SMITH v. SHOE SHOW, INC.

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

SARAH SMITH, MICHAEL CRISCO, )

and JEFFREY MORROW, )

individually and as )

representatives of a class of )

similarly situated persons, )

)

Plaintiffs, )

)

v. ) 1:20CV813

)

SHOE SHOW, INC.; BOARD OF )

TRUSTEES OF SHOE SHOW )

RETIREMENT SAVINGS PLAN; JOHN )

VAN DER POEL, ROBERT TUCKER, )

and LISA TUCKER, )

)

Defendants. )

MEMORANDUM OPINION AND ORDER

OSTEEN, JR., District Judge

Presently before the court is a Motion to Dismiss

Plaintiffs’ Complaint under Federal Rule of Civil Procedure

12(b)(6) filed by Defendants Shoe Show, Inc., Board of Trustees

of Shoe Show Retirement Savings Plan, John Van Der Poel, Robert

Tucker, and Lisa Tucker (together, “Defendants”). (Doc. 11.)

Individually and as representatives of a class of similarly

situated persons, Plaintiffs Sarah Smith, Michael Crisco, and

Jeffrey Morrow (together, “Plaintiffs”) responded in opposition.

(Doc. 20.) Defendants filed a reply. (Doc. 22.)

For the reasons set forth herein, this court will grant in

part and deny in part Defendants’ Motion to Dismiss. This court

will dismiss some of the claims asserted under Count I, dismiss

the entirety of Count II, and decline to dismiss Count III.

I. FACTUAL BACKGROUND

On a motion to dismiss, a court must “accept as true all of

the factual allegations contained in the complaint . . . .” Ray

v. Roane, 948 F.3d 222, 226 (4th Cir. 2020) (internal quotation

marks omitted) (quoting King v. Rubenstein, 825 F.3d 206, 212

(4th Cir. 2016)). The facts, taken in the light most favorable

to Plaintiffs, are as follows.

Defendant Shoe Show, Inc. (“Shoe Show”), a footwear

retailer with over 1,100 stores across forty-seven states,

sponsors a tax-qualified, defined contribution retirement plan

(the “Plan”) for eligible current and former employees. (Compl.

– Class Action (“Compl.”) (Doc. 1) ¶¶ 15-19, 21.)1 This type of

plan, commonly referred to as a 401(k), allows participants to

direct their retirement savings contributions into various

investment fund options offered by the Plan. (Id. ¶ 1.) The Plan

is “relatively large,” (id. ¶ 106), with over 1,500 participants

1 All citations in this Memorandum Opinion and Order to

documents filed with the court refer to the page numbers located

at the bottom right-hand corner of the documents as they appear

on CM/ECF.

and total assets over $40 million, (Ex. F, 2019 Form 5500

(Excerpts) (Doc. 12-6) at 3, 5).2 Plaintiffs are former Plan

participants. (Compl. (Doc. 1) ¶¶ 10-12.) Defendants are Plan

fiduciaries and responsible for its administration. (Id. ¶¶ 2-3,

22-28, 29.) During the relevant time period, MassMutual served

as the Plan’s recordkeeper and was responsible for tracking “who

[wa]s in the plan, what they own[ed], and what money [wa]s going

in and out.” (Id. ¶¶ 28, 47.)

Plaintiffs allege that since 2014, Defendants have been in

violation of the Employee Retirement Income Security Act

(“ERISA”), 29 U.S.C. § 1001, et seq., by breaching their

fiduciary duties and engaging in prohibited transactions with a

party in interest. (Compl. (Doc. 1) ¶¶ 9, 188-229.) Plaintiffs’

2 Even though Plaintiffs have not attached the Plan’s Form

5500 annual report filings to their Complaint, there are two

reasons why this court may consider them at the motion to

dismiss stage. First, the filings are “integral to and

explicitly relied on in the [C]omplaint and . . . [P]laintiffs

do not challenge [their] authenticity.” Phillips v. LCI Int’l,

Inc., 190 F.3d 609, 618 (4th Cir. 1999). Indeed, Plaintiffs’

Complaint references the Form 5500s repeatedly. (E.g., Compl.

(Doc. 1) ¶¶ 2, 4, 20, 61, 97.) Second, the filings may be

considered because “[i]n reviewing a Rule 12(b)(6) dismissal,

[courts] may properly take judicial notice of matters of public

record.” Philips v. Pitt Cty. Mem’l Hosp., 572 F.3d 176, 180

(4th Cir. 2009). Here, the Form 5500s are unquestionably matters

of public record. They are filed with the United States

Department of Labor and are publicly available online. U.S.

Dep’t of Labor, Form 5500 Search, EFAST, https://www.efast.dol.

gov/5500search/ (last visited Feb. 22, 2022) (enter “Shoe Show,

Inc.” in “Sponsor Name” field).

factual foundation for these claims rests on Defendants’: (1)

failure to limit MassMutual’s fees, (2) failure to offer the

most affordable share classes, (3) failure to offer passive

funds, and (4) failure to diversify the Plan’s equity funds.

(Id. ¶¶ 94-169.) These factual allegations are described in

greater detail in Part IV’s analysis, infra.

II. PROCEDURAL BACKGROUND

Plaintiffs filed their Complaint on September 3, 2020.

(Compl. (Doc. 1).) Plaintiffs assert three ERISA counts:

(I) breach of the fiduciary duties of prudence, monitoring,

loyalty, and the obligation to act in accordance with Plan

documents and instruments; (II) breach of the fiduciary duties

of prudence and diversification, and (III) prohibited

transactions with a party in interest. (Id. ¶¶ 188-229.)

Defendants filed a Motion to Dismiss Plaintiffs’ Complaint on

November 16, 2020, (Doc. 11), along with an accompanying

Memorandum, (Mem. of Law in Supp. of Defs.’ Mot to Dismiss Pls.’

Compl. (“Defs.’ Br.”) (Doc. 12)). Plaintiffs responded in

opposition, (Resp. in Opp’n to Defs.’ Mot to Dismiss (“Pls.’

Br.”) (Doc. 20)), and Defendants replied, (Defs.’ Reply in Supp.

of Mot. to Dismiss Pls.’ Compl. (“Defs.’ Reply”) (Doc. 22)).

Plaintiffs then filed a notice of subsequently decided authority

regarding the United States Supreme Court’s ruling in Hughes v.

