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‘Large’ Plan Targeted in Excessive Fee Suit

Fiduciary Rules and Practices

Another excessive fee suit—heavy on definitions and allegations, including a couple of potshots at the providers involved—has been filed in the U.S. District Court for the District of Minnesota.

Minnesota hospital system North Memorial Health Care has been charged (Keller v. N. Mem’l Health Care, D. Minn., No. 0:22-cv-01794, complaint 7/15/22) by participant-plaintiffs Kathleen Keller and Crystal Smith[1] with having “breached the duties they owed to the Plan, to Plaintiffs, and to the other participants of the Plan by, inter alia, (1) failing to objectively and adequately review the Plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; (2) maintaining certain funds in the Plan despite the availability of identical or similar investment options with lower costs and/or better performance histories; and (3) failing to control the Plan’s recordkeeping costs.”

At the plan’s fiscal year-end in 2020, the 401(k) Plan had more than $465 million in net assets under management, according to the suit (and about 5,800 participants)—assets which, according to the suit, gave it “as a large plan” (rather than the “mega” label often affixed to most of the larger plans targeted in these suits) “substantial bargaining power regarding the fees and expenses that were charged against participants’ investments.” That said, the plaintiffs here allege that the fiduciary defendants (both the plan committee and those who appointed them) “…did not try to reduce the Plan’s expenses or exercise appropriate judgment to scrutinize each investment option that was offered in the Plan to ensure it was prudent.”

Guilt by Association?

Admitting that they “did not have and do[es] not have actual knowledge of the specifics of Defendants’ decision-making process with respect to the Plan, including Defendants’ processes (and execution of such) for selecting, monitoring, and removing Plan investments,” the plaintiffs here claim to have made “reasonable inferences” regarding those factors. 

First, they claim that at “all times during the Class Period, Defendants knew or should have known of the existence of identical less expensive share classes and therefore also should have immediately identified the prudence of transferring the Plan’s funds into these alternative investments”—and they state as fact that “the Plan did not receive any additional services or benefits based on its use of more expensive share classes.” At this point, the suit points to the providers of the plan’s target-date fund provider (JP Morgan Securities LLC), and an SEC action that they say alleged that that provider failed to provide certain customers with sales charge waivers and lower fee share classes. In a case that had nothing to do with the present case.

And then they also take a potshot at Transamerica Corporation, recordkeeper for the Plan for five of the six years of the Class Period. The suit states that “the SEC has, on several occasions, imposed remedial sanctions and cease-and-desist orders on Transamerica for its conduct that violated federal law. Specifically, the suit claims that Transamerica made “material misstatements of fact to investors and potential investors, engaged in business practices which operated as a fraud or deceit upon clients or prospective clients, failed to reasonably supervise the variable annuity recommendations its agents were making, and failed to reasonably supervise the 529 plan share-class recommendations that its agents were making, among other violations”—though what all that has to do with this case isn’t so much stated as implied.

Familiar ‘Grounds’

These plaintiffs also had a beef with the selection of actively managed funds in the plan (which they claim were held by some $460 million of the plan’s assets), noting that the “performance of the managers of these funds fell well short of acceptable industry standards and they should have been replaced at the beginning of the Class Period or sooner. Failure to do so cost the Plan and its participants millions of dollars in lost opportunity and revenue.”

The plaintiffs also took issue with the recordkeeping fees. While repeating the caveat that revenue-sharing is not unlawful per se, they go on to state that, “In the case of North Memorial’s 401(k) plan, using a combination of a flat recordkeeping charge paid by participants with revenue sharing used to potentially cover additional fees resulted in a worst-case scenario for the Plan’s participants because it saddled Plan participants with above-market recordkeeping fees.” 

Median ‘Well’? 

By way of proof, they assert that “in 2019 Plan participants paid $181 per year per person in recordkeeping and administrative fees: $91 per person per year in direct fees plus $90 per person per year in revenue sharing”—which, based on a 2019 report from NEPC[2] (more precisely, a news report on it), they claim is “more than three times the recent national median”—and that the administrative fee paid by the plan was “more than three times the recordkeeping fees for similarly sized plans in the region”—though how a report based on fewer than 200 plans constitutes a “national median” is not explained. 

Will the court be persuaded by the allegations—or might it (especially armed with a motion to dismiss from the defendants) demand more? 

We shall see.

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] The plaintiffs here are represented by what seems to be a new name to this line of litigation: Baillon Thome Jozwiak & Wanta LLP.

[2] While the survey has been cited repeatedly in this type of lawsuit, some recent rulings have been critical of the limited sampling size and the lack of comparative plan data.