SeaWorld Soaked With Excessive Fee Suit

The plan is smaller than most targeted with such allegations—but the allegations are familiar.

The eight plaintiffs here (Coppel, Flores, Garcia, Martinez, Mitchell, Ortega, Uriostegui and Usselman—participants in or beneficiaries of the $310 million SeaWorld Parks and Entertainment 401(K) Plan, and the SWBG, LLC 401(K) Plan) claim to have been injured by the fiduciary defendants’ “lack of loyalty, imprudent skill and flawed processes in breach of their fiduciary duties,” specifically that: 

• defendants offered Plaintiffs, and Plaintiffs invested in, higher cost fund shares when otherwise identical lower cost shares were available which caused participants diminished investment returns in their 401(k) accounts; 
• defendants permitted Plaintiffs and other Plan participants to be charged excessive service fees, which reduced participants’ Plan account balances and caused them diminished investment returns; 
• defendants chose and continually offered Plaintiffs, and Plaintiffs invested in, funds that continually failed to meet or exceed industry benchmarks for rates of return, which reduced their Plan account balances and caused them diminished investment returns; and 
• defendants chose and continually offered Plaintiffs, and Plaintiffs invested in, a pool of investment that was not sufficiently diverse to hedge risks according to industry standards, which reduced their Plan account balances and caused them diminished investment returns.

The suit (Coppel v. SeaWorld Parks & Entertainment, Inc., S.D. Cal., No. 3:21-cv-01430, complaint 8/10/21) also names—but does not include as defendants—a number of “Covered Service Providers” as parties of interest, specifically Massachusetts Mutual Life Insurance Company, which served as the recordkeeper of the Plan until Dec. 31, 2019, at which point Prudential Retirement Insurance and Annuity Company replaced them. Also LPL Financial, LLC, was the designated “shareholder service provider” to the Plan until sometime in 2014, when Alliant Retirement Services, LLC became the designed “Financial Adviser.”

Higher Cost Shares?

The plaintiffs, represented by Christina Humphrey Law PC and Tower Legal Group PC, allege that since the inception of the plan (March 1, 2010), defendants offered higher cost mutual fund share classes as investment options[1] for the Plan “even though 90% of the time lower cost class shares of those exact same mutual funds with the same attributes were readily available.” They also claim that defendants “offered higher cost share classes rather than readily available lower cost options to Plan participants for a decade before finally acknowledging their imprudent actions and changing share classes in January 2020.” 

That said, they go on to state that the fiduciary defendants “…did not seek to correct the harm caused to their participants by putting the Plan back into the condition it would have been in had the breaches not occurred as mandated by ERISA and the IRS. By choosing and maintaining higher cost share classes for a decade instead of available lower cost shares as illustrated above, Defendants caused Plan participants/beneficiaries harm by not just forcing them to pay higher fees, but also lost yield and returns they rely on for retirement income as a result of those higher fees on nearly every mutual fund offered through the Plan.” This, they state had an “erosive effect of excessive fees and the resulting lost returns compounds over time.”

They then characterize a subsequent shift in fund options as an “acknowledgement that service provider fees were excessive and that lower cost share classes are beneficial,” but state that the move to lower priced share classes in 2016 involved only “a limited number of funds,” and that regardless they “failed to correct the harm caused by previous excessive fees and imprudently continued to add new funds after 2015 which did not offer the lowest share class available to participants.

“The extra fees cost Plan participants over a million dollars per year,” the plaintiffs claim, noting that “the class A shares of the target-date funds alone cost participants over $900,000 in 2015 over their least expensive option.”

Doing the Math?

They spend some time doing math—calculating the potential impact of these “additional” fees, applying typical returns of stocks and bonds, medium income and average savings percentages (all of which is arguably “just” math for illustrative purposes), then discern that participants have “lost” the potential to make an additional $2,480. 

They go on to claim that rather than relying on these excessive fees (and “incurring unnecessary losses”), they argue that “defendants could have simply demanded the recordkeeper (MassMutual) accept a more reasonable charge of $40 annually for each of the 17,208 participants/beneficiaries (listed on line 6g of the Defendants’ 2010 Annual Return/Report of Employee Benefit Plan) or they would request a proposal (RFP) from other recordkeepers.”