Northwestern University, 142 S. Ct. 737 (2022). (Doc. 25.)

Additionally, Plaintiffs have filed a Motion for Class

Certification and Appointment of Fitzgerald Law as Class

Counsel, (Doc. 16), along with an accompanying Memorandum,

(Doc. 17). This court postponed further briefing on and

determination of Plaintiffs’ Motion for Class Certification

“until further order of this court.” (Doc. 21 at 2.) Because

this Memorandum Opinion and Order will grant in part and deny in

part Defendants’ Motion to Dismiss, this court finds that it is

now appropriate for briefing on Plaintiffs’ Motion for Class

Certification to proceed. This court will order the parties to

propose a briefing schedule in their Federal Rule of Civil

Procedure 26(f) report to this court.

III. STANDARD OF REVIEW

“To survive a [Rule 12(b)(6)] motion to dismiss, a

complaint must contain sufficient factual matter, accepted as

true, to ‘state a claim to relief that is plausible on its

face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim

is plausible on its face “when the plaintiff pleads factual

content that allows the court to draw the reasonable inference

that the defendant is liable for the misconduct alleged” and

demonstrates “more than a sheer possibility that a defendant has

acted unlawfully.” Id. When ruling on a motion to dismiss, this

court accepts the complaint’s factual allegations as true. Id.

Further, this court liberally construes “the complaint,

including all reasonable inferences therefrom . . . in the

plaintiff’s favor.” Est. of Williams-Moore v. All. One

Receivables Mgmt., Inc., 335 F. Supp. 2d 636, 646 (M.D.N.C.

2004). This court does not, however, accept legal conclusions as

true, and “[t]hreadbare recitals of the elements of a cause of

action, supported by mere conclusory statements, do not

suffice.” Iqbal, 556 U.S. at 678.

IV. ANALYSIS

Plaintiffs advance three ERISA counts: (I) breach of the

fiduciary duties of prudence, monitoring, loyalty, and the

obligation to act in accordance with Plan documents and

instruments; (II) breach of the fiduciary duties of prudence and

diversification; and (III) prohibited transactions with a party

in interest. (Compl. (Doc. 1) ¶¶ 188-229 (citing 29 U.S.C.

§§ 1104(a)(1), 1106(a)(1)).) All three counts are predicated on

allegations that the Plan is governed by ERISA and Defendants

are Plan fiduciaries. (E.g., id. ¶¶ 15, 190, 210, 219.)

Defendants do not contest these threshold elements. Instead,

they focus on each count’s substance. As to Counts I and II,

Defendants argue that Plaintiffs have failed to plausibly allege

any fiduciary breach occurred. (Defs.’ Br. (Doc. 12) at 15-31,

35-41.) As to Count III, Defendants argue that MassMutual’s fee

arrangement is statutorily exempted from ERISA’s prohibited

transaction provision. (Id. at 32-35.)

A. Count I: Prudence, Monitoring, Loyalty, and Acting in

Accordance with Plan Documents and Instruments

Count I alleges Defendants violated ERISA by breaching

their fiduciary duties of (1) prudence, (2) monitoring,

(3) loyalty, and (4) obligation to act in accordance with plan

documents and instruments. (Compl. (Doc. 1) ¶¶ 188-208 (citing

29 U.S.C. § 1104(a)(1)(A)-(B), (D)).) These “fiduciary

obligations of the trustees to the participants and

beneficiaries of [an ERISA] plan are . . . the highest known to

the law.” Tatum v. RJR Pension Inv. Comm., 761 F.3d 346, 356

(4th Cir. 2014) (alterations in original) (internal quotation

marks omitted) (quoting Donovan v. Bierwirth, 680 F.2d 263, 272

n.8 (2d Cir. 1982)). Each fiduciary duty is addressed in turn.

1. Duty of Prudence

ERISA’s duty of prudence requires that plan fiduciaries act

“with the care, skill, prudence, and diligence under the

circumstances then prevailing that a prudent man acting in a like

capacity and familiar with such matters would use in the conduct

of an enterprise of a like character and with like aims.” 29

U.S.C. § 1104(a)(1)(B). “The primary question is whether the

fiduciary, ‘at the time [it] engaged in the challenged

transactions, employed the appropriate methods to investigate

the merits of the investment’” or the merits of a third-party

service provider’s proposed fees and services. Reetz v. Lowe’s

Cos., Inc., Civil Action No. 5:18-CV-00075-KDB-DCK, 2021 WL

4771535, at *53 (W.D.N.C. Oct. 12, 2021) (alteration in

original) (quoting DiFelice v. U.S. Airways, Inc., 497 F.3d 410,

420 (4th Cir. 2007)).

In Count I, Plaintiffs allege Defendants imprudently failed

to (1) limit MassMutual’s fees, (2) offer funds utilizing the

most affordable share classes, and (3) offer passive funds.

(Compl. (Doc. 1) ¶¶ 191, 200.) Courts in this circuit have found

similar factual allegations sufficiently alleged ERISA

imprudence claims. See e.g., Jones v. Coca-Cola Consol., Inc.,

No. 3:20-cv-00654-FDW-DSC, 2021 WL 1226551, at *4 n.3 (W.D.N.C.

Mar. 31, 2021) (“Alleging that excessively high fees were

charged to plan participants can independently constitute a

breach of one’s dut[y] of prudence . . . under ERISA.”); Kruger

v. Novant Health, Inc., 131 F. Supp. 3d 470, 478 (M.D.N.C. 2015)

(“[The] present [p]laintiffs have stated enough of a claim for

breach of fiduciary duty to survive Defendants’ motion to

dismiss based on the imprudent retention of the retail class

funds when institutional class shares were available.”); Dearing

v. IQVIA, Inc., No. 1:20CV574, 2021 WL 4291171, at *2 (M.D.N.C.

