Nagy v. CEP America, LLC

Opinion

1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 DANIEL E. NAGY, et al., 10 Case No. 23-cv-05648-RS Plaintiffs, 11 v. ORDER GRANTING IN PART AND 12 DENYING IN PART MOTION TO CEP AMERICA, LLC, et al., DISMISS 13 Defendants. 14

15 I. INTRODUCTION 16 In this putative Employee Retirement Income Security Act (“ERISA”) class action, 17 Plaintiffs Daniel E. Nagy and Maria Romero bring causes of action averring various breaches of 18 fiduciary duties and prohibited transactions against Defendants CEP America, LLC (d/b/a 19 “Vituity”) and the MedAmerica Retirement & Benefits Committee (the “Committee”).1 Plaintiffs 20 are participants in Vituity’s 401(k) Profit Sharing Plan (the “Plan”), which used Schwab 21 Retirement Plan Services and its affiliates (collectively, “Schwab”) as its recordkeeper. 22 Defendants move to dismiss the complaint pursuant to Rule 12(b)(1) on the grounds Plaintiff 23 Nagy lacks Article III standing and Rule 12(b)(6) on the grounds Plaintiffs fail to state a claim for 24 each of their causes of action. For the following reasons, Defendants’ motion is granted in part and 25 denied in part. 26

27 1 The complaint also names as Defendants Jane and John Does 1 through 25, individual members 1 II. BACKGROUND2 2 The Plan is a defined contribution retirement plan for Vituity employees for which Vituity 3 serves as plan administrator.3 In this role, Vituity is responsible for investing, managing, and 4 controlling Plan assets. Defendants selected Schwab to serve as the Plan’s recordkeeper and 5 perform corresponding services such as “maintain[ing] participant account balances” and 6 “provid[ing] a website and telephone number for Plan Participants to monitor and control their 7 Plan accounts.” Dkt. 1 (“Compl.”) ¶ 37. Though Schwab provided various services to the Plan in 8 its capacity as recordkeeper, Vituity also provided the Plan with (and charged for) administrative 9 services. 10 At a high level, Plaintiffs’ causes of action can be divided into (1) those relating to Schwab 11 investments and (2) those relating to administrative fees paid to Vituity.4 In the first bucket of 12 claims, Plaintiffs aver Defendants breached their fiduciary duties by causing the Plan to pay 13 Schwab excessive fees of more than $250 per participant per year for the services it provided and 14 also by selecting an unreasonably low-yield savings account offered by Schwab (the “Savings 15 Account”) as the Plan’s capital preservation option. Plaintiffs argue the Plan’s large size (6,232 16 participants at the end of 2023) meant Defendants should have been able to, but did not, leverage 17 economies of scale to minimize costs. Instead, Plaintiffs claim Schwab charged the Plan fees many 18 times higher than the average fees paid to recordkeepers by similarly sized plans, despite Schwab 19 providing “only standard services typical of other recordkeepers.” Id. ¶ 100. Defendants accepted 20 these high fees, Plaintiffs argue, because they were borne by Plan Participants and because 21 Defendants also used Schwab to administer the MedAmerica Retirement Plan for CEP Physicians 22

23 2 The factual background of this case is based on the well-pled allegations in the complaint, which are taken as true for the purposes of this motion. 24 3 Vituity delegated some of its responsibilities as plan administrator to the Committee and its 25 members. 26 4 Plaintiffs clarified at oral argument that they do not aver a freestanding cause of action for breach of the duty of loyalty. This order accepts that representation. For clarity of the record, there is no 27 live breach of the duty of loyalty cause of action in this case. 1 (the “Pension Plan”), which charged no fees. The Plan, in other words, was subsidizing the 2 Pension Plan for Vituity’s benefit. Plaintiffs estimate Defendants’ decisions allowed Schwab to 3 collect millions of dollars in excessive fees and other compensation.5 Further, Plaintiffs argue that 4 every time the Plan and Plan participants deposited money in the Savings Account, they “lent 5 money to Schwab” and engaged in prohibited transactions under ERISA. Id. ¶ 164; see 29 U.S.C. 6 § 1106(a)(1)(B). 