Allegations of Excessive Fees Predominant in ERISA Litigation
The Employee Retirement Income Security Act (ERISA) lays out the rules for the proper administration and investment of employee benefit plans. An awareness of current ERISA litigation can help ERISA fiduciaries better understand their ERISA-mandated duties and facilitate compliance.
The following cases – some dismissed, some settled, and some just filed – are good reminders of the importance of understanding the rules of ERISA.
McCaffree Financial Corp. v. Principal Life Ins. - Dismissed
Summary: The plan sponsor, McCaffree, sued its service provider, Principal, claiming excessive and unnecessary fees were charged against certain investment options. The court held that Principal was not an ERISA fiduciary to the plan at the time the service contract was signed. While the fees charged were likely excessive, McCaffree failed to establish a connection between the fees and any post-contractual fiduciary duty Principal may have owed plan participants.
Lesson: Buyer beware; understand who is an ERISA fiduciary and who is not.
Anderson v. Principal Life Ins. - Settled
Summary: The plaintiffs, representing current and former employees of Principal, sued their employer claiming breach of the duty of loyalty and excessive fees. Principal settled the case for $11 million and was required to cut ongoing administration fees in half.
Lesson: When the plan sponsor has an interest in or relationship to a party of interest to the plan, special care must be taken.
Bilewicz v. Fidelity - Settled
Summary: The plaintiffs, representing current and former employees of Fidelity, sued their employer claiming breach of the duty of loyalty and excessive fees. Fidelity settled for $12 million and was required to add non-Fidelity funds to the investment menu.
Lesson: All plan investment decisions must be made in the best interests of the participants, regardless of conflicting interests.
Kruger v. Novant Health - Settled
Summary: Plan participants sued their employer, Novant Health, alleging a breach of the prudent expert rule due to excessive fees and unreasonable compensation to the plan's service providers, Empower and DL Davis. Novant Health settled the case for $32 million and was required to hire an outside expert to assist in reviewing all investment alternatives within the plan.
Lesson: It is standard industry practice for investment advisors that are affiliated with a broker/dealer to receive indirect compensation from those they recommend. This practice should be closely monitored by plan fiduciaries because of the conflicts it creates.
Spano v. Boeing - Settled
Summary: Plan participants sued their employer, Boeing, claiming a breach of the prudent expert rule due to excessive fees and unreasonable compensation to the plan's service provider, State Street. The case started in 2006 and settled in 2015 for $57 million.
Lesson: Asset-based plan administration fees can be reasonable when first negotiated, but as plan assets rise, they can quickly become unreasonable.
Abbott v. Lockheed - Settled
Summary: Plan participants sued their employer, Lockheed, claiming a breach of the prudent expert rule due to excessive fees and unreasonable compensation to the plan's service provider, State Street. The case started in 2006 and settled in 2015 for $62 million, making it the largest settlement of its kind.
Lesson: Per head administrative fees are the ultimate measure of reasonableness and the best mechanism when negotiating administrative fee arrangements.
Sulyma v. Intel - Filed October 2015
Summary: Plan participants are suing the Intel Investment Committee claiming a breach of the prudent expert rule. The complaint alleges poor performance resulted from imprudently investing an extraordinarily high percentage (+40%) of the plan's target-date retirement funds in “high priced alternatives” without the aid of an outside expert.
Lesson: Investment decisions do not have to always lead to outperformance, but they must demonstrate compliance with a prudent process that takes into consideration cost, risk, and historical results.
Bell v. Anthem - Filed December 2015
Summary: Plan participants are suing their employer, Anthem, claiming a breach of the prudent expert rule due to excessive fees and unreasonable compensation to the plan's service provider, Vanguard. The case alleges the plan was not using the lowest-cost share class, was using a “microscopically low yielding” money market fund instead of a stable value fund, and had unreasonably high per-head recordkeeping fees.
Lesson: It is not enough for total plan costs to be lower than your peers. ERISA fiduciaries must be able to demonstrate they do not force participants to pay “excessive” fees for any component of plan administration.
Troudt v. Oracle - Filed January 2016
Summary: Plan participants are suing their employer, Oracle, claiming that the plan fiduciaries breached their duties of loyalty and prudence. The complaint insinuates that Oracle looked the other way while plan participants were forced to pay excessive recordkeeping fees and invest in inferior funds because of Oracle’s desire to please Fidelity, its sixth-largest shareholder.
Lesson: Outside relationships with 401(k) plan service providers increase the risk that participants can successfully claim a breach of duty of loyalty and should be closely monitored, preferably by a third party.
The information presented here has been obtained from sources believed to be reliable, but Francis Investment Counsel does not guarantee its accuracy or completeness. Francis Investment Counsel does not provide tax or legal advice. Please consult your tax and/or legal advisor for such guidance.