Sept. 21, 2021) (declining to dismiss the plaintiffs’

allegations that the “[d]efendants’ decision to add the Active

[fund] suite over the Index [fund] suite, and their failure to

replace the Active suite with the Index suite at any point

during the Class Period, constitute[d] a glaring breach of their

fiduciary duties.”).

a. Failure to Limit MassMutual’s Fees

Plaintiffs allege that MassMutual, the Plan’s recordkeeper,

“received handsome compensation, much higher than what Shoe Show

could have easily negotiated, which ultimately the Plan’s

participants, including the class representatives, paid.”3

(Compl. (Doc. 1) ¶¶ 93, 96; accord id. ¶¶ 191(C), 191(E),

200(C).) MassMutual was compensated via a practice known as

“revenue sharing,” meaning it received “asset based

compensation, not fixed dollar or per head pay.” (Id. ¶¶ 59,

101.) Therefore, when the Plan’s “assets grew, so did

MassMutual’s effective earnings even though its duties and

accounting costs did not grow in proportion.” (Id. ¶ 102.)

3 Plaintiffs level similar overpayment allegations against

LPL Financial (Id. ¶¶ 109–11.)

Plaintiffs argue that Defendants should have used “the

Plan’s increasing size and long-standing relationship [with

MassMutual] as bargaining power to reduce the participants’

recordkeeping fee.” (Id. ¶ 104.) Specifically, Defendants

“should have required MassMutual to charge a flat fee, such as

$60 at the most, for each participant to reflect the actual cost

of recordkeeping.” (Id. ¶ 106.) Defendants discarding revenue

sharing would be in accordance “with the consistent [industry]

trend of not utilizing investment revenue to pay fees.” (Id.

¶ 158(A) (internal quotation marks omitted) (quoting the

Deloitte Defined Contribution Benchmarking Survey, 2019

edition)4.) At a minimum, Plaintiffs argue Defendants should have

hired a consultant to benchmark the Plan’s administrative costs

or “engaged in an objective, competitive process to hire the

lowest cost” recordkeeper. (Id. ¶¶ 197-98.)

4 Defendants argue that Plaintiffs’ references to the

Deloitte and NEPC publications are “inapposite” because the

plans those publications studied were significantly larger, had

higher participant account balances, and greater employee

participation than the Plan here. (Defs.’ Br. (Doc. 12) at 34

n.6.) Nevertheless, when adjudicating Defendants’ Motion to

Dismiss, this court must liberally construe “the [C]omplaint,

including all reasonable inferences therefrom,” in Plaintiffs’

favor. Est. of Williams-Moore, 335 F. Supp. 2d at 646.

Therefore, this court reserves judgment as to whether the

publications’ survey samples are too dissimilar from the Plan to

serve as useful benchmarks.

“A plaintiff raising an excessive fee claim under ERISA

must allege ‘that fees were excessive related to the services

rendered.’” Kendall v. Pharm. Prod. Dev., LLC, No. 7:20-CV-71-D,

2021 WL 1231415, at *11 (E.D.N.C. Mar. 31, 2021) (quoting Young

v. Gen. Motors Inv. Mgmt. Corp., 325 F. App’x 31, 33 (2d Cir.

2009)). Moreover, a “plan fiduciary’s failure to reduce

recordkeeping costs through negotiation or the solicitation of

competing bids may in some cases breach the duty of prudence.”

Id. at *10 (internal quotation marks omitted) (quoting Silva v.

Evonik Corp., CV No. 20-2202, slip op. at 8 (D.N.J. Dec. 30,

2020) (unpublished)).

Plaintiffs have sufficiently and plausibly alleged that

MassMutual’s fees were excessive compared to the services it

provided. (E.g., Compl. (Doc. 1) ¶¶ 94, 102 (“Defendants allowed

excessive compensation to be paid to providers such as . . .

MassMutual over the years” because when the Plan’s “assets grew,

so did MassMutual’s effective earnings even though its duties

and accounting costs did not grow in proportion.”).) Likewise,

Plaintiffs have sufficiently and plausibly alleged that

Defendants failed to reduce recordkeeping costs via negotiation

or solicitation of competing bids. (E.g., id. ¶¶ 93, 191(E)

(Defendants never “negotiat[ed] with service providers to lower

costs” or “put the Plan’s recordkeeping contract up for bid to

cause MassMutual to competitively bid for Shoe Show’s work.”);

accord e.g., id. ¶ 198.)

Defendants argue that the Plan’s asset pool was too small

to confer enough bargaining power for Defendants to renegotiate

MassMutual’s revenue sharing fee arrangement. (Defs.’ Br.

(Doc. 12) at 27-28.) They stress that the Plan’s approximately

$40 million asset pool makes it of “relatively small size,”

compared to what is usually seen in ERISA cases. (Id. at 19, 28;

Defs.’ Reply (Doc. 22) at 13-14 (“Shoe Show’s Plan is only 3%

the size of Novant’s plan, and less than 0.5% the size of Wal-

Mart’s plan. Plaintiffs’ implication that Shoe Show similarly

enjoys the bargaining leverage of a Novant or Wal-Mart is not a

‘close call’—it is implausible on its face. Moreover, none of

the other cases cited in Plaintiffs’ brief involved 401(k) plans

near as small as Shoe Show’s Plan. The smallest plan at issue

was $500 million, still more than ten times larger than Shoe

Show’s Plan.” (internal citations omitted)).)

Defendants’ argument raises factual questions and is thus

premature. While the Plan’s asset pool may be significantly

smaller than those in other cases, at this preliminary juncture

it cannot be determined that—as a matter of law—a $40 million

asset pool fails to confer a plan with sufficient bargaining

power to renegotiate a recordkeeper’s revenue sharing fee

structure. At the motion to dismiss stage, this court must

accept the Complaint’s factual allegations (not Defendants’

allegations) as true. Iqbal, 556 U.S. at 678. The Complaint

alleges that the Plan is “relatively large,” bestowing upon

Defendants significant “bargaining power to reduce the

participants’ recordkeeping fee.” (Compl. (Doc. 1) ¶¶ 104, 106.)

Given that these allegations must be taken as true, this court

declines at this time to find that the Plan’s asset pool was too

small for Defendants to negotiate lower fees from MassMutual.

Defendants also argue that even if the Plan was large

enough to allow MassMutual’s fee arrangement to be renegotiated,

the Plan would not have been better served by replacing revenue

sharing with a flat fee per participant structure. (Defs.’ Br.