7 In the second bucket of claims, Plaintiffs aver Defendants breached their fiduciary duty of 8 prudence and engaged in prohibited transactions with respect to the administrative fees Vituity 9 charged the Plan. Vituity collected fees ranging from $236 to $411 per participant per year from 10 the Plan for administrative services it provided. Plaintiffs allege these direct fees constituted 11 unreasonable administrative expenses when compared with comparable 401(k) plans. All told, the 12 Plan paid, per participant, more than $600 in administrative fees per year to Schwab and Vituity. 13 Plaintiffs also aver Defendants engaged in prohibited transactions, such as collecting fees from the 14 Plan and selecting the Savings Account default capital preservation option for Plan assets. 15 Plaintiffs claim Defendants chose the Savings Account in order to benefit Schwab so that Schwab 16 would not charge a separate Vituity pension plan for its services. 17 III. LEGAL STANDARD 18 Article III of the United States Constitution authorizes the judiciary to adjudicate only 19 “cases” and “controversies.” The doctrine of standing is “an essential and unchanging part of the 20 case-or-controversy requirement of Article III.” Lujan v. Defs. of Wildlife, 504 U.S. 555, 560 21 (1992). A Rule 12(b)(1) motion to dismiss a complaint challenges the court's subject matter 22

23 5 Plaintiffs allege Schwab received payments from the Plan or otherwise profited from its 24 involvement with the Plan through at least five pathways: 1. Direct disbursement from the Plan; 25 2. Revenue-sharing payments from Plan investments; 3. Fees charged by proprietary Schwab-managed ETFs to investors; 26 4. Use of assets invested in the Savings Account; 27 5. Other compensation sources, such as float interest and marketing access to Plan participants. 1 jurisdiction over asserted claims. It is the plaintiff's burden to prove jurisdiction at the time the 2 action is commenced. Spokeo, Inc. v. Robins, 578 U.S. 330, 338 (2016). 3 A complaint must also contain “a short and plain statement of the claim showing that the 4 pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). While “detailed factual allegations” are not required, a complaint must have sufficient factual allegations to state a claim that is “plausible on 5 its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 6 544, 555, 570 (2007)). A claim is facially plausible “when the plaintiff pleads factual content that 7 allows the court to draw the reasonable inference that the defendant is liable for the misconduct 8 alleged.” Id. (citing Twombly, 550 U.S. at 556). This standard asks for “more than a sheer 9 possibility that a defendant has acted unlawfully.” Id. This determination is a context-specific task 10 requiring the court “to draw on its judicial experience and common sense.” Id. at 679. 11 A Rule 12(b)(6) motion to dismiss tests the sufficiency of the claims alleged in the 12 complaint. Dismissal under Rule 12(b)(6) may be based on either the “lack of a cognizable legal 13 theory” or on “the absence of sufficient facts alleged under a cognizable legal theory.” See 14 Conservation Force v. Salazar, 646 F.3d 1240, 1242 (9th Cir. 2011) (internal quotation marks and 15 citation omitted). When evaluating such a motion, the court must accept all allegations of material 16 fact in the complaint as true and construe them in the light most favorable to the non-moving 17 party. In re Quality Sys., Inc. Sec. Litig., 865 F.3d 1130, 1140 (9th Cir. 2017). It must also “draw 18 all reasonable inferences in favor of the nonmoving party.” Usher v. City of Los Angeles, 828 F.2d 19 556, 561 (9th Cir. 1987). 