Parmer v. Land O' Lakes, Inc.

Background

Craig Parmer and Mark A. Laurance, former Land O’Lakes employees and participants in the Land O’Lakes Employee Savings & Supplemental Retirement Plan, filed a proposed class action under the Employee Retirement Income Security Act of 1974 (ERISA). They sued Land O’Lakes, its Board of Directors, the Land O’Lakes Retirement Plan Committee, and John Does 1–30. The defendants were alleged to be fiduciaries of the plan.

The plaintiffs alleged breaches of ERISA’s duties of prudence and loyalty. Their theories included failing to investigate and select lower-cost investment funds, failing to monitor or control recordkeeping expenses, allowing recordkeeping affiliates to benefit at participants’ expense, and failing to monitor other fiduciaries. They sought class certification, declaratory and equitable relief, and damages.

Standing

The plaintiffs challenged 18 investment options even though they had invested in only three. The defendants argued that the plaintiffs lacked standing to challenge options in which they had not invested. The court rejected that argument and held that the plaintiffs had standing to challenge the entire defined-contribution plan.

The court relied on the Eighth Circuit’s decision in a prior related proceeding, which allowed a participant who adequately alleged injury to an individual account to proceed on behalf of the plan or other participants. The court distinguished the Supreme Court’s decision involving a defined-benefit plan because this plan was a defined-contribution plan, in which benefits are tied to the value of participants’ accounts and fiduciary investment decisions.

Investment-Fee Theories

The plaintiffs used four theories to allege that the defendants imprudently selected or maintained overly expensive funds.

First, the plaintiffs compared the plan’s expense ratios with median expense ratios for funds in similar categories from an Investment Company Institute study. The court held that these were not meaningful benchmarks because the study did not distinguish between actively managed and passively managed funds. The plaintiffs could not proceed on this theory.

Second, the plaintiffs compared the plan’s Investor class shares with allegedly identical, lower-cost institutional, or “I-Class,” shares. The court held that the plaintiffs plausibly alleged a breach of the duty of prudence based on the defendants’ alleged failure to investigate or obtain the lower-cost shares. Different share classes of the same fund could provide a meaningful comparison, and the complaint alleged that the plan’s size gave it access to institutional shares without additional benefits being provided by the more expensive Investor shares.

Third, the plaintiffs alleged that the defendants failed to investigate lower-cost collective trusts. The court held that the complaint did not provide a meaningful basis for comparing the plan’s mutual funds with collective trusts and rejected this theory.

Fourth, the plaintiffs compared the plan’s funds with lower-cost actively managed and passively managed funds and alleged that the defendants should have favored passive funds over active funds. The court held that these comparisons were not meaningful because the funds had different strategies, risks, aims, and potential rewards. It also held that offering both actively managed and passively managed options was not itself imprudent. The plaintiffs could not proceed on these theories.

Recordkeeping Fees

The plaintiffs alleged that the defendants failed to prudently manage and control the plan’s recordkeeping costs, including by failing to seek competitive rates and monitor compensation under a revenue-sharing arrangement. The court held that the plaintiffs sufficiently alleged an imprudence claim based on excessive recordkeeping fees.

The court noted that the defendants’ contract with the recordkeepers could not defeat the claim at the motion-to-dismiss stage because the plaintiffs were not parties to that contract. The complaint alleged that the plan had a large participant and asset base, that the recordkeeping market was competitive, that the defendants paid more than reasonable fees, and that comparable or superior recordkeeping arrangements were available.

Duty of Loyalty

The plaintiffs alleged that Financial Engines paid millions of dollars to Alight and Hewitt Associates, the plan’s recordkeepers, from fees collected from participants. The court held that the plaintiffs had not adequately pleaded a breach of ERISA’s duty of loyalty.

The court explained that it was not enough to allege that the defendants’ actions benefited third-party recordkeepers. The plaintiffs also had to allege facts showing that benefiting Financial Engines or Alight was the defendants’ goal. The court found that they had not done so.

Failure to Monitor

The defendants argued that the failure-to-monitor claim should be dismissed because it depended on the underlying fiduciary-breach claim. Because the court found that the plaintiffs had sufficiently stated a fiduciary-breach claim, it also held that they had sufficiently pleaded the failure-to-monitor claim.

Disposition

The court ordered that the defendants’ motion to dismiss was granted in part and denied in part. The plaintiffs could proceed with claims based on the alleged failure to obtain lower-cost institutional share classes, excessive recordkeeping fees, and failure to monitor fiduciaries. The court did not allow the other investment theories or the duty-of-loyalty theory to proceed.