(Doc. 12) at 27.) Defendants insist that because Plaintiffs have

failed to allege “that any fees not paid through revenue sharing

would have been paid instead by Shoe Show,” “abandoning revenue

sharing would . . . [simply] redirect administrative costs to be

borne by the Plan.” (Id. at 25, 27.) This argument does not

rebut Plaintiffs’ imprudence claim. Insofar as that claim,

Plaintiffs do not allege that forgoing revenue sharing would

necessarily shift the fee burden to Defendants from participants

or the Plan itself. Rather, Plaintiffs acknowledge that even if

revenue sharing is replaced by direct fees, the Plan may still

be responsible for those fees. (Compl. (Doc. 1) ¶¶ 54-55 (“Fixed

dollar or per head compensation occurs when a recordkeeper or

custodian is paid a certain, set amount per participant . . . .

[These] expenses can be paid . . . directly by the plan[.]”).)

Nonetheless, Plaintiffs still argue that revenue sharing should

be discarded because they would ultimately be better served by a

flat per participant direct fee structure. (Id. ¶¶ 106, 200(B).)

Plaintiffs allege that the Plan’s current revenue sharing

arrangement charges participants $219 in annual fees, a

“windfall” for MassMutual given that the industry fee average is

far lower. (Id. ¶¶ 97, 106.) Plaintiffs also assert that among

plan fiduciaries there is a “consistent trend of not utilizing

investment revenue to pay fees.” (Id. ¶ 158(A) (internal

quotation marks omitted) (quoting the Deloitte Defined

Contribution Benchmarking Survey, 2019 edition); accord id.

¶ 57.) Given these allegations—which must be taken as true at

this juncture, Iqbal, 556 U.S. at 678—Plaintiffs’ claim that

Defendants imprudently failed to require “MassMutual to charge a

flat fee, such as $60 at the most, for each participant to

reflect the actual cost of recordkeeping,” (id. ¶ 106), passes

“across the plausibility line, and the court allows

[P]laintiffs’ claim of imprudence regarding recordkeeping fees

to proceed.” Kendall, 2021 WL 1231415, at *10-11 (allowing an

ERISA excessive recordkeeping fee imprudence claim to proceed

where a revenue sharing arrangement allegedly cost participants

between $54 and $143 annually).

b. Failure to Offer Funds Utilizing the Most

Affordable Share Classes

Plaintiffs allege that “Defendants continually imprudently

limited their participants’ choices to high-cost retail share

classes of funds.” (Compl. (Doc. 1) ¶ 115; accord id. ¶ 191(A).)

Plaintiffs explain that “[t]he only difference between retail

and institutional funds is that the institutional funds are less

expensive to the participants.” (Id. ¶ 114 (emphasis in

original).) Plaintiffs maintain that Defendants “did not even

ask MassMutual for institutional funds,” even though MassMutual

would be “willing, particularly given the size of the Plan, to

offer institutional funds and even to waive minimum purchase

amounts for institutional funds when asked.” (Id. ¶ 118.)

While Plaintiffs acknowledge that in 2018 “Defendants

replaced some share classes in the Plan with slightly less

costly classes,” Plaintiffs assert these new classes were still

“not the lowest cost options”; rather, “they were also

unnecessarily expensive and detrimental to the Plan’s

participants.” (Id. ¶ 133.) Plaintiffs question why when

Defendants replaced these share classes, they did not choose

funds with even cheaper classes that the Plan qualified for.

(Id. ¶¶ 134-42.) Defendants’ failure to “pick up the phone and

call MassMutual and demand the exact same fund with a lower cost

structure” “caused inferior performance for the Plan . . . as

well as the participants en masse.” (Id. ¶ 143.)

In Tibble v. Edison International, 575 U.S. 523 (2015), the

plaintiffs made similar allegations to Plaintiffs here. The

Tibble plaintiffs alleged that their plan fiduciaries had

offered “higher priced retail-class mutual funds as Plan

investments when materially identical lower priced

institutional-class mutual funds were available.” Id. at 525–26.

In remanding the case for further findings, the Supreme Court

held that the plaintiffs had identified a potential violation

with respect to these funds because “[a] plaintiff may allege

that a fiduciary breached the duty of prudence by failing to

properly monitor investments and remove imprudent ones.” Id. at

530. But importantly, “‘merely alleging that a plan offered

retail rather than institutional share classes is insufficient

to carry a claim for fiduciary breach.’ In analyzing alleged

lower cost alternatives, a court should consider ‘whether the

[more expensive] class share offered other benefits that may

have offset any additional costs.’” Kendall, 2021 WL 1231415, at

*7 (internal citations omitted) (quoting Marks v. Trader Joe’s

Co., No. CV19-10942 PA (JEMx), 2020 WL 2504333, at *8 (C.D. Cal.

Apr. 24, 2020)). If there are no other benefits, but instead the

lower cost alternatives are identical, then a plausible breach

of a plan fiduciary’s duty of prudence has been alleged. Jones,

2021 WL 1226551, at *5 (“Plaintiffs’ factual allegations

regarding Defendants’ alleged failure to utilize cheaper

investments that offer identical underlying investments [such as

cheaper share classes] sufficiently states a claim for breach of

fiduciary duty.”).

Here, Plaintiffs have alleged sufficient facts that

Defendants breached their duty of prudence by offering funds

featuring overly expensive retail share classes. Plaintiffs have

alleged that Defendants offered funds with share classes that

are composed of “the exact same” underlying investments as funds

with “lower cost structure[s].” (Compl. (Doc. 1) ¶ 143.) These

allegations plausibly suggest that Defendants have failed to

properly monitor the Plan’s investments and remove imprudent

funds. Tibble, 575 U.S. at 528. Defendants have not provided any

credible explanation justifying the more expensive share

classes. Defendants argue that the Plan’s more expensive retail

share classes are “meaningfully different” from the less

expensive classes because the cheaper “institutional share

classes do not enable Plan administrative expenses to be paid

through revenue sharing.” (Defs.’ Br. (Doc. 12) at 20-21

(emphasis in original).) But, per Plaintiffs’ allegations,

revenue sharing is not a benefit—it is a detriment, see supra

Part IV.A.1.a, and at the motion to dismiss stage Plaintiff’s

allegations are assumed to be true. Defendants also maintain

that the Plan was too small “to negotiate for less expensive

institutional share classes.” (Defs.’ Br. (Doc. 12) at 20.) This

argument fails for the same reason it failed regarding

Defendants’ ability to negotiate lower recordkeeping fees. See

supra Part IV.A.1.a. It raises a factual dispute that at this

juncture must be decided in favor of Plaintiffs’ averments to

the contrary. Therefore, Plaintiffs plausible allegations that

Defendants selected unnecessarily expensive share classes for

the Plan suffice to state an imprudence claim.

c. Failure to Offer Passively Managed Funds

Plaintiffs allege that “Defendants had the option and

ability to obtain passive . . . funds [also known as index

funds], which would be unequivocally better for the

participants, but they failed to do so.” (Id. ¶ 129; accord id.