20 IV. DISCUSSION 21 A. Standing 22 Defendants first argue Plaintiff Nagy lacks Article III standing to assert his claims because 23 he signed a separation agreement, upon ending his employment with Vituity, releasing his ability 24 to bring any violation or claim under ERISA against Vituity. “[T]he irreducible constitutional 25 minimum of standing” requires, as relevant here, a showing of a concrete and particularized injury 26 that is actual or imminent. Lujan, 504 U.S. at 560. Putative class representatives must demonstrate 27 “they personally have been injured, not that injury has been suffered by other, unidentified 1 members of the class.” Warth v. Seldin, 422 U.S. 490, 502 (1975). A plaintiff’s release of 2 individual claims does not constitute a release of representative claims brought pursuant to ERISA 3 § 502(a)(2). Bowles v. Reade, 198 F.3d 752, 759–60 (9th Cir. 1999). 4 Plaintiffs point to Bowles as Ninth Circuit authority squarely contrary to Defendants’ 5 standing argument. Defendants acknowledge Bowles (albeit not until their reply brief) but argue 6 that case has since been effectively overruled by two Supreme Court decisions: LaRue v. DeWolff, 7 Boberg & Associates, 552 U.S. 248, 256 (2008), and Thole v. U.S. Bank N.A., 590 U.S. 538, 544 8 (2020). LaRue, however, held plaintiffs may bring individual claims pursuant to § 502(a)(2), not 9 that they are required to do so. Fernandez v. Franklin Resources, Inc., No. 17-cv-6409, 2018 WL 10 1697089, at *4 (N.D. Cal. Apr. 6, 2018). Thole reaffirmed the need to show injury-in-fact to 11 establish standing, see 590 U.S. at 544, but Bowles makes clear the § 502(a)(2) remedy is a “return 12 to The Plans and all participants of all losses incurred,” 198 F.3d at 760 (emphasis added). In 13 other words, Plaintiff Nagy retained his right to recover, like any other Plan participant, should a 14 § 502(a)(2) claim brought on behalf of the Plan succeed. LaRue and Thole provide no basis to 15 depart from Bowles’ holding that a plaintiff does not release § 502(a)(2) claims brought on behalf 16 of a plan by signing an individual release. Defendants cite to no Ninth Circuit authority for the 17 proposition Bowles is no longer good law where a plaintiff seeks to bring representative claims on 18 behalf of a plan. Plaintiff Nagy has standing to bring this action. 19 B. Breach of Duty of Prudence 20 Next, Defendants move to dismiss Plaintiffs’ breach of the duty of prudence claims 21 relating to Vituity’s decision to select the Savings Account as the Plan’s capital preservation 22 option (Count I) and to allow Vituity (Count III) and Schwab (Count V) to charge Plan 23 participants excessive administrative fees. Fiduciaries are obligated to: 24 discharge [their] duties with respect to a plan solely in the interest of the participants and beneficiaries and . . . with the care, skill, prudence, and 25 diligence under the circumstances then prevailing that a prudent man acting in 26 a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. 27 1 29 U.S.C. § 1104(a)(1)(B). The relevant inquiry for a breach of duty of prudence claim is whether 2 a fiduciary, “at the time they engaged in the challenged transactions, employed the appropriate 3 methods to investigate the merits of the investment and to structure the investment.” Donovan v. 4 Mazzola, 716 F.2d 1226, 1232 (9th Cir. 1983). A party must make sufficient “circumstantial 5 factual allegations” to permit a reasonable inference “from what is alleged that the process was 6 flawed.” Pension Ben. Guar. Corp. ex rel. St. Vincent Cath. Med. Ctrs. Ret. Plan v. Morgan 7 Stanley Inv. Mgmt. Inc, 712 F.3d 705, 718 (2nd Cir. 2013) (citation omitted). Fiduciaries must 8 continue to “monitor trust investments and remove imprudent ones” and “incur only costs that are 9 reasonable” in addition to exercising prudence when investment decisions are made in the first 10 instance. Tibble v. Edison Int’l, 843 F.3d 1187, 1197 (9th Cir. 2016) (citation omitted). 11 1. Excessive administrative fees 12 Defendants argue Plaintiffs failed to “plead any facts regarding the actual process Vituity 13 used” relating to choosing investment vehicles or evaluating administrative fees charged to Plan 14 participants. Dkt. 23, at 9. They cite White v. Chevron Corp. for the proposition that plan 15 fiduciaries need not choose the cheapest investment funds available but may instead reasonably 16 pick funds that, while carrying higher fees, are attractive for other reasons. See No. 16-cv-793, 17 2016 WL 4502808, at *10 (N.D. Cal. Aug. 29, 2016) (“White I”). Defendants argue Plaintiffs have 18 not pled facts sufficient to raise a plausible inference that Defendants’ process for selecting 19 investment options was flawed. 