Payne v. Hormel Foods Corp.

Background

Hormel Foods Corporation, its Board of Directors, and unidentified officers, employees, and contractors sponsor and operate two retirement plans: the Hormel Foods Corporation Tax Deferred Investment Plan A and the Hormel Foods Corporation Joint Earnings Profit Sharing Trust. The plans together hold at least $1.2 billion in assets under management.

Scott Payne has participated in the plans since at least 2017. In this proposed class action, he alleges that the defendants breached their duties of care, skill, prudence, and diligence under the Employee Retirement Income Security Act of 1974 (ERISA). His claims concern two subjects: the plans’ stable-value investment option and the share classes selected for certain mutual funds.

Stable-Value Investment

The plans offer a MassMutual general-account guaranteed investment contract as their stable-value option. The opinion explains that a general-account contract is backed by the insurer’s unrestricted general investment accounts and is exposed to the insurer’s claims and liabilities. A separate-account contract is backed by a separate investment account and is designed to insulate the assets from claims against the insurer.

Payne alleges that the MassMutual general-account contract underperformed comparable investments from 2017 through 2023. He compared it with MassMutual’s separate-account contracts and with the TIAA-CREF traditional general-account annuity. The plans’ general-account contract had crediting rates ranging from 3.00% to 3.20%. MassMutual’s separate-account contracts had typical crediting rates ranging from 3.81% to 4.68%, and the TIAA-CREF annuity had rates ranging from 4.25% to 7.00% during the periods described in the complaint.

The court held that Payne plausibly identified meaningful benchmarks. It found the TIAA-CREF annuity sufficiently similar because Payne alleged that it was a fixed-annuity general-account investment with the same structure, purpose, and risk profile. The court also found MassMutual’s separate-account contracts sufficiently similar even though they had different risk profiles, because they were managed by the same insurer, were stable-value guaranteed investment contracts, and shared the goal of protecting principal in exchange for low crediting rates.

The court further held that Payne plausibly alleged a flawed fiduciary process based on the claimed six years of underperformance. He alleged that a prudent fiduciary could have negotiated a better rate with MassMutual or replaced the option with a safer or higher-performing one. The court therefore denied dismissal of this part of the claim.

Mutual-Fund Share Classes

The plans offer, among other investments, the DFA U.S. Large Cap Value Fund and the Harbor Capital Appreciation Fund. Payne alleges that mutual-fund share classes have the same investment portfolio and management, with cost being the sole difference between share classes.

For the DFA Fund, Payne alleges that Hormel selected an institutional share class with annual net expense ratios ranging from 0.22% to 0.27% from 2017 through 2021, even though the plans likely could have qualified for a less expensive share class. He alleges that the selected class cost between 0.08% and 0.14% more than an available less expensive class.

For the Harbor Fund, Payne alleges that Hormel selected an institutional share class with annual net expense ratios ranging from 0.65% to 0.67% from 2017 through 2021, even though the plans likely could have qualified for the retirement share class. He alleges that the retirement share class was 0.08% less expensive in each year at issue.

The court considered the publicly available plan reports and fund prospectuses because they were part of the public record or were embraced by the complaint. It declined to consider fee-disclosure documents and a 2016 investment brochure that Hormel offered to dispute Payne’s factual allegations. The court found that those materials were not properly considered at the motion-to-dismiss stage for that purpose.

The court held that Payne’s allegations about the plans’ large asset pool, their ability to obtain cheaper share classes, and the selection of more expensive classes were similar to allegations that the Eighth Circuit had found sufficient in other ERISA cases. Whether the plans could obtain approval for the cheaper DFA share class was a factual dispute. The court also declined to resolve Hormel’s argument that revenue sharing made the Harbor institutional share class cheaper on a net basis because that argument relied on materials outside the pleadings that the court could not consider at this stage. The court therefore denied dismissal of the mutual-fund share-class claims.

Board’s Fiduciary Status

ERISA defines a fiduciary in part as a person who exercises discretionary authority or control over a plan’s management or assets, gives investment advice for compensation, or has discretionary responsibility for plan administration. Fiduciary status is determined in relation to the specific action being challenged.

Payne alleges that the Board consisted of people authorized or entrusted to make discretionary decisions about the plans’ investments and had discretion to select or reject those investments. The court held that these allegations plausibly showed that the Board acted as a fiduciary during the relevant period. It declined to consider purported plan documents offered to contradict the allegations because the documents were working copies, had not been approved or executed, and were submitted to dispute the complaint’s factual allegations.

Disposition and Classification

The court denied the defendants’ Motion to Dismiss. The classification is procedural_order because the ruling was on a motion under Federal Rule of Civil Procedure 12(b)(6), which asks whether the complaint adequately states claims, rather than finally deciding liability on the ERISA claims.