Introduction

The case of Danielle Forman, Nichole Georg, and Cindy Haney v. TriHealth, Inc. (40 F.4th 443) addresses critical issues under the Employee Retirement Income Security Act of 1974 (ERISA), specifically pertaining to the fiduciary duties of employers managing employee 401(k) plans. The plaintiffs, represented as individual employees and a class of participants in TriHealth Inc.'s retirement plan, alleged that their employer breached fiduciary duties by offering more expensive mutual fund share classes when cheaper, functionally identical alternatives were available. The Sixth Circuit Court of Appeals, in a decision delivered on July 13, 2022, partially affirmed and partially reversed the district court's dismissal of the plaintiffs' claims, thereby setting significant precedent for future ERISA-related litigation.

Summary of the Judgment

The Sixth Circuit Court of Appeals examined whether TriHealth, Inc. violated its fiduciary duty under ERISA by offering more expensive retail mutual fund share classes to its employees when cheaper institutional share classes were available for the same investment strategies. The plaintiffs argued that this practice increased administrative fees and reduced the overall value of their retirement savings. The District Court had dismissed most of their claims, citing insufficient evidence of imprudence. However, the Appeals Court found that the plaintiffs presented a plausible claim regarding the failure to utilize lower-cost share classes, thereby reversing part of the District Court's decision and allowing this specific claim to proceed.

Analysis

Precedents Cited

The judgment references several key precedents that shape the interpretation of ERISA's fiduciary duties:

• CommonSpirit Health Decision: Addressed similar claims of imprudence in offering higher-cost investment options without sufficient justification, ultimately finding insufficiency in the plaintiffs' arguments.
• Tibble v. Edison Int'l (575 U.S. 523): Established that the duty of prudence requires plan fiduciaries to act with the care, skill, prudence, and diligence of a prudent person in similar circumstances.
• Hughes v. Northwestern University (142 S.Ct. 737): Rejected a bright-line rule that a broad menu of funds could automatically defend against imprudence claims, emphasizing the importance of context-sensitive scrutiny.
• Other circuit cases such as Davis v. Washington Univ., Sacerdote v. N.Y. Univ., and Sweda v. Univ. of Pa. reinforced the notion that offering higher-cost share classes without functional differences could constitute imprudence.

Legal Reasoning

The court's legal reasoning centered on the interpretation of ERISA's requirement for fiduciaries to act prudently. Prudence, as defined under ERISA, involves making investment decisions that a reasonable professional would make in managing similar plans. The Sixth Circuit emphasized that while fiduciaries have discretion in selecting investment options, they must not neglect opportunities to minimize fees when equivalent alternatives exist.

In reviewing the plaintiffs' claims, the court found that the employees had sufficiently alleged that TriHealth failed to leverage its scale to obtain cheaper institutional share classes. The presence of a plausible inference that TriHealth did not act with the required level of prudence justified allowing this claim to proceed. The court also addressed and dismissed TriHealth's objections regarding the need for a "meaningful benchmark" and the applicability of previous Seventh Circuit decisions, clarifying that the specific circumstances of this case warranted a different analysis.

Impact

This judgment has significant implications for the administration of defined-contribution plans under ERISA:

• Enhanced Scrutiny of Fiduciary Decisions: Plan fiduciaries must now more carefully evaluate their selection of investment options, ensuring that they are not unnecessarily burdening plan participants with higher fees when cheaper, equivalent alternatives are available.
• Precedent for Future Litigation: The decision provides a basis for similar claims in other jurisdictions, potentially leading to increased litigation focused on fee structures and share class selections in retirement plans.
• Possible Increase in Fiduciary Accountability: Employers and plan administrators may face greater accountability in their investment decisions, encouraging more transparent and cost-effective offerings.

Complex Concepts Simplified

ERISA and Fiduciary Duty

ERISA: The Employee Retirement Income Security Act of 1974 is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry. It aims to protect individuals in these plans.

Fiduciary Duty: Under ERISA, fiduciaries are individuals or entities that manage and control plan assets. They are legally obligated to act in the best interests of plan participants, exercising care, skill, prudence, and diligence.

Prudence Standard

The prudence standard requires fiduciaries to make investment decisions with the same care that a prudent person would use, considering the plan's participants and their circumstances.

Mutual Fund Share Classes

Mutual funds often have different share classes (e.g., retail vs. institutional) that vary in terms of fees and minimum investment requirements. Institutional shares typically have lower fees due to higher minimum investments and are usually available to larger investors.

Conclusion

The Sixth Circuit's decision in Forman v. TriHealth underscores the critical responsibility of plan fiduciaries to act prudently in managing retirement investments. By allowing the plaintiffs' claim regarding the failure to offer lower-cost institutional share classes to proceed, the court highlighted the necessity for fiduciaries to not only provide a range of investment options but also to ensure that these options are cost-effective and aligned with the best interests of plan participants.

This judgment serves as a pivotal reference point for future ERISA litigation, emphasizing that fiduciaries must diligently seek out the most advantageous investment options for participants and avoid unnecessary fee burdens. Employers and plan administrators must thus exercise greater scrutiny and accountability in their investment selection processes to comply with ERISA's fiduciary standards.