20 Courts have taken slightly different approaches at the motion to dismiss stage to evaluating 21 the viability of causes of action averring excessive recordkeeping and administrative fees. 22 Compare In re Sutter Health ERISA Litig., No. 20-cv-1007, 2023 WL 1868865, at *10 (E.D. Cal. 23 Feb. 9, 2023) (finding allegation of specific facts supporting claims of excessive fees sufficient), 24 with Wehner v. Genentech, Inc., No. 20-cv-6894, 2021 WL 507599, at *5 (N.D. Cal. Feb. 9, 2021) 25 (holding “a plaintiff must plead administrative fees that are excessive in relation to the specific 26 services the recordkeeper provided to the specific plan at issue”). In White I, the court (applying 27 the latter approach) dismissed breach of duty of prudence claims in part because the plaintiffs did 1 not “allege any facts from which one could infer that the same services were available for less on 2 the market.” 2016 WL 4502808, at *14. These approaches are perhaps most clearly distinguished 3 by the extent of the burden they place, respectively, on plaintiffs to plead that fees were excessive. 4 i. Fees paid to Schwab 5 With respect to fees Schwab charged for the recordkeeping services it provided, Plaintiffs 6 allege the Plan paid recordkeeping fees ranging from approximately $250 to $450 per participant 7 per year to Schwab alone. Compl. ¶ 51. The complaint alleges Schwab offered “standard services 8 typical of other recordkeepers” despite receiving these higher fees, id. ¶ 100, and that Vituity also 9 provided (and charged for) services to the Plan that were, in theory, not provided by Schwab, 10 demonstrating that the scope of services Schwab offered the Plan was limited, id. ¶¶ 111–125. 11 Schwab provided “Trustee services” as well as the “offering of a brokerage window.” Id. ¶ 100. 12 To contextualize the fees paid to Schwab, Plaintiffs point to data evaluated by a defense expert in 13 another case about recordkeeping fees for nine plans with between 2,500 and 15,000 participants 14 where “the range of fees was $48.00 to $86.15” in 2017. Id. ¶ 99. Defendants do not contest that 15 the fees paid in these nine comparator cases were for recordkeeping services alone. Plaintiffs also 16 point to a 2021 New England Pension Consulting survey finding a benchmark fee of $50 per 17 participant for recordkeeping services for plans of similar sizes to the Plan here. 18 Plaintiffs have done enough to support a plausible inference that Defendants breached their 19 duty of prudence by paying excessive administrative fees to Schwab. Defendants argue Plaintiffs’ 20 proffered comparator plans are unhelpful because the “allegations about the Plan’s fees refer to 21 payment to two parties for two different types of services (recordkeeping and general 22 administration).” Dkt. 23, at 12 (emphasis in original); see also Wehner, 2021 WL 507599, at *6 23 (finding failure to provide adequate market comparator). Plaintiffs, however, explicitly allege that 24 the fees the Plan paid Schwab simply for ordinary recordkeeping services (see Compl. ¶ 100) 25 dwarfed those paid to recordkeepers across a range of comparable plans.6 See Johnson v. Fujitsu 26

27 6 Defendants contend Plaintiffs actually allege Schwab provided “additional administrative services” to the Plan (unlike the comparator plans) such that Plaintiffs’ comparisons are useless. 1 Tech. & Bus. of Am., Inc., 250 F. Supp. 3d 460, 467 (N.D. Cal. 2017) (finding claimed breaches of 2 duties of prudence and loyalty plausible where “recordkeeping expenses were five to ten times 3 higher than average for similarly-sized plans with over $1 billion in assets”). The comparator 4 plans to which Plaintiffs point spanned a range of sizes—from somewhat smaller than the Plan 5 here to somewhat larger—where the recordkeeping fees charged were multiples less than those 6 charged here. That Plaintiffs also aver Vituity charged the Plan additional fees each year does not 7 preclude comparing fees Schwab charged the Plan for recordkeeping and the fees charged by other 8 recordkeepers for their recordkeeping services. Plaintiffs need not provide even more granular, 9 micro-level “apples to apples” comparisons, based on data to which they may not yet have access, 10 in order to survive a motion to dismiss. Defendants’ motion to dismiss Count V is denied. 