Third Circuit Revives Excessive Fee Litigation Against ERISA Retirement Plan Fiduciaries

Mator v. Wesco Distribution, Inc., No. 22-2552, __F.4th__, 2024 WL 2198120 (3d Cir. May 16, 2024) (Before: Hardiman, Porter, and Fisher, Circuit Judges).

Plaintiffs-Appellants Nancy and Robert Mator brought an action on behalf of themselves and other plan participants and beneficiaries against Wesco Distribution, Inc., and fiduciaries of the Wesco Distribution, Inc. Retirement Savings Plan, for breaching their ERISA duty of prudence by causing the Plan to pay excessive recordkeeping fees, by offering mutual fund investment options in higher-cost share classes, and by breaching their duty to monitor processes and people administering the Plan. The district court dismissed the action and Third Circuit Court of Appeals vacated the district court’s decision and remanded the matter for further proceedings.

The Third Circuit found that Plaintiffs stated a claim under ERISA that the Defendants breached their duty of prudence by causing the Plan to pay excessive recordkeeping fees by alleging that the Plan’s fees were several times larger than what similar plans paid, the Plan’s fiduciary did not negotiate a fee cap or solicit bids even though revenue sharing rates fell on a percentage basis, the asset-based fee structure caused the Plan’s fees to rise when there was no corresponding increase in services, and similarly situated fiduciaries requested proposals and negotiated with recordkeepers to keep fees reasonable. The court found that information about comparator plans helped render Plaintiffs’ claim plausible that Defendants breached their duty of prudence by causing the Plan to pay excessive recordkeeping fees despite differences in service codes. The court also allowed Plaintiffs’ allegations to encompass a period outside of the limitation period in order to allow for necessary context-specific analysis.

Defendants explained that Plaintiffs “essentially double-count” fees because the Plan’s recordkeeper did not receive any direct fees from the Plan, as confirmed by the absence of any such fees in the participant disclosures. The court found that this explanation was not obvious, natural, or more likely than allegations of misconduct, and therefore Plaintiffs’ claim that Defendants breached their duty could not be dismissed on that basis. Further, the Plan filed annual Form 5500s reporting that it paid hundreds of thousands of dollars to its recordkeeper as “direct compensation.”

The court also found that Plaintiffs’ price comparisons could raise the inference of an imprudent fiduciary process by the Plan, where Plaintiffs alleged that fees went from about $154 to $54 per participant when the Plan switched recordkeeping services and there was no change in the kind or quality of recordkeeping services provided to participants. Lastly, the court found that Plaintiffs’ claim that the Defendants breached their fiduciary duty through the Plan’s offerings of retail-class mutual fund shares were supported by allegations that the direct fees alone were too high, so paying additional fees through revenue sharing was imprudent. Further, direct fees were already paying for administrative services, so there was no reason to pay for more services indirectly.

Because the court vacated the dismissal of the fiduciary breach claim, it also vacated the dismissal of the derivative monitoring claim.