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Latest Excessive Fee Suit Strikes Utility Chord

Government Affairs

You might think there couldn’t be another multibillion-dollar 401(k) plan to be sued—and yet there is.

This suit was filed by former participant Michael Johnson, “individually and as representative of a class of participants and beneficiaries of the Duke Energy Retirement Savings Plan,” a plan with $8.6 billion in assets and 39,000 participants as of year-end 2018.

The 25-page suit (Johnson v. Duke Energy Corp., W.D.N.C., No. 3:20-cv-00528, complaint 9/23/20) presents[1] a relatively succinct case regarding its claims that the Duke plan defendants breached their fiduciary duties of loyalty and prudence, and that Duke energy failed to monitor the actions of the plan fiduciaries. 

Recordkeeping ‘Charges’

Filed by the law firms of Nichols Kaster PLLP,[2] Tharrington Smith LLP and Levin Law Firm PLLC on behalf of the class, the suit cites the plan’s Form 5500 and says that it showed that the plan’s recordkeeper (Fidelity) was paid direct compensation for recordkeeping services to the Plan has been between $58 and $67 per participant during the class period. Then, the suit alleges that, “based on Plaintiffs’ investigation and publicly available filings, a prudent and loyal fiduciary of a similarly sized plan could have obtained comparable administrative services of like quality for approximately $25 to $30 per participant near the beginning of the statutory period, in 2014, and between $20 and $25 per participant towards the end of the class period.”

They next allege that, “not only have Duke Energy’s recordkeeping fees been two to three times higher than competitive marketplace rates, but the Form 5500s also demonstrate that Duke Energy has used the same recordkeeper for at least the past decade, and that the recordkeeping rates paid by participants stayed roughly the same between 2014 and 2018, while marketplace rates were dropping.” 

At this point, the plaintiffs shift to an “inference that Defendants failed to monitor recordkeeping compensation during that period, and failed to solicit competitive bids from other recordkeepers that would have resulted either in retention of a new recordkeeper or a significant reduction in the rates paid to its existing recordkeeper.” Having established the “inference,” they claim that the “defendants’ failure to monitor or control the Plan’s recordkeeping expenses cost Plan participants millions of dollars during the class period.”

Managed ‘Account’

The suit also alleges that the defendants “caused Plan participants to pay excessive managed account service fees during the class period.” More specifically, the suit claims that “since at least 2010, Defendants have retained Financial Engines—one of the largest managed account service providers in in the industry—to provide managed account services to the Plan, and for which participants paid an annual fee—0.50% of their average account balance for the year—regardless of the size of their account.” In doing so, the suit alleges that the defendants “have caused the Plan to pay significantly more for managed account services than other plans pay for identical services.” Defendants also failed to capture tiered pricing for participants with larger account balances, which the suit claims is “industry standard for managed account services.”

By comparison, the suit cites several other large plans with managed account programs, including the Citi Retirement Savings Plan, which the suit claims “paid between 30 to 50 percent less for Financial Engines’ managed account service: 0.35% of the balance per year for the first $100,000 in participant’s account, 0.30% of the balance per year for the next $150,000 in participant’s account, and 0.25% of the balance per year for all other money in the participant’s account.”

The plaintiff here concludes that “had Defendants paid closer attention to managed account fees, they could have similarly negotiated lower rates for Financial 9. These managed account service fees were made on the Citi Retirement Savings Plan—Annual Fee Disclosure Statement as of December 31, 2015.”

Renegotiate ‘Shunned’

Proving that no good deed goes unpunished, the suit notes that “around 2019 Defendants finally recognized the excessive fees they were causing Plan participants to pay for managed account services and renegotiated the Plan’s managed account service fees.” That said, that renegotiation set a fee of 33 bps on all assets for managed account services, and “while this is an improvement over 50 bps, it is still excessive given the industry trends for managed account services and the enormous leverage the Plan enjoys in the marketplace,” according to the suit, which claims that, “even under this new fee structure, participants in the Duke Energy plan continue to pay 20 to 50 percent higher fees than participants in the Comcast 401(k) plan.”

The suit concludes that Duke Energy breached its fiduciary monitoring duties by, among other things:

  • Failing to monitor and evaluate the performance of its appointees or have a system in place for doing so, standing idly by as the Plan suffered significant losses as a result of its appointees’ imprudent actions and omissions with respect to the Plan.
  • Failing to monitor its appointees’ fiduciary processes, which would have alerted a prudent fiduciary to the breaches of fiduciary duties described herein.
  • Failing to remove appointees whose performance was inadequate in that they continued to maintain imprudent, excessively costly recordkeeping and managed account services, to the detriment of the Plan and Plan participants’ retirement savings.

And that, as a consequence of the foregoing breaches of the duty to monitor, the plan “suffered millions of dollars of losses due to excessive fees.”

In an email response to Bloomberg Law, Duke Energy responded, “Duke Energy’s retirement savings plan has been carefully designed and administered as a retirement savings tool for the company’s 29,000 employees. Duke Energy and its fiduciaries take seriously their responsibilities under the federal Employee Retirement Income Security Act of 1974, and work diligently to fully discharge their duties under the law. The company will vigorously defend against this lawsuit.”

Stay tuned.

Footnotes

[1] 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.

[2] Nichols Kaster PLLP has appeared with striking regularity in this type of litigation, including cases involving John Hancock, M&T Bank, MFS, SEI and Goldman Sachs, as well as suits involving Deutsche Bank Americas Holding Corp., BB&T and American Airlines. 

Nichols Kaster was also one of three litigation firms specifically noted in a recent property and casualty renewal template that has reportedly showed up in a number of cases.