11 ii. Fees paid to Vituity 12 Plaintiffs also aver Defendants breached their duty of prudence with respect to the fees the 13 Plan paid Vituity for administrative services. In comparison with the complaint’s allegations 14 concerning administrative services provided by Schwab, Plaintiffs are less specific in alleging 15 what administrative services Vituity provided the Plan. See Dkt. 34, at 8 (contending fees Vituity 16 charged were “presumably for purported administrative services not provided by Schwab”). 17 Plaintiffs note the Plan compensated Vituity for the salaries and expenses of employees who 18 provided administrative services for the Plan and that, all told, the Plan paid Vituity approximately 19 $236 to $411 per participant per year in administrative fees. 20 Plaintiffs do not plead sufficient facts to raise a plausible inference that the fees Vituity 21 charged were excessive—or, for that matter, that there was anything out of the ordinary in Vituity 22 providing administrative services to the Plan.7 Plaintiffs’ acknowledgement that they do not know 23 what types of administrative services Vituity provided the Plan stands in stark contrast to their 24

25 See Dkt. 23, at 2. Plaintiffs, however, allege Schwab provided only “standard services typical of other recordkeepers.” Compl. ¶ 100. 26 7 The fact Vituity was being paid for services it provided does not, without more, make it plausible 27 that the fees it collected were excessive. 1 claims regarding how Schwab provided the same basket (or potentially even a smaller basket) of 2 recordkeeping services relative to the comparator plans. Moreover, Plaintiffs offer no point of 3 reference for whether Vituity’s fees were excessive, but instead merely claim Vituity provided 4 unspecified administrative services for too much in fees. Neither party disputes an entity in 5 Vituity’s position could conceivably provide reasonably priced administrative services to a 6 retirement plan without running afoul of its fiduciary duties. It follows that there must be some 7 non-speculative basis for determining whether such administrative services were excessive. 8 Plaintiffs have not supplied such a basis here. Count III will be dismissed for failure to state a 9 claim with leave to amend. 10 2. Savings Account investment 11 Defendants also move to dismiss Count I, which avers Defendants breached their duty of 12 prudence by causing the Plan and Plan participants to invest more than $50,000,000 in the Savings 13 Account (the Plan’s capital preservation account). Plaintiffs claim Defendants’ choice of the 14 Savings Account was an imprudent one because of its predictably low rate of returns and suggest 15 Defendants should have chosen either or both of Schwab’s alternative capital preservation options: 16 a money-market fund or a stable value fund. Defendants do not contest the Savings Account 17 produced lower returns, but argue this cause of action fails because, unlike the Savings Account, 18 “Plaintiffs’ preferred alternatives . . . are not FDIC-insured accounts,” and because a fund’s poor 19 performance does not raise an inference of imprudence. Dkt. 23, at 15. 20 An analysis of whether a fiduciary violated the duty of prudence depends on a “fiduciary’s 21 conduct in arriving at an investment decision, not on its results.” Terraza v. Safeway Inc., 241 F. 22 Supp. 3d 1057, 1069 (N.D. Cal. 2017) (citation omitted). A fiduciary has a “continuing duty to 23 monitor . . . investments and remove imprudent ones.” Tibble v. Edison Int’l, 575 U.S. 525, 529 24 (2015). Fiduciaries are not required to select the highest-performing fund in order to satisfy their 25 duty of prudence. See Davis v. Wash. Univ. in St. Louis, 960 F.3d 478, 486 (8th Cir. 2020); see 26 also Smith v. CommonSpirit Health, 37 F.4th 1160, 1167 (6th Cir. 2022) (“A retirement plan acts 27 wisely, not imprudently, when it offers distinct funds to deal with different objectives for different 1 investors.”). 