¶¶ 79, 191(B).) Instead, “Defendants only offer[ed] actively

managed funds in the plan,” (id. ¶ 124), which “are typically

much more expensive than index funds,” (id. ¶ 81). Plaintiffs

question whether this added expense is worthwhile, using one of

the Plan’s underperforming active funds to support the

proposition that “80% or more of active managers across all

categories underperformed their respective benchmarks.” (Id.

¶¶ 80, 151 (internal quotation marks omitted) (quoting S&P Dow

Jones Scorecard).) Given this persistent underperformance,

Plaintiffs allege that plan fiduciaries are increasingly turning

to index funds. (Id. ¶ 159(C).)

While this court and others in this circuit have allowed

imprudence allegations based on the use of active rather than

passive funds to survive motions to dismiss, to do so a

plaintiff must identify passive funds that can serve as a

meaningful benchmark to a plan’s active funds. See e.g.,

Dearing, 2021 WL 4291171, at *2 (alleging that the passive funds

the defendants should have selected and the active funds the

defendants had selected were “similar in many ways—they [we]re

offered by the same investment management company, they share[d]

a management team, and appear[ed] to have near identical asset

allocation strategies”); Kendall, 2021 WL 1231415, at *9

(holding that if “actively-and passively-managed funds can be

compared, [a] complaint . . . [must] contain a meaningful

benchmark”).

Here, Plaintiffs have failed to identify a meaningful

benchmark that could support the Complaint’s conclusory

allegations. They simply broadly assert that replacing the

Plan’s costly active funds with cheaper passive funds would be

“unequivocally better” for plan participants, (Compl. (Doc. 1)

¶ 128), but Plaintiffs never specify exactly which particular

passive funds should be added or why those funds can serve as

meaningful benchmarks to the Plan’s active funds. In lieu of

such allegations, Plaintiffs have failed to plead sufficient

facts to plausibly allege Defendants’ failure to offer passive

funds was imprudent.

2. Duty to Monitor

“A claim for the failure to monitor derives from and

depends on an ‘underlying breach of fiduciary duty cognizable

under ERISA.’” Kendall, 2021 WL 1231415, at *11 (quoting In re

Duke Energy ERISA Litig., 281 F. Supp. 2d 786, 795 (W.D.N.C.

2003)). Thus, the “duty to monitor claim is only as broad as the

surviving prudence claim and is otherwise dismissed.” Id. at *12

(internal quotation marks omitted) (quoting Cunningham v.

Cornell Univ., No. 16-cv-6525 (PKC), 2017 WL 4358769, at *11

(S.D.N.Y. Sept. 29, 2017)). Because this court has found

Plaintiffs’ excessive fee and share class allegations state

plausible imprudence claims, supra Parts IV.A.1.a-b, Plaintiffs’

monitoring claim survives as well. The duty to monitor requires

that plan fiduciaries “‘systematic[ally] conside[r] all the

investments . . . at regular intervals’ to ensure that they are

appropriate.” Tibble, 575 U.S. at 529 (quoting A. Hess, G.

Bogert, & G. Bogert, Law of Trusts and Trustees § 684, at 145–46

(3d ed. 2009)). In short, “a fiduciary is required to conduct a

regular review of its investment.” Id. at 528.

Plaintiffs allege Defendants breached this duty “to monitor

and control investment and administrative costs on an ongoing

basis” because Defendants failed to take steps “such as hiring a

consultant to conduct a benchmarking study” and “conduct[ing] a

prudent and objective review of the Plan’s investments.” (Compl.

(Doc. 1) ¶¶ 200(E), 204.) Defendants respond that this alleged

failure to monitor is contradicted by the Plan’s Form 5500

filings and Plaintiffs’ own allegations, which show that

Defendants periodically changed the Plan’s funds—evincing

adequate monitoring. (Defs.’ Br. (Doc. 12) at 30-31.) But

Plaintiffs’ factual allegations about these changes cast them in

a different light. Plaintiffs argue that it was not until 2018

that Defendants replaced several expensive share classes with

cheaper identical classes, suggesting that Defendants must not

have been “monitor[ing] the fee structures of the Plan until

that time.” (Compl. (Doc. 1) ¶ 152.) Thus, for the first four

years of the class period, (id. ¶ 9), Defendants allegedly

failed to monitor the Plan. Because when adjudicating motions to

dismiss this court makes “all reasonable inferences . . . in the

plaintiff’s favor,” Est. of Williams-Moore, 335 F. Supp. 2d at

646, this court must defer to Plaintiffs’ description of the

2018 Plan changes. Therefore, Plaintiffs have alleged sufficient

facts to state a plausible monitoring claim.

3. Duty of Loyalty

ERISA’s duty of loyalty requires that a plan fiduciary

“discharge his duties with respect to a plan solely in the

interest of the participants and beneficiaries and . . . for the

exclusive purpose of: (i) providing benefits to participants and

their beneficiaries; and (ii) defraying reasonable expenses of

administering the plan.” 29 U.S.C. § 1104(a)(1)(A). “To state a

claim for breach of the duty of loyalty, plaintiffs must

plausibly allege that the [defendants] acted with the purpose of

benefitting itself or a third party.” Kendall, 2021 WL 1231415,

at *11. These allegations “must do more than simply recast

purported breaches of the duty of prudence as disloyal acts.”

Id. (internal quotation marks omitted) (quoting Sacerdote v.

N.Y. Univ., No. 16-cv-6284 (KBF), 2017 WL 3701482, at *5

(S.D.N.Y. Aug. 25, 2017)) (“Specifically, prudence claims

regarding recordkeeping may not simply be repackaged as a

disloyalty claim without additional allegations.”). Rather,

disloyalty allegations must “must contain independent facts

‘suggesting [that] Defendant benefitted, financially or

otherwise, from any decisions related to the Plan[] or engaged

in disloyal conduct in order to benefit itself or someone other

than the Plan[’s] beneficiaries.’” Id. (alterations in original)

(quoting Nicolas v. Trs. of Princeton Univ., No. 17-3695, 2017

WL 4455897, at *3 (D.N.J. Sept. 25, 2017)).

