Novant Workers OK'd to Bring Excessive-Fees Claims

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Sept. 18 — A putative class of current and former Novant Health Inc. employees may proceed with their lawsuit asserting that the company and its retirement plan committee breached their fiduciary duties by overpaying millions of dollars in fees in relation to the plan, a federal judge in North Carolina ruled.

In a Sept. 17 opinion, Judge William L. Osteen Jr. of the U.S. District Court for the Middle District of North Carolina found that the retirement savings plan participants sufficiently stated a claim for relief under the Employee Retirement Income Security Act by alleging that Novant breached its fiduciary duties by only offering “retail class shares” of mutual funds even though less expensive “institutional shares” that provide the same return on investment were available.

Participants Claim Lower Fee Options Available

According to the court, the plan's total assets increased from about $612 million in 2008 to more than $1.42 billion in 2012, even though there was little increase in the number of plan participants.

The participants contended that the plan is “comprised of a very large pool of assets” and “retirement plans of such size have the ability to obtain institutional class shares of mutual funds.” Thus, the participants asserted that Novant and the plan committee breached their fiduciary duties by offering only the more expensive retail class shares to participants, even though less expensive institutional class shares of the same funds were available.

Moving to dismiss the complaint, Novant pointed to decisions of the U.S. courts of Appeals for the Third and Seventh circuits, which held that “large, diversified menu of options” that were available to plan participants countered claims of fiduciary breach. 

But the district court said the fee ranges in those cases were “notably different” than the range in the case at hand. Furthermore, the present case is distinguishable because the participants are not just alleging that the fee range was excessive, but that lower-fee options were available for the same investment vehicles, the court said.

The U.S. Court of Appeals for the Fourth Circuit hasn't addressed whether an excessive-fees claim can survive a motion to dismiss, the court said. But a decision by the U.S. Court of Appeals for the Eighth Circuit, Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 48 EBC 1097 (8th Cir. 2009), “agrees with Fourth Circuit precedent that fiduciaries of an ERISA plan are responsible for monitoring ‘the prudence of each investment option available to plan participants,' ” it said.

In Braden, the Eighth Circuit found that a claim of fiduciary breach involving the use of retail class shares when institutional options were available was sufficient to survive a motion to dismiss.

“This court finds Braden persuasive on the issue of what is required for a plaintiff to state an excessive fees claim for breach of fiduciary duty under ERISA at the motion to dismiss stage,” the court said.

Because the claims in the present case are similar, the court found that the participants sufficiently stated a claim to survive the motion-to-dismiss stage.

The court said the participants may also proceed with their claim that because the plan's assets increased, the amount paid to service providers Great-West Life & Annuity Insurance Company and D.L. Davis & Co. increased to an amount beyond what is reasonable for the services they provide.

The participants were represented by Schlichter Bogard & Denton. Novant and the committee were represented by Morgan, Lewis & Bockius LLP.

Text of the opinion is at http://www.bloomberglaw.com/public/document/Karolyn_v_Novant_Health_No_114CV208_2015_BL_301659_MDNC_Sept_17_2.