2 The parties agree higher-performing alternatives to the Savings Account existed but 3 disagree about the significance of the fact, to a breach of prudence analysis, that the Savings 4 Account was FDIC-insured. Plaintiffs argue “Defendants were obligated to ensure the Savings 5 Account paid a reasonable rate of interest,” Dkt. 34, at 17, but determining what constitutes a 6 reasonable rate of interest depends on the goals of a particular investment decision. That a money 7 market fund may offer a lower rate of return compared to, say, a stable value fund does not in 8 itself raise a plausible inference of imprudence given the different risks each type of fund poses. 9 See White v. Chevron Corp., No. 16-cv-793, 2017 WL 2352137, at *11 (N.D. Cal. May 31, 2017) 10 (“White II”) (noting “stable value funds take greater risks than money market funds” and that a 11 plan need only offer “some type of low-risk capital preservation option”). Plaintiffs’ cited cases 12 for the proposition that their underperformance allegations are sufficient do not demand a different 13 result. In Terraza, for instance, the court found plaintiff pled sufficient facts that the plan’s 14 recordkeeper, J.P. Morgan, exerted significant influence over the defendants’ decision-making 15 process to support a claim that the defendants improperly selected underperforming investment 16 options. See 241 F. Supp. 3d at 1076–77. Here, Plaintiffs do not support a similar plausible 17 inference of improper influence by Schwab; rather, the facts pled suggest Defendants could have 18 picked any of the three available capital preservation options. 19 Plaintiffs also contend the fact the Savings Account was FDIC-insured meant little because 20 the Plan was protected by a fidelity bond and Securities Investors Protection Corporation 21 coverage, as well as because the “government protects the value of US Government Money 22 Market Funds similarly to the level of protection offered by the FDIC.” Dkt. 34, at 17. Therefore, 23 Plaintiffs suggest, FDIC insurance could not justify an investment decision offering such low 24 returns. These conclusory statements do not establish a plausible basis to conclude Defendants’ 25 selection of the FDIC-insured capital preservation option was imprudent. Plaintiffs do not plead 26 facts explaining how the FDIC coverage available for the Savings Account was no better than 27 other protections available for Plan assets or mutual fund investments. See Anderson v. Intel Corp. 1 Inv. Pol. Comm., 579 F. Supp. 3d 1133, 1147–48 (N.D. Cal. 2022) (plaintiff arguing fiduciary 2 should have selected different fund had to provide “meaningful benchmark” against which chosen 3 fund could be compared). Indeed, Plaintiffs plead FDIC insurance had “little or no real value” to 4 the Plan, Compl. ¶ 162, a conclusory statement that appears at least partially to acknowledge that 5 the Savings Account may have been a safer investment choice under some market conditions. 6 Pointing to the mere possibility that FDIC insurance did not offer more protection for the Savings 7 Account compared to the other plans—rather than pleading facts that support this theory—is 8 insufficient for Plaintiffs to meet their pleading burden for this claim.8 9 Finally, Plaintiffs suggest Defendants chose the Savings Account to benefit Schwab and, in 10 turn, themselves, and that this pushes their breach of fiduciary duty claim into the realm of the 11 plausible. According to this theory, Defendants chose the Savings Account so that Schwab would 12 pay nominal interest for the privilege of gaining access to tens of millions of dollars in capital. 13 Schwab, in turn, would not charge Defendants for services it rendered to the Pension Plan for 14 which Vituity is the Trustee. This self-dealing theory is utterly speculative and does not make 15 Plaintiffs’ breach of the duty of prudence claim with respect to the Savings Account more 16 plausible. That an annual filing does not reflect payments from Vituity to Schwab for 17 administration of the Pension Plan does not, without more support, raise the plausible inference 18 that the Pension Plan was being subsidized by the Plan. Count I is dismissed for failure to state a 19 claim with leave to amend. 