Judge Dismisses Trader Joe’s ERISA Lawsuit

Court ruling shoots down five allegations of breach of fiduciary duty.

A US District Court judge has dismissed a lawsuit against the Trader Joe’s Company Retirement Plan that accused its fiduciaries of breaching their Employee Retirement Income Security Act (ERISA) duties.

The lawsuit was filed at the end of December by plaintiffs Nicolas Marks and Lorri Bowling, who are former participants of the plan. Judge Percy Anderson ruled against the plaintiffs’ five main allegations, saying the claims were “insufficient to survive a motion to dismiss.”

The plaintiffs alleged that the plan’s fiduciaries paid unreasonable recordkeeping fees to its recordkeeper, Capital Research; that they failed to seek competitive bids for recordkeeping every three years; that they chose higher cost mutual fund share classes; that they allowed Capital Research to collect and invest excessive fees before giving them back to the plan; and that they failed to adequately monitor committee members.

For the first claim, the plaintiffs allege the plan paid recordkeeper Capital Research an estimated $140 per participant when a “reasonable recordkeeping fee for the plan is $40 per participant.” However, the judge ruled against this claim because the plaintiffs’ estimate of $140 per participant for recordkeeping fees has “no factual basis,” as the plaintiffs admitted they don’t actually know how much the recordkeeping fees are.

For the claim that the fiduciaries failed to seeking competitive recordkeeping bids every three years, the judge ruled that the was no legal requirement to solicit competitive bids on a regular basis. The judge said the plaintiffs’ complaint does not show any facts suggesting that the fiduciaries could have obtained less expensive recordkeeping services elsewhere through competitive bidding. He also said there are no facts to show that the fiduciaries failed to consider putting the fee structure out for competitive bidding or failed to negotiate a reasonable fee structure with Capital Research.

The judge also said there was no basis for the allegation that “Trader Joe’s chose inappropriate, higher cost mutual fund share classes” in selecting retail share classes of funds rather than lower priced institutional class shares. Citing the case of White v. Chevron Corp, Anderson ruled that merely alleging that a plan offered retail rather than institutional share classes is insufficient to carry a claim for fiduciary breach.

“All plaintiffs have done is offer a hypothetical scenario suggesting an investor class share in a mutual fund ‘may’ in general charge an annual expense ratio higher than an institutional class share in the same fund,” Anderson wrote in his ruling.

The judge also shot down the allegation that Capital Research essentially admits that it charges excessive fees because it returns a portion of the fees to the plan at the end of each fiscal year. The plaintiffs argued that instead of getting returned fees at the end of the year, the plan should negotiate lower fees and that the plan misses out on using those returned fees during the year to invest on the behalf of plan participants.

However, Anderson ruled that the plaintiffs “do not allege any facts to support this conclusory allegation that Capital Research’s repayment of money to plan participants demonstrates an ‘admission of excessive fees’ and in turn a breach of the duty of prudence.”

The judge also sided with Trader Joe’s regarding the allegation that it failed to monitor and remove committee members because the allegation is derivative of the other claims, which were not supported by facts. Anderson said Trader Joe’s is “correct in referring to this claim as ‘derivative,’ as the claim as pled is wholly dependent on the breaches of duty previously alleged.”

Additionally, the judge also agreed with Trade Joe’s that the plaintiffs do not have standing to seek injunctive relief because they are not realistically threatened by a breach of fiduciary duties because they are former, not current participants of the plan.

Despite ruling in favor of Trader Joe’s on all five allegations, the judge said the court “cannot conclude at this point that any amendment would be futile,” and gave the plaintiffs 14 days to amend their complaint. However, if the plaintiffs fail to file an amended complaint by then, the case will be tossed out.

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