The U.S. Court of Appeals for the Ninth Circuit partially reversed the dismissal of two proposed class actions alleging mismanagement of separate 401(k) plans in violation of ERISA. In Davis v. Salesforce.com, Inc., 2022 WL 105557 (9th Cir. Apr. 8, 2022), participants in401(k) plan claimed that Salesforce.com, its board of directors, investment committee and executives breached their fiduciary duties by imprudently selecting and retaining relatively high-cost investments and failing to investigate less expensive alternatives, despite the availability of lower-cost options with identical or substantially similar underlying assets. The district court dismissed the plaintiffs’ complaint in its entirety, noting that it lacked adequate factual support. Specifically, the district court held that the allegations regarding alternative share classes, without more, were insufficient to state a claim; the complaint improperly attempted to compare passive funds with actively managed funds; and there is no obligation to offer alternatives such as collective investment trusts (CITs), and, in any event, CITs are not meaningful comparators to mutual funds.
The Ninth Circuit affirmed the district court’s dismissal of claims related to actively managed funds but reversed as to the share class and CIT claims. In particular, the appellate court found that plaintiffs’ allegations regarding lower-cost share classes that were viable substitutes for nine mutual funds offered by the plan, taken as true, were sufficient to withstand a motion to dismiss. The defendants’ “obvious alternative explanation,” though “plausible,” was properly left for summary judgment. Similarly, the question of whether the different regulatory regimes governing mutual funds and CITs justified retaining higher-cost mutual funds in the plan through 2019 should be left to summary judgment.
A different panel in the Ninth Circuit employed similar reasoning to resurrect comparable claims involving the Trader Joe’s 401(k) plan. In Kong v. Trader Joe’s Co., 2002 WL 1125667 (9th Cir. April 15, 2022), the appellate court held that the defendants’ explanation for choosing more expensive retail share classes — a revenue sharing agreement to defray costs of plan administration — was “unavailing at the pleading stage” because it only showed “what could occur in theory — not what occurred in fact.” As in Davis, the Kong panel focused exclusively on the allegations in the complaint, not any plausible alternative explanations.
In both cases, the Ninth Circuit principally relied on the Supreme Court’s decision in Tibble v. Edison Int’l, 575 U.S. 523 (2015), rather than the recently decided Hughes v. Northwestern University, 142 S.Ct. 737, 741 (2022). Nevertheless, the rationale in both Davis and Kong tracks closely to Hughes, which also relied on Tibble to overturn the dismissal of ERISA breach of fiduciary duty claims.