As has been argued in other such litigation these plaintiffs claim that a per record/participant charge is “a more reasonable and equitable payment method instead of asset-based” pay,” and holds out that MassMutual’s pay “nearly tripled between 2010 and 2019 despite the fact that the number of participants that had to be record kept remained largely flat.” That if that had been the case, “the participants/beneficiaries would have kept two thousand more dollars each in compounded returns (again based on the median income and savings rates). Finally, the trust would have had an estimated $35 million MORE dollars in it (2,000 * 17,208).” Ultimately, they hang their hat on the 15th Annual NEPC 2020 Defined Contribution Plan & Fee Survey to allege that a “reasonable recordkeeping fee” for the plan would be $40/participant. 

The plaintiffs here also tackle revenue-sharing—not its very existence (as many of these lawsuits do), but the method of allocating it back to participant accounts, claiming that under the current methodology of doing so, “a participant could be credited with another participant’s payment.”

Miss Coding?

Also brought in for criticism was the coding of LPL’s services to the plan on the Form 5500, and the plaintiffs’ also alleged that “the services they did provide were principally motivated by compensation rather than what was in the best interest of the Plan participants.” Moreover, they argue that “what is true for LPL applies to Alliant Insurance Services, LLC, and Alliant Retirement Services, as well who provided Consulting (general) according to Defendants’ Form 5500 Schedule C service code 16.” 

Ultimately, “because the Defendants never acted to exchange the share classes of the mutual funds with their least expensive option, it is unclear what value LPL and Alliant brought to the Plan and its participants/beneficiaries,” the plaintiffs state. “The vast majority of funds in the plan caused financial harm through high costs and lagging returns. The target-date funds and Columbia index funds are notable examples because they were selected at the Plan’s inception and remained in the plan through 2019. If LPL and Alliant added no value then any fee paid to them is unreasonable.”

All in all, the plaintiffs claim that the fiduciary defendants “failed to use the Plan’s bargaining power to leverage its CSPs to charge lower administrative fees for the Plan participants,” and that they “…failed to take any or adequate action to monitor, evaluate or reduce LPL or Alliant’s fees.”

The plaintiffs acknowledge that “the Investment Policy Statement (IPS), meeting minutes and other information used at the time the investments were selected and subsequently monitored are in sole possession of the Defendants and are material for a trier of fact to determine what level of effort, skill and participant loyalty were applied to the investment selection and monitoring process”—though they did quote from MassMutual’s sample investment policy to try and make their case.

That said, the plaintiffs here sought to differentiate their claims from what a number of other lawsuits have claimed, noting that they were “…not merely arguing that Defendants should offer institutional share classes instead of retail or that Defendants needed to scour the universe for cheaper alternatives, rather MORE prudent options were available within the prospectuses of 90% of the funds the Defendants chose.”

And, completing the circle, and as some others (but not many) have argued in such litigation, they challenged the correlation of the investments in the plan’s menu, alleging that “equity funds were well over 90% correlated with one another.”

Monitoring ‘Misses’

Ultimately, the suit alleges that the defendants breached its fiduciary monitoring duties by (among other things):

a. “failing to monitor and evaluate the performance of other Plan fiduciaries or have a system in place for doing so, standing idly by as the Plan suffered losses as a result of other Plan fiduciaries’ election to continue to pay fees that were significantly higher than what the Plan could have paid for a substantially identical investment products readily available elsewhere;
b. “failing to monitor the processes by which the Plan’s investments were evaluated, which would have alerted a prudent fiduciary to the excessive costs being incurred in the Plan to the substantial detriment of the Plan and the Plan’s participants’ retirement savings, including Plaintiffs and members of the Class; 
c. “failing to remove fiduciaries whose performance was inadequate, as they continued to maintain excessively costly investments in the Plan, all to the detriment of the Plan and Plan participants’ retirement savings; and
d. “failing to institute competitive bidding for covered service providers.”

Moreover, “as a direct and proximate result of these breaches of the duty to monitor, the Plan, Plaintiffs, and members of the Class suffered millions of dollars of losses. Had Defendant complied with its fiduciary obligations, the Plan would not have suffered these losses, and Plan participants would have had more money available to them for their retirement.”

Stay tuned…

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.

Footnote

[1] The Plan offers 29 investment options, three with 28 mutual funds and one guaranteed investment contract fund. Defendants select the Plan’s investment options.