Six months ago, we summarized the Supreme Court’s decision in Hughes v. Northwestern University[1] and explored potential implications for health plan administrators under ERISA. We hoped the Hughes decision would encourage more proactive fiduciary risk assessment and preemptive mitigation by ERISA health plan sponsors. On June 22, 2022, the Sixth Circuit Court of Appeals decided Smith v. CommonSpirit Health, becoming the first court of appeals to issue a published opinion applying the new Hughes standard. While two unpublished decisions were issued by the Ninth Circuit, reviving fee and expense cases under Hughes, this is the first published opinion and comes down on the side of the defendant, issuing a strong dismissal under Hughes. As a reminder, Hughes held that courts deciding motions to dismiss in fee-and-expense cases under the ERISA must engage in a “context-specific inquiry” that gives “due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise." Not only do plan administrators have a duty to offer prudent fund offerings, but they also have a fiduciary duty to “remove” the “imprudent ones.” The unanimous opinion recognized “[a]t times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs…” and courts must give regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.
At Issue in CommonSpirit In CommonSpirit, the plaintiffs were participants in a defined contribution plan. The participant plaintiffs claimed that the plan fiduciaries breached their duty of prudence by offering actively managed investment options, as opposed to lower cost, and better performing index options, and for allowing the plan to pay excessive record-keeping and management fees. The defendant, CommonSpirit, successfully moved to dismiss the claim for failure to state a cause of action, and the Sixth Circuit upheld the dismissal. As noted above, the court’s analysis centered around the duty a plan sponsor owed to plan participants when deciding what investment options to make available. Importantly, the court held that
“ERISA … does not allow fiduciaries merely to offer a broad range of options and call it a day… [w]hile plan participants retain the right to choose which fund is appropriate for them, the plan must ensure that all fund options remain prudent options.”
The plaintiff argued that it would be very difficult to allege a defect in the processes undertaken by the fiduciary because she was not privy to the process at issue. Responding to the plaintiff’s concern about the difficulties in pleading a process-based fiduciary defect at such an early stage in litigation, the court countered that:
"ERISA’s extensive disclosure requirements [operate to] ease the burdens….[a] retirement plan must disclose a range of information about costs and performance, including [] administrative expenses it charges to participants and investment related information explaining the characteristics of the plan’s investment options… [p]lus, publicly available performance information about an investment may show sufficiently dismal performance..[sufficient to allege that a] prudent fiduciary would have acted differently."
The court recognized that actively managed funds cost more than passively managed funds, but that fact alone did not make active funds imprudent. Claims of imprudence “require evidence that an investment was imprudent from the moment the administrator selected it, that the investment became imprudent over time, OR that the investment was otherwise clearly unsuitable for the goals of the fund based on ongoing performance.” (emphasis added).
The court also rejected the record-keeping claims. Plaintiffs failed to provide proper context for their claims on this front, so the court affirmed dismissal of their excessive fee claims and denied her leave to amend the complaint on procedural grounds.
What Does CommonSpirit Mean for Future Fiduciary Disputes?
CommonSpirit is a complete defense victory, and some have seen it as a welcome development in the 401k excessive fee litigation landscape. The case demonstrates that post-Hughes, the pleading standards are somewhat in flux – leaving room for additional caselaw development to give plan sponsors and plan members more clarity on fiduciary standards. CommonSpirit as Applied to ERISA Health Plan Fiduciaries:
While some may see the opinion as a blow plaintiffs, there are some great snippets from the opinion that will prove valuable to health plan fiduciaries and provide further clarification of the fiduciary standards for ERISA sponsors. First, the court doubles down on the “duty to monitor” and the need to proactively remove imprudent options from plan members’ various plan selection options. Boldly stated, “ERISA… does not not allow fiduciaries merely to offer a broad range of options and call it a day.” Is offering a high deductible health plan alongside a standard PPO, both from the same BUCA with increasing rates YOY of >5-10% considered prudent, when there are other ERISA - compliant health plan options available? If a health plan administrator reviews the most recent transparency data available (from hospitals and plans) and sees that their network rates are two to four times higher than a cash rate – or three to five times higher than another similar network offering – is continuation of that offering prudent? If you contract with a vendor that steers members to high-cost low quality providers, is that prudent? If you contract with a vendor that refuses to allow you to steer members to high quality providers low cost providers, is that imprudent?
Second, and perhaps more significant, is the court’s emphasis on the availability of information derived from ERISA’s disclosure requirements and otherwise publicly available information. The plaintiff was arguing that it would be nearly impossible for her to plead facts about the plan fiduciaries’ performance and processes because she was not privy to those processes. The court didn’t bite. Instead, the court noted that the disclosure requirements (e.g., compensation disclosure, fee, and admin expense disclosure, etc.) when coupled with publicly available information would have been enough for the plaintiff to more clearly allege breach of fiduciary duty from a process perspective.
Given the Consolidated Appropriations Act of 2021 (CAA) emphasis on data transparency for ERISA fiduciaries, DOL’s compensation disclosure requirements from brokers/consultants and third-party service providers, as well as all the new publicly available hospital and plan transparency data, it seems clear that both potential plaintiffs and defendants should be on notice. If the courts are going to expect plan participants to be aware of and utilizing this data to support their fiduciary duty complaints, we should certainly expect that ERISA plan sponsors (i.e., defendants) are actually complying with and leveraging these new rules and regulations in performing their duties prudently.
A Continuing Call to Action
As employers and employees across the country are grappling with inflation, negative economic growth, rising labor costs, and double-digit rate increases from their health plans, we must not be shocked when the first class stands up and says – WHAT THE F$#% to their employer and/or fiduciary advisor that has been asleep at the wheel. That WTF moment will likely come in a well-pled complaint, supported by a wealth of data and information that is now available because of transparency initiatives and regulatory/statutory directives.
I predict (and hope) that the courts will begin to utilize presumption shifting to assist plan members and their proxies, in their quest to bring accountability to the process of healthcare purchasing on their behalf. For example, where an employer has failed to comply with DOL’s third party service provider compensation disclosure requirements, there should be a presumptive breach of fiduciary duty, and the burden then shifts to the employer to rebut said presumption to prevail in the case. Or perhaps, where a plan fiduciary has stayed with the same BUCAH and broker for over twenty years, never documenting or exploring alternative vendors or models despite rising costs and consequences, the employer has presumptively breached his fiduciary duty and must now offer affirmative evidence to rebut.
As a recession looms (or stays, depending upon your viewpoint), and as healthcare costs increasingly crowd out other public priorities like addressing climate change, poverty,
infrastructure, housing, food insecurity, education, etc., there can be no doubt that a massive liability time bomb is ticking. We have the tools to dismantle it, but do we have the will?
[1] Hughes v. Nw. Univ., 142 S. Ct. 737 (2022).
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