A judge has rejected motions to dismiss two Employee Retirement Income Security Act (ERISA) lawsuits filed in the U.S. District Court for the Northern District of California, Lorenz v. Safeway and Terraza v. SafeWay.
The cases have a lot of similarities, but Lorenz received a slightly subtler ruling that, strictly speaking, actually granted in part and denied in part SafeWay’s motion to dismiss. Background included in case documents offers extensive detail about the investment and revenue sharing fee agreements at question, reached first with J.P. Morgan Retirement Planning Services and later continued with Great-West.
In the underlying complaint, plaintiff Lorenz alleges that the Safeway defendants “breached their fiduciary duty of prudence by selecting funds that charged higher fees than comparable, readily-available funds, and which had no meaningful record of performance so as to indicate that higher performance would offset this difference in fees; and entering into and maintaining a revenue-sharing agreement with the plan’s recordkeepers … that resulted in excessive compensation to those entities.”
Further, Lorenz claims that the “revenue-sharing agreement constituted a prohibited transaction under ERISA for which the Safeway defendants (as fiduciaries) and Great-West (as a party in interest) are both liable.”
Lorenz seeks “reimbursement from the Safeway defendants for all losses resulting from their breaches of fiduciary duty, as well as reimbursement from both the Safeway defendants and Great-West for any compensation received as a result of transactions prohibited by ERISA.” He further “seeks to certify a class of “all participants in any employee benefit plan governed by ERISA who invested in the JPM Smartretire Passiveblend Funds from 2011 to the present where JPMRPS/Great-West served as the recordkeeper for the plan and received an asset-based revenue sharing payment in connection with the JPM Smartretire Passiveblend Funds.” He also “proposes a Safeway Subclass, which would include “all participants in the plan who invested in any of the JPM Smartretire Passiveblend Funds from the time these funds were first offered by the Plan in 2011 until they ceased to be offered in the Plan in July 2016.”
NEXT: Motion to dismiss proves partially successful
Facing these allegations, defendants moved to dismiss Lorenz’s complaint on grounds that his claims are untimely and fail to state a claim for breach of fiduciary duty, “because the expense ratios of the JP Morgan Smartretirement Passiveblend funds were reasonable as a matter of law and Great-West was not compensated through a revenue-sharing agreement, but rather through a per-participant fee.” SafeWay also argues that plaintiff “failed to state a prohibited transaction claim because the transaction was exempt under ERISA; even if Lorenz has stated a prohibited transaction claim, he lacks constitutional standing to bring such claim.” Finally, the defense argues the plaintiff “may not seek monetary damages against Great-West because it is a party in interest, not a fiduciary.”
The court applies ERISA rules 12(b)(1) and 12(b)(6) to reach its conclusions on whether these matters can be litigated—along with a laundry list of precedent-setting cases, such as Cetacean Cmty. v. Bush; Safe Air for Everyone v. Meyer; Wolfe v. Strankman; Savage v. Glendale Union High Sch., Dist. No. 205, Maricopa, Cty.; Bell Atl. Corp. v. Twombly; Ashcroft v. Iqbal; Knievel v. ESPN; and numerous others.
Applying principles from these cases to the matter hand, the court “finds that Lorenz has adequately alleged a concrete injury sufficient to establish Article III standing. Lorenz alleges that he invested in the JP Morgan target date funds, that a portion of the amount he invested was used to compensate Great-West, that the compensation was excessive, and that, as a result, he received lower investment returns … Regardless of whether Lorenz has advanced a plausible theory that Great-West did in fact receive excessive compensation, the court assumes the merits of his legal claim for purposes of the standing analysis. Therefore, Lorenz does not allege a mere technical violation of ERISA; he alleges that the prohibited transaction between the Safeway Defendants and Great-West caused him to suffer real financial injury … The cases that Great-West cites are inapposite.”
NEXT: Some claims ruled untimely
The defense was more successful arguing Lorenz’s prohibited transaction claim is time-barred under the three-year statute of limitations.
“The Safeway Defendants contend that the 2011 Participant Disclosure Notices were distributed to Lorenz and all other plan participants no later than 2012, and Lorenz does not dispute this contention in his briefing,” the decision states. “Unlike a claim for breach of fiduciary duty, which turns on the prudence of a fiduciary’s decisionmaking process, a violation of Section 1106(a)(1)(C) occurs when a fiduciary with respect to a plan causes the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect furnishing of goods, services, or facilities between the plan and a party in interest.” According to the court, Lorenz “had actual knowledge that the Safeway defendants had caused the plan to engage in such a transaction for services with its recordkeeper no later than 2012, when the 2011 Participant Disclosure Notice was available to him.”
“That disclosure provides that the recordkeeper will receive fees from the plan for its services, and therefore gave Lorenz actual knowledge of the prohibited transaction alleged here,” the decision states. “This is true regardless of whether Lorenz actually read the Participant Disclosure Notice … Despite having actual knowledge of the alleged prohibited transaction, Lorenz did not file suit until four years later in 2016. Therefore, his prohibited transaction claim is untimely under ERISA’s three-year statute of limitations.”
After significant further consideration of various standards laid out by ERISA, the court “dismisses the prohibited transaction claim against the Safeway Defendants and Great-West with prejudice because it is untimely under the three-year statute of limitations. Because this is the only claim asserted against Great-West, the Court directs the Clerk to terminate Great-West as a defendant in this action. The Court denies the motion to dismiss the claim against the Safeway Defendants for breach of fiduciary duty.”
A similar set of facts and argumentation make up the text of the Terraza vs SafeWay decision—except no claims were time barred in that case.