There’s a battle brewing in Battle Creek about excessive recordkeeping and managed account fees.
Bradley H. Fleming, a former accountant at Kellogg’s, has sued his former employer, the Kellogg Co., its board of directors, its ERIA finance committee and its ERISA administrative committee claiming that they didn’t properly monitor the account service fees.
More specifically, the suit claims that the defendants named above “breached the duty of prudence they owed to the Plan by requiring the Plan to “pay[ ] excessive recordkeeping fees [and managed account fees],” and by failing to timely remove their high-cost recordkeepers, Transamerica Retirement Solutions (“Transamerica”) (2016-2020), and Fidelity Investments (“Fidelity”) (2021-present).”
Once again, we’re talking about a large plan—$1,906,222,216 in assets and 12,244 participants at year-end 2020, according to the suit. All of which, according to the suit (Fleming v. Kellogg Co. et al., case number 1:22-cv-00593, in the U.S. District Court for the Western District of Michigan) meant that “the Plan thus had substantial bargaining power regarding Plan fees and expenses. Defendants, however, did not regularly monitor Transamerica and Fidelity to ensure that they remained the prudent and objectively reasonable choices.”
They went on to acknowledge that “reasonable, in turn, depends on contextually understanding the market for such recordkeeping services at the time that the recordkeeping contract is entered into.”
Interestingly enough, the suit—the plaintiff here is represented by Paul M. Secunda of Walcheske & Luzi LLC and Troy W. Haney of Haney Law Firm PC—claims that “there is no requirement to allege the actual inappropriate fiduciary actions taken because a breach of fiduciary duty claim under ERISA can survive a motion to dismiss without well-pleaded factual allegations relating directly to the methods employed by the ERISA fiduciary if the complaint alleges facts that, if proved, would show that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident.” That said, the suit goes on to assert that “the unreasonable recordkeeping and managed account fees paid inferentially tells the plausible story that Defendants breached their fiduciary duty of prudence under ERISA.”
The plaintiff didn’t have much use for managed accounts, noting at one point that, “in practice, there is often little to no material customization provided to the vast majority of plan participants which results in no material value to most, if not all, participants relative to the fees paid.” Moreover, the suit claims that “many managed account services merely mimic the asset allocations available through a target date fund while charging additional unnecessary fees for their services.”
The suit also asserts (as fact, though without proof or reference) that:
- “In many cases, the covered service provider will promote the managed account services over other potential solutions because the covered service provider will earn more revenue when participants use the managed account 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 also states (citing an earlier excessive fee case, Tussey v. ABB, Inc., 746 F.3d 327, 336 (8th Cir. 2014)) that “prudent fiduciaries implement three related processes to prudently manage and control a plan’s recordkeeping costs; that a hypothetical prudent fiduciary (1) tracks the recordkeeper’s expenses by demanding documents that summarize and contextualize the record-keeper’s compensation, such as fee transparencies, fee analyses, fee summaries, relationship pricing analyses, cost-competitiveness analyses, and multi-practice and standalone pricing reports, to make an informed evaluation as to whether a recordkeeper is receiving no more than a reasonable fee for the quality and level of services provided to a plan, (2) must identify all fees, including direct compensation and revenue sharing being paid to the plan’s recordkeeper, and finally (3) must remain informed about overall trends in the marketplace regarding the fees being paid by other plans, as well as the recordkeeping rates that are available.”
The plaintiff here determined that as the plan “had on average had 14,685 participants and paid an average effective annual recordkeeping fee (“administrative service fees”) of at least approximately $2,006,585, which equates to an average of at least approximately $137 per participant”—and the presented that conclusion against a table of ostensibly similar plans (at least in size and participant count) with fees ranging from $30-$45, but most in the $30s. Then, citing the U.S. Supreme Court’s recent decision in the Hughes v. Northwestern decision, explaining that, “[a]t times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise”—but then stated that these recordkeeping allegations are “not about reasonable tradeoffs between recordkeepers providing a different level or quality of services.” Rather, they assert that the “defendants failed to take advantage of the Plan’s size to timely negotiate lower fees from its existing recordkeepers, Transamerica and Fidelity, and Defendants could have obtained the same Bundled RK&A services for less.”
Similar arguments were then presented with regard to the managed account services provided to the plan by Financial Engines—and then presented a table comparing ostensibly similar programs and what they paid for managed account services. “The Plan’s managed account services added no material value to Plaintiffs or to other Plan participants to warrant any additional fees,” the suit claims. “The asset allocations created by the managed account services were not materially different than the asset allocations provided by the age-appropriate target date options ubiquitously available to Defendants in the market.”
Ultimately, the suit argues that the fiduciary defendants here (and those that appointed them) breached their duty to monitor by, among other things:
- failing to monitor and evaluate the performance of individuals responsible for Plan recordkeeping fees on the Committees or have a system in place for doing so, standing idly by as the Plan suffered significant losses in the form of objectively unreasonably recordkeeping expenses;
- failing to monitor the process by which the Plan’s recordkeepers, Transamerica and Fidelity, was evaluated and failing to investigate the availability of more reasonably-priced recordkeepers; and
- failing to remove individuals responsible for Plan recordkeeping fees on the Committees whose performance was inadequate in that these individuals continued to pay the same recordkeeping costs even though solicitation of competitive bids would have shown that maintaining Transamerica or Fidelity as the recordkeepers at the contracted price was imprudent, excessively costly, all to the detriment of the Plan and Plan participants’ retirement savings.
Oh—and “as the consequences of the foregoing breaches of the duty to monitor for recordkeeping fees the Plaintiff and Plan participants suffered millions of dollars of objectively unreasonable and unnecessary monetary losses.”
As for those who appointed and/or oversaw the plan fiduciaries, breaches were alleged for:
- failing to monitor and evaluate the performance of individuals responsible for Plan managed account fees on the Committees or have a system in place for doing so, standing idly by as the Plan suffered significant losses in the form of objectively unreasonably managed account expenses;
- failing to monitor the process by which the Plan’s managed account service provider, Financial Engines, was evaluated and failing to investigate the availability of more reasonably-priced managed account providers; and
- failing to remove individuals responsible for Plan managed account fees on the Committees whose performance was inadequate in that these individuals continued to pay the same managed account costs even though solicitation of competitive bids would have shown that maintaining Financial Engines as the managed account provider at the contracted price was “imprudent, excessively costly, all to the detriment of the Plan and Plan participants’ retirement savings.”
All of which, as with the recordkeeping circumstances outlined above, the consequences of allegedly failing to monitor for managed account fees “the Plaintiff and Plan participants suffered millions of dollars of objectively unreasonable and unnecessary monetary losses.”
Will the court be persuaded? Or will the case be dismissed? Stay tuned.