Plaintiffs allege Defendants breached their duty of loyalty

by “[f]ailing to act ‘solely and exclusively’ for the benefit of

participants by selecting and retaining investments in the Plan

. . . because they would generate more revenue for MassMutual

and therefore, the Defendants would not receive an invoice for

recordkeeping.” (Compl. (Doc. 1) ¶ 200(A).) Plaintiffs assert

Defendants’ desire to relieve pressure off themselves to pay

MassMutual’s fees was Defendants’ motivation in selecting the

Plan’s higher price active funds and share classes. (Id. ¶ 127.)

This is rank speculation and does not raise more than a

“sheer possibility,” Iqbal, 556 U.S. at 678, that Defendants

actually had these disloyal motivations, see, e.g., Brotherston

v. Putman Invests., LLC, 907 F.3d 17, 40-41 (1st Cir. 2018) (To

establish disloyalty it must be shown that a “fiduciary’s

operative motive was to further its own interests.” (internal

quotation marks omitted) (quoting Ellis v. Fid. Mgmt. Tr. Co.,

883 F.3d 1, 6 (1st Cir. 2018))). Plaintiffs have failed to

provide any “independent facts” or “additional allegations,”

Kendall, 2021 WL 1231415, at *11, to support the disloyalty

claim and distinguish it from the imprudence claim. Instead,

Plaintiffs “simply recast,” id., the facts underlying the

imprudence claim—namely, that Defendants offered unnecessarily

expensive active funds and share classes—and speculate that

these facts make it “possible” Defendants “potentially had an

incentive” to “push costs to its workers” to “relieve[] pressure

on the recordkeeper to charge Shoe Show fees directly.” (Compl.

(Doc. 1) ¶¶ 120-21, 127.) These allegations concerning

Defendants’ “possible” and “potential” motives, (id. ¶¶ 120,

127), do not rise to the level of plausibility necessary to

state a disloyalty claim.

Further undermining the disloyalty claim is that Plaintiffs

never allege Defendants would have necessarily paid any

increased fees that MassMutual would have demanded if the Plan

transitioned to cheaper share classes or passive funds. Contra

Kruger, 131 F. Supp. 3d at 479 n.9 (The plaintiffs alleged the

defendants “repeatedly represented that the administrative costs

of the Plan would not be paid by the Plan itself,” thus

indicating that the defendants would pay any increased fees

imposed by the recordkeeper.). Instead, it seems just as likely—

perhaps more so—that Defendants would push those new fees back

on participants by having the Plan pick up the increased tab.

Plaintiffs expressly acknowledge that this is an option by

explaining that ERISA plan administrative expenses do not have

to be either “paid directly by employers” or paid via “revenue

sharing,” but rather can also be paid “directly by the plan.”

(Compl. (Doc. 1) ¶ 55.) Consequently, there is no reason to

believe that in this case Defendants were selecting more

expensive funds to relieve pressure off themselves to have to

pay MassMutual’s fees. Even if Defendants had selected cheaper

funds and as a result MassMutual demanded greater fees to make

up for the lost revenue, the Complaint fails to plausibly allege

that those new fees would be shouldered by Defendants as opposed

to the Plan itself. Therefore, Plaintiffs have failed to plead

sufficient facts to state a plausible disloyalty claim, and the

portions of Count I that attempt to assert such a claim will be

dismissed.

4. Duty to Act in Accordance with Plan Documents and

Instruments

ERISA requires that plan fiduciaries act “in accordance

with the documents and instruments governing the plan.” 29

U.S.C. § 1104(a)(1)(D). “ERISA’s ‘statutory scheme . . . is

built around reliance on the face of written plan documents,’”

Jordan v. MEBA Pension Tr., No. ELH-20-3649, 2021 WL 4148460, at

*9 (D. Md. Sept. 10, 2021) (alteration in original) (quoting

U.S. Airways, Inc. v. McCutchen, 569 U.S. 88, 100 (2013)), and

thus plan fiduciaries must administer the Plan in accordance

with the “literal and natural meaning” of Plan documents’ “plain

language,” United McGill Corp. v. Stinnett, 154 F.3d 168, 172

(4th Cir. 1998) (internal quotation marks omitted) (quoting

Health Cost Controls v. Isbell, 139 F.3d 1070, 1072 (6th Cir.

1997)).

Plaintiffs insist that “Defendants violated their own plan

documents” by failing to adhere to “MassMutual’s investment

policy.” (Compl. (Doc. 1) ¶ 148; accord id. ¶¶ 149, 168-69,

204.) Plaintiffs’ Complaint, after alleging that the Plan’s

investment options were too expensive and insufficiently

diversified, recites MassMutual’s investment policy and then

declares—in rather conclusory fashion—that “Defendants’ actions

did not meet this policy.” (Id. ¶ 169.) Thus, “Defendants

violated . . . [t]he ERISA statute [which] requires fiduciaries

to act ‘in accordance with the documents and instruments

governing the plan.’” (Id. ¶ 149 (quoting 29 U.S.C. §

1104(a)(1)(D)).)

These allegations amount to “[t]hreadbare recitals of the

elements of a cause of action, supported by mere conclusory

statements.” Iqbal, 556 U.S. at 678. Moreover, it appears that

MassMutual’s investment policy, which Defendants have allegedly

violated, is simply a “recommended” policy. (Compl. (Doc. 1)

¶ 168.) Indeed, the policy uses non-binding language. (Id. ¶ 169

(“The policy states: ‘The Plan intends to provide . . . . Major

asset classes to be offered may include . . . .’”) (emphases

added); id. ¶ 148(A) (“The particular investments should pursue

the following standards . . . .”) (emphasis added).)

However, this court remains mindful

of the practical context of ERISA litigation. No

matter how clever or diligent, ERISA plaintiffs

generally lack the inside information necessary to

make out their claims in detail unless and until

discovery commences. Thus, while a plaintiff must

offer sufficient factual allegations to show that he

or she is not merely engaged in a fishing expedition

or strike suit, [courts] must also take account of

their limited access to crucial information. If

plaintiffs cannot state a claim without pleading facts

which tend systemically to be in the sole possession

of defendants, the remedial scheme of the statute will

fail, and the crucial rights secured by ERISA will

suffer. These considerations counsel careful and

holistic evaluation of an ERISA complaint’s factual

allegations before concluding that they do not support

a plausible inference that the plaintiff is entitled

to relief.

Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 598 (8th Cir.

2009); accord Reetz v. Lowe’s Cos., Inc., Civil Action No. 5:18-

CV-00075-KDB-DCK, 2019 WL 4233616, at *3 (W.D.N.C. Sept. 6,

2019). Plaintiffs’ failure to sufficiently state a plausible

claim for failure to act in accordance with plan documents and

instruments may possibly be a result of this “limited access to

crucial information . . . which tend[s] systemically to be in

the sole possession of defendants.” Braden, 588 F.3d at 598.

Plaintiffs seem to admit as much; they state that “[o]nce

Plaintiffs obtain the Plan’s Adoption Agreement,” and other Plan

documents, “a more formal and precise list of . . . breaches

can be asserted.” (Compl. (Doc. 1) ¶ 202.)

Nevertheless, despite ERISA litigation’s inherent

information asymmetries, pursuant to Iqbal, 556 U.S. at 678,

this court simply cannot allow this “threadbare” and

“conclusory” claim to proceed. Dismissal of Plaintiffs’ failure

to act in accordance with plan documents and instruments claim

is especially warranted given that the Complaint itself

acknowledges that the Plan document Defendants allegedly

violated, and the terms contained therein, were non-binding.

(See Compl. (Doc. 1) ¶¶ 148(A), 168.) Therefore, Plaintiffs have

not pled sufficient facts to state a plausible failure to act in

accordance with plan documents and instruments claim, and the

portions of Count I that attempt to assert such a claim will be

dismissed.

B. Count II: Diversification

Count II alleges that Defendants imprudently failed to

diversify the Plan’s funds.5 (Id. ¶¶ 209-17.) ERISA requires that

plan fiduciaries “diversify[] the investments of the plan so as

to minimize the risk of large losses.” 29 U.S.C.

§ 1104(a)(1)(C). A failure to diversify can lead to excessive

correlation between the plan’s funds, causing funds that “are in

the same sector . . . to rise and fall together.” Stegemann v.

Gannett Co., 970 F.3d 465, 478 (4th Cir. 2020). “[T]he essence

of diversification is that a diversified portfolio is superior

to a non-diversified portfolio because a diversified portfolio

can achieve the same expected return as an un-diversified

portfolio, but the diversified portfolio will be less risky.”

Id. at 481.

Plaintiffs allege that the portfolio of funds “Defendants

selected provided little diversification among the equity

funds.” (Compl. (Doc. 1) ¶ 167.) For example, the Plan “lacked a

5 Count II advances both an ERISA imprudence claim and an

ERISA diversification claim. (Compl. (Doc. 1) at 59 (“COUNT II

VIOLATION OF ERISA §§ 404(a)(1)(B) and (C) BREACH OF DUTIES OF

PRUDENCE AND DIVERSIFICATION”).) ERISA’s structure intertwines

these claims. Stegemann, 970 F.3d at 473 n.7 (“Between

§ 1104(a)(1)(B) and § 1104(a)(1)(C), ERISA has a somewhat

circular structure. Prudence includes diversification, and

diversification references prudence.”). Given this “overlap,”

id., this court’s analysis of Count II appropriately applies to

both claims.

basic emerging market fund or real estate fund . . . that would

have greatly helped participants diversify.” (Id. ¶ 214.)

Defendants insist this lack of diversity led to high levels of

correlation between the Plan’s equity funds, (id. ¶ 166),

leaving participants “unable to maintain a good portfolio,” (id.

¶ 215).

Plaintiffs have failed to plead sufficient facts to state a

plausible diversification claim. That the Plan lacked certain

sector-specific funds, such as an emerging market or real estate

fund, (id. ¶ 214), does not render the Plan undiversified

because ERISA “does not demand that plans offer . . . any []

particular type of investment.” Reetz, 2021 WL 4771535, at *51.

Plaintiffs themselves acknowledge “that ‘the Plan has offered

over twenty investment options,’” (Pls.’ Br. (Doc. 20) at 35-36

(quoting Defs.’ Br. (Doc. 12) at 12)), and do not contest that

the Plan’s Form 5500s show this includes

(1) a suite of lifestyle funds, each of which is “one-

stop shopping” to invest in a diversified mix of

underlying funds with exposure to bonds and equity in

a range of geographies, sectors, and market

capitalizations; (2) a balanced fund, which invests

roughly 60/40 in equities and bonds; (3) a suite of

target-date funds, each of which is a “set it and

forget it” dynamic portfolio of diversified

investments in underlying bond and equity funds in a

variety of geographies, sectors, and market

capitalizations, the allocation of which becomes more

conservative over time through retirement; (4) an

array of funds allowing for non-U.S. geographic

investment diversity, including developing and

emerging markets; (5) an array of funds allowing for

diversity based on market capitalization, including

small- and mid-cap and large-cap options; and (6) a

variety of funds offering diversified cash and cash

equivalency exposures, including diversified bond

funds and a stable value fund.

(Defs.’ Br. (Doc. 12) at 38-39 (citing the Plan’s Form 5500s,

Exs. A–F (Docs. 12-1 – 12-6)).) Thus, Plaintiffs’ insistence

that the Plan was undiversified, among equity funds or

otherwise, is a bare allegation made implausible by

uncontroverted public records.

Finally, there is no legal basis for Plaintiffs’ allegation

that Defendants breached their duty to diversify by offering

equity funds that were too correlated. In this circuit, the

correlation theory of diversification has been applied only to

plans offering multiple funds that are solely invested in a

single company’s stock. Stegemann, 970 F.3d at 478; Tatum, 855

F.3d at 566–67. Because the Plan here did not contain any of

these so-called “single-stock” funds, there is no legal

precedent for finding its equity funds too correlated—even

taking as true Plaintiffs’ allegations that “Defendants’ equity

(stock) fund[s]” feature a “>90% correlation.” (Compl. (Doc. 1)

¶ 166.) Therefore, Count II will be dismissed because it lacks

sufficient facts to state a plausible diversification claim.

