeping fees than what was available to a single plan of similar size, and, as the decision states, defendants further contend that this argument “compares apples to oranges, contains fatally flawed reasoning, and is contradicted by the documents relied upon in the First Amended Complaint.”

Learning from the failed motion 

One interesting fact to point out about these proceedings is that, to argue their side of the motion, Essentia Health submitted some 639 pages of attachments to their memorandum in support of the motion to dismiss. The documents included excerpts from annual fee disclosures sent to participants, as well as copies of excerpts from Form 5500s and amended Form 5500s from the plans. Not only did plaintiffs not take issue with these submissions, the court explains, but they actually submitted their own additional 454 pages’ worth of the attachments to the Form 5500.

However, the court more or less rebukes the parties for this flood of additional paperwork.

“Because all of these additional documents are either clearly embraced by the First Amended Complaint and/or available public records, the Court could, if it chose to, consider them without converting the present Motion to Dismiss under Rule 12(b)(6) into one for summary judgment under Rule 56,” the decision explains. “However, the documents defendants submitted … are submitted explicitly to refute factual allegations made in the First Amended Complaint. To encourage this court to consider their exhibits and make factual findings in the context of the motion presently before this court, defendants cite Chicago Dist. Council of Carpenters Welfare Fund v. Caremark, in which the Seventh Circuit in reviewing a ruling on a motion to dismiss, considered contracts which had been attached to the complaint, and the Seventh Circuit stated: To the extent that the contracts contradict the complaint, the contracts trump the facts of allegations presented in the complaint.”

However, Chicago Dist. Council of Carpenters Welfare Fund, in addition to not being binding on the Minnesota District Court ruling here, is “easily distinguishable from the present case.”

“In that case, the contracts were attached to the complaint itself; here, defendants are attempting to submit additional documents outside of the First Amended Complaint to rebut and undermine factual allegations made in the First Amended Complaint,” the decision states. “Defendants provide no case law from within the Eighth Circuit which allows them to do so despite the well-established standards set forth above confining Rule 12(b)(6) analysis to facts alleged within the four corners of the complaint (or which do not contradict the complaint), which must be taken as true.”

In light of this well-established standard, the court declined to consider the extra exhibits submitted by both parties in conjunction with the Rule 12(b)(6) motion to dismiss.

On the matter of whether the challenge can be time-barred under ERISA, as defendants also argued, the court observed the following: “Although the case presently before this court involves a duty to pay reasonable recordkeeping fees and not a duty to evaluate retention of investments, both duties are continuing, and the Supreme Court’s reasoning in Tibble vs. Edison applies here as well.”

The full text of the complaint, including further detail on the court’s consideration of the “separation of the duty to monitor from the duty of prudence,” among other topics, is available here.