Massive 401(k) Suit Settlement Struck

In a remarkably short period, an excessive fee suit involving proprietary funds has settled for what may be the largest monetary settlement among those cases to date. 

 

The suit—filed on Feb. 15, 2019 by plaintiff (and former McKinsey plan participant) Tushar Bhatia against McKinsey and MIO (MIO Partners, Inc., a subsidiary of McKinsey)—asserted claims for breach of fiduciary duty, prohibited transactions, and equitable restitution under ERISA. More specifically, he alleged that McKinsey adopted certain in-house funds for the plans (McKinsey & Company, Inc. (PSRP) Profit-Sharing Retirement Plan and the McKinsey & Company, Inc. (MPPP) Money Purchase Pension Plan) that are managed by MIO, and not offered in any other retirement plan. He further alleged that the MIO funds performed worse than alternative, lower-cost investment options, and that MIO received more than $20 to $36 million per year in investment management fees in connection with these funds.[1] Further, he alleged that the plan fiduciaries “failed to appropriately monitor and control the Plans’ administrative expenses.” 

 

Oh, and the suit—filed on behalf of the plaintiff by Nichols Kaster PLLP[2]—also alleged that “each participant pays approximately $95 per year or more for recordkeeping services (out of a total $160 annual administrative charge),” which the plaintiff not only claimed was “…more than twice the reasonable market rate for similarly-sized plans (approximately $30 to $40 per participant),” but that “McKinsey improperly retains around 25% of the recordkeeping charge for itself.”

 

But that, as they say was then—a mere 18 months ago. Now, under the terms of the proposed Settlement (Bhatia v. McKinsey & Co., S.D.N.Y., No. 1:19-cv-01466, motion for preliminary settlement approval 8/10/20), McKinsey (and/or its insurers) will pay a Gross Settlement Amount of $39,500,000 into a common fund for some 33,000 current and former participants. 

The agreement notes that this recovery “…measures favorably,” representing approximately 0.65% of the $6.2 billion plan assets. The parties also note that represents approximately 22% of the total amount of fees that MIO received from the plans in connection with MIO Funds during the class period ($180 million), and approximately 21% of the combined sum of these MIO fees plus the alleged recordkeeping excess ($9 million).

 

 

Before that settlement is distributed, the Settlement Agreement requires that Class Counsel file their motion for Attorneys’ Fees and Costs at least 30 days before the deadline for objections. That said, while something in the range of 25%-33% of the settlement seems to be the “norm,” the agreement says that Class Counsel will seek no more than one-fourth of the Gross Settlement Amount in attorneys’ fees. The settlement also says that the award to the named plaintiff “shall not exceed $15,000.” However, the settlement agreement notes that those “awards shall be determined by the Court in its discretion; the Settlement Agreement does not purport to establish a presumptively reasonable amount.”

 

Speaking of distributions, the settlement outlines a plan of allocating the settlement—setting a Settlement Allocation Score for each quarter during the Class Period, “which shall be the sum of 15 points (if the eligible Class Member had an Active Account at the end of the quarter) plus 0.0020 points for every dollar invested by the eligible Class Member in MIO funds at the end of the quarter (up to a maximum of 300 points),” and then allocated among eligible Class Members on a pro rata basis in proportion to their Average Settlement Allocation Score across all quarters.[3]

 

 

Now, in addition to the monetary settlement, McKinsey has agreed that:

 

Finally, the agreement notes that, ‘‘as required under DOL regulations, the Settlement will be subject to review by an Independent Fiduciary as well as the Court, and that that Independent Fiduciary will issue its report at least 30 days before the final Fairness Hearing so that the Court may consider it.”
We’ll see what the court has to say…

 

 

[1] The suit alleged that the McKinsey plans were the only defined contribution plans in the country (out of more than 650,000 total) that have retained MIO as an investment manager and have utilized these MIO-managed portfolios. “No other plan uses these proprietary portfolios.”

 

[2] If that name sounds familiar, no wonder. They’ve represented plaintiffs in a wave of retirement plan litigation, including including cases involving Oklahoma’s BOKF NA, 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. 

 

[3] Current participants will have their plan accounts automatically credited with their share of the settlement fund, while former participants will be required to submit a claim form that will allow them to elect to have their distribution rolled over to an individual retirement account or other eligible employer plan, or to receive a direct payment by check.