20 C. Prohibited Transactions 21 Defendants also move to dismiss Counts II and IV, in which Plaintiffs claim Defendants 22 breached ERISA provisions governing “prohibited transactions” by a fiduciary. See 29 U.S.C. 23 § 1106(a)(1)(B) (averments in Count II relating to Savings Account); id. §§ 1106(a)(1)(D), 1106 24 (b) (averments in Count IV relating to administrative fees charged by Vituity to the Plan). ERISA 25

26 8 Since Plaintiffs’ duty of prudence claim relating to the Savings Account selection is insufficiently pleaded, it is unnecessary to address Defendants’ additional argument, relying on 27 House Conference Report No. 92-1280, that a fully insured investment is presumptively prudent. 1 prohibits fiduciaries from engaging in certain types of transactions involving a plan and a party in 2 interest.9 29 U.S.C. § 1106(a)(1). Additionally, fiduciaries may not engage in self-dealing 3 transactions. Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir. 1996). Where a statutory exemption 4 constitutes an affirmative defense to an alleged ERISA violation, dismissal is appropriate “only if 5 the defense is ‘clearly indicated’ and ‘appear[s] on the face of the pleading.’” Harris v. Amgen, 6 Inc., 788 F.3d 916, 943 (9th Cir. 2015) (alteration in original) (quoting 5B Charles Alan Wright & 7 Arthur R. Miller, Federal Practice & Procedure § 1357 (3d ed. 2004)) (declining to find 8 affirmative defense under § 408(e) clearly available from face of complaint), rev’d on other 9 grounds, 577 U.S. 308 (2016); see also Allen v. GreatBanc Trust Co., 835 F.3d 670, 676 (7th Cir. 10 2016) (collecting cases). 11 1. Count II 12 In Count II, Plaintiffs aver Defendants violated § 406(a)(1)(B)10 each time the Plan or Plan 13 participants put money into the Savings Account because these selections constituted the “lending 14 of money or other extension of credit between the plan and a party in interest.” 29 U.S.C. 15 § 1106(a)(1)(B). Defendants argue this claim amounts to an indictment of how savings accounts 16 work, and that if the arrangement with Schwab amounts to “lending of money” or “extension of 17 credit” to Schwab it would call into question, in the ERISA context, any deposit into a savings 18 account. See Dkt. 23, at 19–20. They argue Plaintiffs’ reading of those terms is implausible. 19 Congress enacted § 406 to protect against transactions “likely to injure the pension plan.” 20 Wright v. Oregon Metallurgical Corp., 360 F.3d 1090, 1100 (9th Cir. 2004) (quoting Lockheed 21 Corp. v. Spink, 517 U.S. 882, 888 (1996)). Plaintiffs’ proffered reading of the transactions to 22 which § 406 applies is indeed broad to the extent it means any investment of plan funds in a 23 savings account could constitute a prohibited transaction under § 406(a)(1)(B). The Ninth Circuit 24

25 9 It is undisputed Schwab is a party in interest for purposes of Plaintiffs’ prohibited transaction causes of action. 26 10 Plaintiffs plead, in the alternative, that these transactions violated the other subsections of 27 § 406(a)(1). 1 recently took an expansive view of the transactions to which a different subsection of the statute, 2 § 406(a)(1)(C), applies. See Bugielski v. AT&T Servs., Inc., 76 F.4th 894, 901 (9th Cir. 2023) 3 (interpreting plain text of § 406(a)(1)(C) and rejecting argument that it was “improbable” the 4 statute “would prohibit ubiquitous service transactions” (citation omitted)). It found unpersuasive 5 the suggestion that it should “read additional limitations, requirements, or exceptions into the 6 statutory text.” Id. Further, whether a prohibited transaction claim is adequately pleaded is a 7 separate question from whether an affirmative defense to that claim exists. 