C. Count III: Prohibited Transactions

ERISA prohibits plan fiduciaries from entering transactions

with a “party in interest,” which includes “a person providing

services to such plan.” 29 U.S.C. §§ 1002(14)(B), 1106(a).

Specifically, the statute requires that

(1) A fiduciary with respect to a plan shall not

cause the plan to engage in a transaction, if he

knows or should know that such transaction

constitutes a direct or indirect—

. . . .

(C) furnishing of . . . services . . . between

the plan and a party in interest;

(D) transfer to, or use by or for the benefit of

a party in interest, of any assets of the

plan.

Id. § 1106(a)(1). These prohibitions “supplement[] the

fiduciary’s general duty of loyalty to the plan’s beneficiaries

by categorically barring certain transactions deemed ‘likely to

injure the pension plan.’” Harris Tr. & Sav. Bank v. Salomon

Smith Barney, Inc., 530 U.S. 238, 241-42 (2000) (internal

citation omitted) (quoting Comm’r v. Keystone Consol. Indus.,

Inc., 508 U.S. 152, 160 (1993)). Importantly, however, a plan

fiduciary may prove a given transaction with a party in interest

is exempted from these prohibitions if it raises the affirmative

defense that the transaction was “necessary for the . . .

operation of the plan,” and “no more than reasonable

compensation [wa]s paid therefor.” 29 U.S.C. § 1108(b)(2)(A);

see also Sims v. BB&T Corp., No. 1:15-CV-732, 2018 WL 3128996,

at *11 (M.D.N.C. June 26, 2018) (“The defendants bear the burden

of establishing an exemption to a prohibited transaction.”);

Braden, 588 F.3d at 600-01 (finding burden on the defendants to

establish “reasonable compensation” exemption to a prohibited

transaction claim).

Plaintiffs allege that the Plan’s revenue sharing with

MassMutual constituted a prohibited transaction with a party in

interest. (Compl. (Doc. 1) ¶¶ 105, 219, 223.) Plaintiffs assert

that the revenue sharing fees “not only were not ‘necessary for

operation of the Plan’” but also featured “excessive

compensation constitut[ing] a direct or indirect furnishing of

services between the Plan and a party in interest for more than

reasonable compensation and a transfer of assets of the Plan to

a party in interest.” (Id. ¶ 222.)

Defendants do not contest that MassMutual is a party in

interest or that the revenue sharing arrangement falls within

the definition of a prohibited transaction; rather, Defendants

argue that the revenue sharing fees are exempted from ERISA’s

prohibited transaction provisions because “Plaintiffs have not

plausibly alleged that the compensation to services providers is

‘more than reasonable.’” (Defs.’ Br. (Doc. 12) at 33 (citing 29

U.S.C. § 1108(b)(2)).)

This argument fails. As a preliminary matter, Plaintiffs

have plausibly alleged that MassMutual’s fees are more than

reasonable. See supra Part IV.A.1.a. But such allegations are

not necessary for Plaintiffs to state a prohibited transaction

claim. All that is required are allegations that Defendants

caused the Plan to enter a transaction with a party in interest.

29 U.S.C. § 1106(a)(1); see Braden, 588 F.3d at 600-02 (In

stating a prohibited transaction claim, a plaintiff “does not

bear the burden of pleading facts showing that the revenue

sharing payments were unreasonable in proportion to the services

rendered.”). The alleged prohibited transaction’s amount only

becomes relevant when a defendant asserts the statutory

“reasonable compensation” exemption, an affirmative defense. See

Braden, 588 F.3d at 600-02 (“The statutory exemptions

established by § 1108 are defenses which must be proven by the

defendant.”); Sims, 2018 WL 3128996, at *11 (“The defendants

bear the burden of establishing an exemption to a prohibited

transaction.”).

This holds true even when, as here, a plaintiff’s

allegations explicitly address the reasonableness of the amount

of the allegedly prohibited transaction. Braden, 588 F.3d at 601

n.10 (The defendants argued that the plaintiff’s “allegations

‘put the [reasonable compensation] exemption in play’ and he

therefore must plead sufficient facts to show that the payments

were unreasonable. To the contrary, a plaintiff need not plead

facts responsive to an affirmative defense before it is

raised.”). Pursuant to Federal Rule of Civil Procedure 12(b),

only certain defenses—not including the reasonable compensation

exemption to an ERISA prohibited transaction claim—can be

asserted in a motion. All other defenses may only be asserted in

responsive pleadings. Fed. R. Civ. P. 12(b). This court is

presently adjudicating Defendants’ Motion to Dismiss, and thus

the case has yet to progress to the responsive pleading stage.

Consequently, as a matter of law, it is premature for Defendants

to assert the reasonable compensation affirmative defense.

Therefore, this court finds that Plaintiffs have sufficiently

stated a plausible prohibited transaction claim.

V. CONCLUSION

For the foregoing reasons, this court finds that Defendants’

Motion to Dismiss Plaintiffs’ Complaint, (Doc. 11), should be

granted in part and denied in part.

IT IS THEREFORE ORDERED that Defendants’ Motion to Dismiss

Plaintiffs’ Complaint, (Doc. 11), is GRANTED IN PART and DENIED

IN PART.

Defendants’ Motion to Dismiss is GRANTED IN PART and DENIED

IN PART as to Count I. The Motion to Dismiss is GRANTED as to the

portions of Count I that assert an imprudence claim based on a

failure to offer passively managed funds, a disloyalty claim, and

failure to act in accordance with plan documents and instruments

claim. The remainder of the claims contained in Count I-an

imprudence claim based on a failure to limit MassMutual’s fees,

an imprudence claim based on a failure to offer funds utilizing

the most affordable share classes, anda duty to monitor claim—

are not dismissed, and Defendants’ Motion to Dismiss is DENIED as

to those claims.

Defendants’ Motion to Dismiss is GRANTED IN FULL as to Count

Il.

Defendants’ Motion to Dismiss is DENIED IN FULL as to Count

Til.

IT IS FURTHER ORDERED that briefing on Plaintiffs’ Motion

for Class Certification and Appointment of Fitzgerald Law as

Class Counsel, (Doc. 16), shall proceed. The parties are hereby

instructed to propose a briefing schedule in their Federal Rule

of Civil Procedure 26(f) report to this court.

This the 25th day of February, 2022.

LW Win L.- ehir. xt.

□ United States District Judge

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