A(nother) $1 Billion Plan Charged in Excessive Fee Suit

You might think the plaintiffs’ bar would have exhausted the number of $1 billion 401(k) plans to sue—but then you’d be wrong.

The latest is healthcare and bioscience company Grifols Shared Services NA—and the fiduciaries of the $1,035,952,055 (as of 2020), 10,550 participant plan who—according to participant-plaintiff Walter J. Gruber, Jr.—breached the duty of prudence they owed to the Plan by requiring the Plan to “pay[ ] excessive recordkeeping fees [and managed account fees].”

The suit (Gruber v. Grifols Shared Servs. NA, Inc., C.D. Cal., No. 2:22-cv-02621, complaint 4/19/22) alleges that they further breached those duties “by failing to remove their high-cost recordkeeper, Fidelity Investments Institutional (“Fidelity”), and their high-cost managed account service provider, Strategic Advisors, Inc. (“SAI”). “These objectively unreasonable recordkeeping, managed account, and investment fees cannot be contextually justified and do not fall within ‘the range of reasonable judgments a fiduciary may make based on her experience and expertise,’” the suit[1] claims.

Familiar Grounds

The suit treads familiar grounds—challenging share classes, recordkeeping fees compared with what are allegedly comparable plans and using managed accounts, which this plaintiff basically accused of being an expensive target-date fund. That said, the allegations were pretty general, but the suit alleged that “there is no requirement to allege the actual inappropriate fiduciary actions taken because “an ERISA plaintiff alleging breach of fiduciary duty does not need to plead details to which he has no access, as long as the facts alleged tell a plausible story.”

The suit disclaims early on by noting, as other suits have before it, that “the Plaintiff and all participants in the Plan did not have knowledge of all material facts (including, among other things, the excessive recordkeeping, managed account, and investment fees) necessary to understand that Defendants breached their fiduciary duty of prudence until shortly before this suit was filed”—a statement no doubt made to establish the beginning of the statute of limitations beyond which damages can’t be claimed.  Indeed, despite the allegations that follow, the suit acknowledges that, “Having never managed a mega 401(k) Plan, meaning a plan with over $500 million dollars in assets, Plaintiff, and all participants in the Plan, lacked actual knowledge of reasonable fee levels available to the Plan.” Of course, that’s the signal that they need to proceed to the next step—fact-finding discovery.

That acknowledged lack of specificity notwithstanding, the suit asserts a number of positions as fact without independent substantiation (several of which seem worth questioning), such as:

• All recordkeepers quote fees for the Bundled RKA services on a per participant basis without regard for any individual differences in services requested, which are treated by the recordkeepers as immaterial because they are, in fact, inconsequential from a cost perspective to the delivery of the Bundled RKA services.
• The vast majority of fees earned by recordkeepers typically come from the bundled fee for providing the Bundled RKA services as opposed to the Ad Hoc RKA services.
• Because dozens of Recordkeepers can provide the complete suite of required RKA services, plan fiduciaries can ensure that the services offered by each specific Recordkeeper are apples-to-apples comparisons.
• Any difference in recordkeeping fees between comparable Plans is not explained by the level and quality of services each recordkeeper provides.
• Many managed account services merely mimic the asset allocations available through a target date fund while charging additional unnecessary fees for their services.
• A benchmarking survey alone is inadequate. Such surveys skew to higher “average prices,” that favor inflated recordkeeping fees. To receive a truly “reasonable” recordkeeping fee in the prevailing market, prudent plan fiduciaries engage in solicitations of competitive bids on a regular basis.

The suit claims that “during the Class Period, Defendants failed to regularly monitor the Plan’s recordkeeping fees paid to recordkeepers, including but not limited to Fidelity,” that they “failed to regularly solicit quotes and/or competitive bids from recordkeepers, including but not limited to Fidelity, in order to avoid paying unreasonable recordkeeping fees,” and that “…unlike a hypothetical prudent fiduciary, Defendants followed a fiduciary process that was done ineffectively given the objectively unreasonable recordkeeping fees it paid to Fidelity and in light of the level and quality of recordkeeper services it received.”

Tables ‘Setting’

Now, as other such suits have done, the plaintiff here produces tables purporting to show what comparable plans (though the comparability appears to be in size alone—having already asserted (without substantiation) that the services provided are essentially identical) have paid for recordkeeping, investment management, and, in this case, managed account services. It claims that the Grifols plan paid average annual recordkeeping/administrative services of an estimated $66/per participant compared to alleged comparables that ranged from $41/participant to $28/participant, “caused Grifols Plan participants, including Plaintiff, to pay excessive fees for managed account services to SAI, which were “estimated not to exceed 0.52% per year of [a participant’s] average daily managed account balance,” and that their choice of more expensive share classes for plan investments “caused unreasonable and unnecessary losses to the Plan’s participants through 2020 in the amount of approximately $649,599.

Ultimately that they “failed to regularly monitor the Plan’s recordkeeping fees paid to recordkeepers, including but not limited to Fidelity,” “failed to regularly solicit quotes and/or competitive bids from recordkeepers, including but not limited to Fidelity, in order to avoid paying unreasonable recordkeeping fees, and that “…unlike a hypothetical prudent fiduciary, Defendants followed a fiduciary process that was done ineffectively given the objectively unreasonable recordkeeping fees it paid to Fidelity and in light of the level and quality of recordkeeper services it received.”

As for the net “damage” attributable to these actions, the suit alleges that “from the years 2016 to 2020, and because Defendants did not act in the best interests of the Plan’s participants, and as compared to other plans of similar sizes with similar amounts of money under management, receiving a similar level and quality of services, the Plan actually cost its participants a total minimum amount of approximately $1,394,637 in unreasonable and excessive RKA fees,” and that, on a compounded basis, racked up “a total, cumulative amount in excess of $1,907,016 in RKA fees.” Invoking the recent Northwestern v. Hughes decision by the U.S. Supreme Court, the suit claims that “…these recordkeeping allegations are not about reasonable tradeoffs between recordkeepers providing a different level or quality of services,” that the “defendants failed to take advantage of the Plan’s size to timely negotiate lower fees from its existing recordkeeper, and Defendants could have obtained the same recordkeeping services for less from other, similar recordkeepers.” Moreover, it asserts that “plaintiff paid these excessive recordkeeping fees in the form of direct compensation to the Plan and suffered injuries to their Plan accounts as a result.”

Ultimately the suit alleges that during the Class Period, Defendants:

1) did not conduct an impartial and objectively reasonable review of the Plan’s investments on a quarterly basis;
2) did not identify the prudent share classes available to the Plan; and
3) did not transfer the Plan’s investments into prudent share classes with the lowest net expense ratios at the earliest opportunity.

Will these allegations be found to be sufficient and plausible in view of the statements made? In the context of the Hughes decision? We shall see.

Footnote

[1] Walcheske & Luzi LLC and Creitz & Serebin LLP represent the plaintiffs here.