Schave v. CentraCare Health System

Background

Angi Schave participated in CentraCare Health System’s 403(b) and 401(k) retirement plans. She sued CentraCare, the Board of Directors of CentraCare Health System, and unnamed defendants identified as John Does 1–40. She alleged that the defendants breached their duties under the Employee Retirement Income Security Act (ERISA) by selecting and maintaining imprudent investments during the alleged class period.

Schave alleged that the defendants failed to select less expensive share classes, invested in funds with excessive management fees, failed to replace high-cost and underperforming funds with nearly identical alternatives, and allowed allegedly improper revenue-sharing payments. The defendants moved to dismiss for lack of subject-matter jurisdiction under Rule 12(b)(1) and failure to state a claim under Rule 12(b)(6).

Standing

The defendants argued that Schave lacked Article III standing to challenge investment options in which she had not invested. The court rejected that argument. Relying on Eighth Circuit precedent, the court held that an ERISA participant in a defined-contribution plan may challenge the plan’s investment options even if the participant did not personally invest in every challenged option.

The court distinguished the Supreme Court’s decision in Thole v. U.S. Bank N.A. because that case involved a defined-benefit plan, while Schave’s plans were defined-contribution plans. The court held that Schave had standing and denied the defendants’ motion to dismiss for lack of subject-matter jurisdiction.

Adequacy of the Claims

The court denied the motion as to Schave’s claim that the defendants selected a more expensive “R5” share class instead of an allegedly available lower-cost “R6” institutional share class. The court concluded that the allegations were similar to allegations previously found sufficient to support a plausible inference that fiduciaries failed to use a prudent decision-making process. The defendants’ argument that rebates offset the cost difference did not require dismissal at the pleading stage.

The court granted the motion as to the excessive-management-fees claim. Schave compared actively managed funds in the plans with passively managed index funds. The court held that the complaint did not provide a meaningful, like-for-like comparison because actively and passively managed funds have different strategies, risks, and potential rewards.

The court also granted the motion as to the claim that defendants failed to replace high-cost and underperforming funds. Schave identified one alternative index fund for each challenged fund and provided five-year performance comparisons, but the complaint did not adequately explain whether the alternatives had similar securities, strategies, or risk profiles. The allegations therefore did not create a plausible inference of imprudence.

Finally, the court granted the motion as to the improper-revenue-sharing claim. It found that most of the allegations described revenue sharing generally and that the only case-specific allegation—that certain funds shared revenue with Fidelity—did not sufficiently connect the alleged payments to an inference of imprudence.

Request to Amend

Schave alternatively requested permission to amend her complaint. The court denied that request because she had not filed a motion for leave to amend or followed the procedures required by the District of Minnesota’s local rules.

Disposition

Judge Wilhelmina M. Wright ordered that the defendants’ motion to dismiss was granted in part and denied in part. The motion was denied as to the standing challenge and the breach-of-fiduciary-duty claim based on failure to select a lower-cost share class. It was granted in all other respects. Schave’s alternative request for leave to amend was denied.