Another multibillion-dollar 401(k) has been sued for a series of familiar—but also some new—angles that are claimed to illustrate a breach of their fiduciary duties under ERISA.
In a suit (Stengl v. L3Harris Techs., Inc., M.D. Fla., No. 6:22-cv-00572, complaint 3/18/22) filed in the U.S. District Court for the Middle District of Florida, plaintiffs Robert J. Stengl, Daniel Will, Ronald F. Kosewicz, Gary K. Colley, Leslie D. Diaz, Amaya Johnson, William A. McKinley and John Karipas “by and through their attorneys, on behalf of the L3Harris Retirement Savings Plan,” claim that they have exhausted their administrative remedies.
Specifically, the $13.5 billion plan had in place an administrative procedure to be followed if any participant or beneficiary believed they were entitled to a benefit beyond that which they received. It involved filing a claim with the plan’s Administrative Committee, in writing, that was to be reviewed within 90 days (unless an extension was granted).
The suit goes on to note that on Nov. 22, 2021, Plaintiffs sent an Administrative Demand to the Plan Administrator via FedEx Priority Overnight, and that on Nov. 23, 2021, Plaintiffs received confirmation that the Administrative Demand was delivered on that day at 11:21 a.m. In response, by email dated March 3, 2022, Counsel for the Defendants “confirmed that Plaintiffs can now be considered to have exhausted all administrative remedies.”
(Too) Expensive Funds
The suit cites as an example how in 2019, the expense ratios for several funds in the Plan “were more expensive than comparable funds found in similarly sized plans (plans having over $1 billion dollars in assets). The majority of funds in the Plan had expense ratios well above the median and average expense ratios for similarly sized plans,” according to the suit. In fact, the plaintiffs here claimed that in some cases, “expense ratios were up to 71% (in the case of the Fidelity Balanced K) and a 60% difference (in the case of the Fidelity Freedom 2060 K Fund) above the median expense ratios in the same category.”
Moreover, the suit alleges that “another fiduciary breach stemming from Defendants’ flawed investment monitoring system resulted in the failure to identify available lower-cost share classes of many of the funds in the Plan during the Class Period.” The plaintiffs argue that “because the more expensive share classes chosen by Defendants were the same in every respect other than price to their less expensive counterparts, the more expensive share class funds could not have (1) a potential for higher return, (2) lower financial risk, (3) more services offered, or (4) greater management flexibility.” Summing it up, the suit comments that, “In short, the Plan did not receive any additional services or benefits based on its use of more expensive share classes; the only consequence was higher costs for Plan participants.”
‘Collective’ Assessment?
“Additional evidence of the Defendants’ flawed process in selecting and monitoring funds for the Plan,” the suit continues, “is evidenced by the lack of collective trusts as investment options.” Specifically, the suit says that a “prudent fiduciary conducting an impartial review of the Plan’s investments would have identified that the Fidelity Diversified International Fund and the Fidelity Magellan funds, which harbored more than $300 million dollars in assets under management as of 2019, were available as CITs.” But instead, “by failing to investigate the use of alternative investments such as collective trusts, Defendants caused the Plan to pay millions of dollars per year in unnecessary fees.”
In an argument of first impression in these cases, the plaintiffs here claim that the fiduciary defendants “failed to utilize the tools of modern portfolio theory in selecting the best investments for the plan.” Now, if the positioning of the argument is different, the basic premise is not. The plaintiffs conclude that since the funds in the plan remained “largely unchanged” since 2015, they assert that “strongly” suggests that “the Plan’s fiduciaries failed to use MPT or any other acceptable alternative to evaluate and replace funds in the Plan.” Here they cite specifically the decision to stay with the Fidelity Freedom K line up of target date funds, pointing to data which they say “shows that several better performing less expensive alternatives were available to the Plan but not chosen by the Plan’s fiduciaries evidencing a lack of an acceptable prudent process in fund selection.”
IPS ‘Fail’?
“Another indication of Defendants failure to follow a prudent process in selecting and monitoring Plan funds was their failure to follow the terms of the Plan’s Investment Policy Statement (IPS),” the suit continues. Here again the evidence is found in the fact that “the Committee allowed funds to remain in the Plan that had been outperformed as long as ten years” and that the Committee “…selected actively managed funds over passively managed funds which was inconsistent with their obligations under the aforementioned provision.” With regard to the latter point, the suit points out that from 2014 through Feb. 29, 2020, at least 81.48% of the “designated investment alternatives of the Plan were actively managed.”
Another unique argument for this band of litigation was that the plan “lacked diversification and created additional concentration risk, high correlation, higher volatility and had poor security selection.” The example cited on this aspect was the plan’s offering of five separate options all said to be in the “large/mega cap space.” The suit goes on to note that in 2015, these five funds “contained more than $1.2 billion dollars or more than 26% of the total plan assets, in 2016 the amount was more than $1.27 billion dollars or more than 25% of plan assets, in 2017, the amount was $1.5 billion dollars and more than 25% of the Plan’s assets. In 2018 and 2019 the amount invested in these 5 funds was more than $1.3 billion dollars and $1.6 billion dollars in assets, respectively.”
Another shortcoming? The suit claims that the defendants “…may have imprudently selected the K class shares of the target date funds in the Plan specifically because they could offset their excessive administrative and record keeping costs with revenue sharing in a way that would be the least obvious to participants.” In fact, the suit alleges that “the K class of the Fidelity Freedom target date funds pay 20 basis points in revenue sharing above the K6 class of the Fidelity Freedom target date funds which amounted to a staggering $2.5 million dollars in revenue sharing in 2019 alone.”
Provider Tenure
And if that were not enough, “the fact that the Plan has stayed with the same recordkeeper, namely Fidelity, over the course of the Class Period, and paid the same relative amount in recordkeeping and administration fees, there is little to suggest that Defendants conducted an appropriate RFP at reasonable intervals or certainly at any time prior to 2015 through the present—to determine whether the Plan could obtain better recordkeeping and administrative fee pricing from other service providers given that the market for recordkeeping is highly competitive, with many vendors equally capable of providing a high-level service.”
At this point, the Capozzi Adler attorneys resurrect their typical characterization of recordkeeping fees as “astronomical” when benchmarked against similar plans. More specifically, that this plan “with over 50,000 participants and over $13 billion dollars in assets in 2019, should have been able to negotiate a recordkeeping cost in the low $20 range from the beginning of the Class Period to the present.” The suit continues, “the Plan’s total recordkeeping and administrative costs are clearly unreasonable as some authorities have recognized that reasonable rates for jumbo plans typically average around $35 per participant, with costs coming down every day.”
The Capozzi Adler firm has previously affixed the “astronomical” label to 401(k) fees—having previously done so in suits involving the $930 million Olin Corporation Contributing Employee Ownership Plan, $1.5 billion Baptist Health South Florida, Inc. 403(b) Employee Retirement Plan, the $1.2 billion 401(k) plan of the American Red Cross, the $700 million Pharmaceutical Product Development, LLC Retirement Savings Plan, the $2 billion plan of Cerner Corp and more recently the $6 billion 401(k) plan of KPMG.
What’s next? Stay tuned.
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.
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