(ASPPA - American Society of Pension Professionals & Actuaries) -
FIDUCIARY RULES AND PRACTICES - The fiduciaries of yet another multi-billion dollar 401(k) has been sued for an alleged breach of its fiduciary duty—ostensibly for causing the plan to pay “unreasonable and excessive fees for recordkeeping and other administrative services”—including a new type of allegation.
This time it’s the fiduciary defendants of the $3.9 billion Laboratory Corporation of America Holdings Employees’ Retirement Plan challenged in a suit filed by current participant (and now plaintiff) Damian McDonald (one of 55,355 in the plan), who in turn is represented by Wenzel Fenton Cabassa PA[1], McKaly Law LLC, and Norris Law Firm PLLC.
As is standard verbiage in these suits, this one (McDonald v. Laboratory Corp. of Am. Holdings, M.D.N.C., No. 1:22-cv-00680, complaint 8/18/22) claims to have “drawn reasonable inferences regarding these processes”—based upon “several factors.” Among those factors, the suit cites as an example that the defendant (allegedly) did not adhere to fiduciary best practices to control Plan fees and expenses—and then argues that, “to the extent that Defendant made any prudent attempt to control the Plan’s expenses and to ensure the expenses were not excessive, Defendant employed flawed and ineffective processes, which failed to ensure that: (a) the fees and expenses charged to Plan participants were reasonable, and (b) that the compensation third-party service providers received from the plan for services provided were reasonable.”
Familiar Ground(s)
For the most part, the suit travels familiar ground(s), spending pages outlining the role(s) and responsibilities of ERISA plan fiduciaries, recounting the impact on retirement savings that even small differentials in fees can have, and outlining for the court the role(s) that various players (such as recordkeepers[2]) play in plan administration—as well as various fee and compensation structures (including the by now “typical” assertion that revenue-sharing isn’t “per se” illegal, before moving on to statements that convey just the opposite impression).
Ultimately, the suit—filed in the U.S. District Court for the Middle District of North Carolina—lays out what it maintains are “three related processes” that prudent fiduciaries have in place in order to “prudently manage and control a plan’s recordkeeping costs.” These include (a) tracking the expenses by “demanding documents that summarize and contextualize the recordkeeper’s compensation,” (b) identifying all fees, including “direct compensation and so-called “indirect” compensation through revenue sharing being paid to the plan’s recordkeeper,” and (c) “remain informed about overall trends in the marketplace regarding the fees being paid by similar plans, as well as the recordkeeping rates that are available in the marketplace.”
The latter this suit asserts—as others have previously—that this “will generally include conducting a request for proposal (“RFP”) process at reasonable intervals, and immediately if the plan’s recordkeeping expenses have grown significantly or appear high in relation to the general marketplace,” before going on to state that “an RFP should happen at least every three to five years as a matter of course, and more frequently if a plan experiences an increase in recordkeeping costs or fee benchmarking reveals the recordkeeper's compensation to exceed levels found in other, similar plans.”
Having stated that, the suit points out that Fidelity is the plan’s recordkeeper, and that it has been during the entire period in question, and that, “upon information and belief Defendant has failed to undertake a prudent RFP since 2016.” Moreover, the suit alleges that if the fiduciary defendants “…had undertaken a prudent RFP to compare Fidelity’s compensation received from the Plan with those of others in the marketplace, Defendant would have recognized that Fidelity’s compensation for recordkeeping services during the Class Period has been (and remains) unreasonable and excessive.”
New Ground(s)?
The suit does plow some new ground—explaining that “upon information and belief, Defendant agreed that anytime Plan participants deposit or withdraw money from their individual accounts, that the money will first pass through a Fidelity clearing account,” and that there had been an agreement that “Fidelity could keep all of the interest earned on Plan participant accounts while participant money is in Fidelity’s clearing account”—a “form of indirect compensation that Fidelity receives as the recordkeeper for the Plan,” but one that the fiduciary defendants had “…not tracked, monitored, negotiated, or disclosed the amount of compensation Fidelity receives from income it earns from float interest income on Participant money.” This, the suit alleges was a breach of fiduciary prudence in “…allowing Fidelity to receive compensation from Plan participants without even knowing the amount of compensation Fidelity collects from interest on participant money.”
Compare ‘Able’
That’s not the end of it, of course—the suit also claims (citing 5500 data) that the fees paid to Fidelity for recordkeeping ranged from $40.20/participant to $48.38/participant during a period in which the suit claims “plans of similar size pay no more than $25 per participant annually—or less….” The suit then, as others have before it, pointed out the example of Fidelity’s own 401(k) (which was also sued based on allegedly excessive fees) where the fee for those services ranged from $14-$21/participant.
According to this plaintiff then, “the key takeaway from this stipulation by Fidelity, the same recordkeeper utilized in this case, is simple: Fidelity served as Labcorp’s Plan’s recordkeeper during much of the same time period from the Moitoso case when Fidelity admitted (1) its own plan didn’t offer services broader or more valuable than any of the plans it served and, more importantly, (2) the value of those services ranged from between $14 to $17 per participant annually. Thus, Labcorp Plan fiduciaries should have negotiated for recordkeeping and administration fees of between $14 to $21 per Plan participant but failed to do so.”
The suit concludes, “the recordkeeping fees paid to Fidelity are far greater than recognized reasonable rates for a plan with nearly $3.9 billion in assets. Given the growth and size of the Plan’s assets during the Class Period, in addition to the general trend towards lower recordkeeping expenses in the marketplace as a whole, the Plan could have obtained recordkeeping services that were comparable to superior to the typical services that would have been provided to the Plan by Fidelity.”
In fact, the suit alleges that “the services that Fidelity provided were nothing out of the ordinary, and a prudent fiduciary would have observed the excessive fees being paid to the recordkeepers and taken corrective action. Defendant’s failure to monitor and control recordkeeping compensation cost the Plan millions of dollars during the Class Period and constituted a breach of the duty of prudence.”
We’ll see if this court is persuaded…
NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.
Footnotes
[1] While they might not yet be as familiar a name as some in the plaintiffs’ bar, they have been involved in a number of similar excessive fee suits, including those filed against Trader Joe’s (though it was subsequently dismissed), and the University of Miami (subsequently settled).
[2] They also make some stupefyingly gross generalizations as fact. Perhaps the most egregious: “Nearly all recordkeepers in the marketplace offer this range of services. The services are essentially the same. Many of the recordkeeping services can be provided by recordkeepers at very little cost.”
By Navin E. Adams, JD
August 25, 2022
