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Big Excessive Fee Settlement Approved

Fiduciary Rules and Practices

A $5.1 million settlement of a suit involving excessive fee allegations regarding a $15 billion plan with a settlement structure has been approved by the court.

The History

Back in June 2020, the $15 billion Costco 401(k) plan was sued in the U.S. District Court for the Eastern District of Wisconsin by participant-plaintiff Dustin S. Soulek (Dustin Soulek v. Costco Wholesale Corp. et al., alleging that the Costco plan fiduciaries “breached the duties they owed to the Plan, to Plaintiff, and to the other participants of the Plan by, among other things: (1) authorizing the Plan to pay unreasonably high fees for recordkeeping; (2) 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; and (3) maintaining certain funds in the Plan despite the availability of identical or similar investment options with lower costs, and/or better performance histories.” 

The case had been put on hold by Judge William C. Griesbach while the U.S. Supreme Court weighed similar allegations against Northwestern University, which it did in January. The settlement terms were submitted for review/approval by the court back in March. 

The Approval

U.S. District Judge William C. Griesbach determined (Soulek v. Costco Wholesale Corporation et al., case number 1:20-cv-00937, in the U.S. District Court for the Eastern District of Wisconsin) that the settlement deal struck by the parties in March was “fair, reasonable, and adequate, based on the following findings of fact, conclusions of law, and determinations of mixed fact/law questions.” 

More specifically, he determined that:

  • the Settlement resulted from arm’s-length negotiations by experienced and competent counsel overseen by a neutral mediator;
  • the Settlement was negotiated only after Class Counsel had received pertinent information and documents from Defendants;
  • the Settling Parties were well positioned to evaluate the value of the Class Action;
  • if the Settlement had not been achieved, both Plaintiffs and Defendants faced the expense, risk, and uncertainty of extended litigation;
  • the amount of the Settlement ($5,100,000) is fair, reasonable, and adequate. The Settlement amount is within the range of reasonable settlements[1] that would have been appropriate in this case, based on the nature of the claims, the potential recovery, the risks of litigation, and settlements that have been approved in other similar cases;
  • the Class Representative (the plaintiff who brough the suit) and Class Counsel (James A. Walcheske, Scott S. Luzi and Paul M. Secunda of Walcheske & Luzi LLC.[2]) concluded that the Settlement Agreement is fair, reasonable and adequate;
  • Class Members (the impacted participants—basically anyone who participated in the Costco retirement plan starting in 2014) had the opportunity to be heard on all issues regarding the Settlement and release of claims by submitting objections to the Settlement Agreement to the Court;
  • there were zero objections to the settlement; and 
  • the Settlement was reviewed by an independent fiduciary, Fiduciary Counselors, who has approved the Settlement.

What’s Different

As for the unique nature of the settlement—it’s basically in the form of a fee reduction, as follows:

  • Current Participants: Costco will provide an administrative fee reduction (valued at a maximum of $3.2 million) by ensuring that the Plan Administrative Service per capita recordkeeping fee deducted from Plan accounts does not exceed $3.25 per Plan account per quarter during the number of calendar quarters following the Effective Date necessary to reach the sum of $3.2 million.
  • Former Participants/Those Without Active Accounts: Costco will also provide the gross sum of $400,000 which, “after accounting for any Attorneys’ Fees and Costs, Administrative Expenses, and class representative service awards approved by the Court,” will be distributed to eligible Class Members on a claims-made basis.

What This Means

This suit involved a big ($15.5 billion, 200,000 participants) plan—and, ultimately, a big settlement in aggregate terms. The nature of such things is that they don’t really resolve any issues raised, and while there is a tendency among many (particularly those on the plaintiffs’ bar) to view these as “wins,” as often as not it is simply a financial decision by the plan fiduciaries to cut their losses (sometimes with the encouragement of their insurance providers) and draw things to a close. And—considering the time and considerable expense that is often demanded of such litigation—that’s often a financially astute decision. 

The participants? Well, dividing $3.2 million over 200,000 participants (not sure how many are in the “former” participant category) will give you some sense of the impact at that level. The attorneys representing them will wind up with somewhere in the neighborhood of $1.5 million…

Footnotes

[1] The plaintiff estimated that the total retirement plan fees (RPS) exceeded a reasonable amount by $30 million and that, based on this estimate, the $5.1 million recovery represents more than 16% of the allegedly excessive RPS fees.

[2] The agreement stipulated that the requested fees for the plaintiff’s attorneys may not exceed $1.5 million (“slightly less than 30% of the settlement amount”), as well as recovery of Administrative Expenses, and a service award of up to $10,000 for the “Class Representative” (plaintiff Dustin Soulek).