8 The parties in Bugielski did not dispute the service transactions at issue fell within the 9 literal meaning of “furnishing of . . . services” in § 406(a)(1)(C). Id. Here, on the other hand, 10 Defendants contend Plan and participant investments in the Savings Account cannot reasonably be 11 interpreted to constitute the “lending of money” or “extension of credit” covered by 12 § 406(a)(1)(B). Defendants cite no authority supportive of their specific, restrictive reading of 13 § 406(a)(1)(B). Plaintiffs argue these terms encompass investments in the Savings Account. Given 14 the Ninth Circuit’s broad reading of § 406(a)(1)(C) in Bugielski, a similarly broad reading of the 15 transactions to which § 406(a)(1)(B) applies is warranted here. Defendants’ motion to dismiss 16 Count II is denied. 17 2. Count IV 18 In Count IV, Plaintiffs aver Defendants engaged in prohibited transactions by arranging for 19 the Plan to pay Vituity for administrative services Vituity provided pursuant to § 406(a)(1)(D) and 20 § 406(b). Defendants respond that under a statutory exception—§ 408(c)(2)—to § 406(a), 21 fiduciaries are not barred from “receiving any reasonable compensation for services rendered . . . 22 in the performance of [its] duties with the plan.” 29 U.S.C. § 1108(c)(2). Defendants also point to 23 Department of Labor regulations in arguing a fiduciary does not violate § 406(b) where it has 24 provided services to a plan and merely seeks reimbursement for those services. See 29 C.F.R. 25 § 2550.408b-2(e)(3). Plaintiffs respond that Defendants’ invocation of the statutory exemption in 26 § 408(c)(2) and the DOL regulation constitute affirmative defenses they need not defeat in their 27 complaint. 1 Defendants do not directly respond to the contention that Plaintiffs have no obligation to 2 plead around affirmative defenses in their complaint. Instead, they argue Count IV should be 3 dismissed because Plaintiffs did not plead sufficient facts that the fees Vituity charged the Plan 4 were unreasonable in order to state a claim under § 406(a)(1)(D) and, further, did not plead 5 causation or loss to the Plan.11 Defendants point to no authority that Plaintiffs must establish 6 whether the fees the Plan paid to Vituity were “reasonable” in order to state a § 406(a)(1)(D) 7 prohibited transaction claim. See Kanawi v. Bechtel Corp., 590 F. Supp. 2d 1213, 1222 (N.D. Cal. 8 2008) (noting § 406(a) “begins with the premise that virtually all transactions between a plan and 9 a party in interest are prohibited”). Whether the fees paid to Vituity were reasonable is more 10 relevant to whether, for instance, the § 408(c)(2) exemption applies. Such an inquiry into the 11 applicability of an affirmative defense is inappropriate for the motion to dismiss stage where 12 Defendants have not otherwise argued an affirmative defense is pleaded on the face of the 13 complaint. See Zavala v. Kruse-Western, Inc., 398 F. Supp. 3d 731, 742–43 (E.D. Cal. 2019) 14 (finding different § 408 affirmative defense not pleaded on face of complaint). Similarly, 15 Defendants raise a potential affirmative defense to Plaintiffs’ § 406(b) prohibited transaction 16 allegations when they refer to 29 C.F.R. § 2550.408b-2(e)(3). Plaintiffs adequately state a 17 prohibited transaction claim as to fees the Plan paid Vituity, and Defendants’ motion to dismiss 18 Count IV is denied. 19 V. CONCLUSION 20 Defendants’ motion to dismiss Plaintiff Nagy under Rule 12(b)(1) for lack of Article III 21 standing is denied. Defendants’ Rule 12(b)(6) motion to dismiss is granted as to Plaintiffs’ breach 22 of fiduciary duty causes of action relating to the Savings Account (Count I) and payments made to 23 Vituity (Count III). These causes of action are dismissed with leave to amend. Defendants’ motion 24 to dismiss is otherwise denied. Plaintiffs are directed to file any amended complaint within 21 25 days of this order. 26

27 11 Defendants’ reference to causation and loss is conclusory and offers no basis for dismissal. 1 IT IS SO ORDERED. 2 3 Dated: May 30, 2024 4 RICHARD SEEBORG 5 Chief United States District Judge 6 7 8 9 10 11 12

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Z 18 19 20 21 22 23 24 25 26 27 28 ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS CASE No. 23-cv-05648-RS