Suit Says Fiduciaries of $700 Million 401(k) Fell Short

A new excessive fee suit challenges the imprudent selection of share classes, the poor selection of a stable value offering AND exorbitant recordkeeping fees.

Here we have one participant-plaintiff Robert  Humphries suing based on the actions (or lack thereof) of the fiduciaries of the $700 million (4,600 participant) Mitsubishi Chemical America Employees’ Savings Plan, specifically the plan sponsor entity itself (Mitsubishi Chemical America, Inc.), “each member of the  Board of Directors of Mitsubishi Chemical, the Plan’s Administrative Committee,” and even “Kitty  Antwine, who was the signatory to the Plan’s annual Form 5500 filed under sections 104 and 4065 of  ERISA and sections 6057(b) and 6058(a) of the Internal Revenue Code”—as well as “John/Jane Does 1-10”—unnamed, but allegedly involved in the “management, operation and administration of the Plan.”[1]

‘Basic’ Claiming

More specifically, the suit (Humphries v. Mitsubishi Chem. Am., Inc., S.D.N.Y., No. 1:23-cv-06214, complaint 7/19/23) alleges that “the fiduciaries to the Plan failed to meet their fiduciary obligations in several basic ways”:

• First by offering and maintaining “higher cost share classes when identical lower cost class shares of the same mutual funds were available,” which the suit says “is one of the most common and well-known example of an imprudent investment decision.” 
• Secondly, the suit claims that the defendants “wasted participants’ money by failing to appropriately select and monitor the Plan’s stable value fund” when “substantially similar products were available from other providers that would have provided far higher returns to the Plan participants.” 
• Thirdly, the suit claims that the defendants failed to monitor the Plan’s fees and expenses, and that “as a result, the Plan kicked back payments to recordkeepers and other non-parties from the retirement savings of Mitsubishi Chemical’s employees in excessive amounts.”

The suit takes pains to point out that “plaintiff is not merely second-guessing Defendants’ investment decisions with the benefit of hindsight. The information Defendants needed, to make informed and prudent decisions, was readily available to them when the decisions were made.”

Class ‘Actions’

The suit, filed in the U.S. District Court for the Southern District of New York, spends considerable space outlining specific fund instances where “Defendants wasted money by failing to select the lowest-cost share class of the mutual fund as an investment option for the Plan,” citing:

• Selection of share class A of the MFS Value Fund (rather than the R6 class, though the plan moved to that in 2021).
• Selection of the Prudential Jennison Mid-Cap Growth Fund share class “Z,” rather than the lower cost share class “Q” (though they removed the fund “in or around 2019”).
• Selection of the Pioneer Fundamental Growth Fund share class “Y,” rather than the available “K” share class (though it was removed from the menu “in or around 2021”).
• Selection of the Goldman Sachs Small Cap Value Fund share class “I,” where a less expensive share class “R6” was available (the fund was removed in “in or around 2021”).
• Selection of the Janus Henderson Flexible Bond Fund, share class “I,” when a less expensive share class “N” was available (removed in 2018).
• Selection of the Virtus Duff & Phelps Real Estate Securities Fund share class “I,” when a less expensive “R6” share class was available (and “easily identifiable”)—removed in 2018.
• Selection of the Pioneer Bond Fund share class “Y,” when another (less expensive) share class “K” was available.

“Investing Plan assets in higher share classes harms the Plan’s participants because it causes them to pay excess indirect fees which are not tethered to any service provided to Plan participants but rather are tied to the amounts invested by Plan participants,” the suit claims. “Defendants’ actions were directly erosive to the Plan’s growth. Defendants this caused Plaintiff and other Plan participants/ beneficiaries harm by not just forcing them to pay higher fees, but also caused lost yield and returns as a result of those higher fees on the majority of investments offered through the Plan. The erosive effect of excessive fees and the resulting lost returns compounds over time substantially lowering the corpus of participants’ retirement investments,” the suit continues.

Stable, Labeled

That said, the suit also calls out for criticism “the single largest asset in the Plan,” the Prudential Guaranteed Interest Account, “a proprietary insurance general account product that is designed to provide liquidity and a stable rate of return, offered by Prudential.” Challenged here were not only the returns, but, as has been the case in other suits targeting similar funds, the crediting rate—“set in advance by Prudential and reset quarterly, as provided in the contract.” The suit claims that the fiduciary defendants “did not have a prudent process for selecting or monitoring the costs of the Prudential GIA,” and that “substantially similar products were available from other providers that would have provided far higher returns to the Plan participants.”

“This breach of fiduciary duty alone resulted in a loss (before compounding) in excess of $16 million of participants’ retirement savings (or at least $9 million if the other option is considered),” the suit claims.  “This loss is something a competent, prudent, and diligent fiduciary would have known was happening in advance and would have been able to avoid.”

‘Substantially Similar’

The suit didn’t only challenge investment costs and returns, however. It also noted “based on information currently available to Plaintiff regarding the Plan’s features, the nature of the administrative services provided by Prudential, the Plan’s active participant level during the Class Period, and the market, the outside limit of a reasonable administrative fee for the Plan should have been no more than $70 per participant for the Class Period.” However, the suit claims that here plan participants were paying excess fees in the range of $175–$375.

“Furthermore,” the suit continues, “another plan such as the Mitsubishi Electric U.S. Companies Retirement Plan, which is substantially similar to the Plan, paid total administrative fees of around $180,466 for the year ending 2021, with 3294 active participants, as seen on this plan’s Form 5500 Report”—whereas, the suit claims that for the entire Class Period, “the average fees that Prudential received was at least 4 times more than the average paid by other substantially similar plans.”

The suit also asks for a jury trial.

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 suit notes that, “though not named as Defendants, certain service providers are fiduciaries to the Plan participants and are parties in interest in the matter. Prudential Trust Company serves as trustee of the Plan. Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company serve as custodians to the Plan for certain investments. These entities are collectively referred to as “Prudential.” Both the trustee and custodians hold the Plan's investment assets and execute investment transactions. UBS Financial Services Inc. was the Plan’s financial consultant from the years 2017 until 2020, later replaced by Sageview Advisory Group, LLC in 2020. These entities are a “party-in-interest” to the Plan, whose services and compensation Defendants had a duty to monitor.”