Excessive Fee Case Moves Forward

Plan fiduciaries largely lost their attempt to dismiss charges filed by plan participants in an excessive fee suit brought by the St. Louis-based law firm of Schlichter, Bogard & Denton.

The lawsuit, filed in late 2015 in the Southern District of Indiana, alleged that fiduciaries of the $5.1 billion Anthem, Inc. 401(k) plan failed to leverage the plan’s size and economic clout to take advantage of lower-fee investment options. This included lower-cost shares of the Vanguard funds that already dominated the plan’s menu — funds that the suit says were “readily available” to plans of this size. They also challenged Anthem’s failure to investigate and offer non-mutual fund investments, including collective trusts and separately managed accounts prior to 2013, as well as Anthem’s decision to offer the Vanguard Prime Money Market Fund, described as “microscopically” low-yielding in the suit, rather than a stable value fund providing higher returns. Also at issue in the suit are the record keeping fees paid to Vanguard.

In considering the motion to dismiss (Bell v. Pension Comm. of ATH Holding Co., 2017 BL 92116, S.D. Ind., No. 1:15-cv-02062-TWP-MPB, 3/23/17), Judge Tanya Walton Pratt dealt with two basic assertions on the part of the Anthem defendants: that the participant-plaintiffs failed to state a claim upon which relief can be granted, and that their claims were “untimely.” In the case of the latter, the court held that while certain “Plan Information” documents were available to participants disclosing fund fees and recordkeeping charges, since they didn’t disclose information about alternatives or outline the competitive bidding process used to obtain the fees, the documents were insufficient to provide information that would have started the three-year statute of limitations.

As for the failure to state a claim, the following five counts were outlined.

Unreasonable Investment Management Fees

Judge Pratt dismissed defendant arguments that defenses successfully raised in other cases (specifically Hecker v. Deere & Co., where the appellate court affirmed that “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund,” and Loomis v. Exelon Corp., where the plan offered both high-expense, high-risk and low-expense index funds, and left the decision to participants) because “neither court addressed whether a defendant violates their fiduciary duty in selecting high-cost investment options where identical investment options are available at a lower cost.”

Unreasonable Administrative Fees

In the suit, the plaintiffs had alleged that the Anthem defendants had breached their fiduciary duty by failing to solicit competitive bids from vendors on a flat participant fee and failed to monitor recordkeeping compensation to ensure that the plan’s record keeper received only reasonable compensation (they also claimed that reasonable compensation for recordkeeping was a flat fee of $30/participant). For their part, defendants argued for dismissal since there were no factual allegations that the recordkeeping fees are the result of any type of self-dealing. Judge Pratt held that self-dealing didn’t need to be established, just that the fiduciaries failed to act with prudence when failing to solicit bids and to monitor and control recordkeeping fees.

Refusal to Supply Requested Information

The plaintiffs alleged that the Anthem Pension Committee failed to supply plan information upon request, while the defendants pressed for dismissal because the plaintiffs alleged only that they sent two requests to the Pension Committee, who refused the requests upon delivery – but the plaintiffs failed to allege that the Pension Committee ever received their requests. Judge Pratt, finding no evidence that the lack of delivery was due to circumstances beyond the control of the plan committee – indeed that the deliberate refusal to accept the two requests from the plaintiffs’ attorneys “…does not amount to ‘matters reasonably beyond the control of the’ Pension Committee.”

Failure to Monitor Fiduciaries

The plaintiffs argued that the defendants breached their fiduciary monitoring duties by, among other things, “failing to ensure that the monitored fiduciaries: (1) had a process for evaluating the Plan’s administrative fees to ensure that the fees are reasonable; (2) considered comparable investment options, including lower-cost share classes of the identical mutual funds, that charged lower fees than the Plan’s mutual fund; and (3) removed appointees who continued to maintain imprudent, excessive-cost investments and an option that did not keep up with inflation.” Judge Pratt ruled there was substance to this claim with regard to the investment and administrative fees, but not with regard to the claims regarding the plan’s inclusion of a money market, rather than a stable value fund.

Failure to Consider the Use of a Stable Value Fund Instead of a Money Market Fund

The plaintiffs alleged that the defendants breached their fiduciary duty by providing and maintaining the Vanguard Prime Money Market Fund, while failing to prudently consider and make a reasoned decision regarding whether to use a stable value fund. However, Judge Pratt noted that both parties agreed that there was no duty to provide a stable value option rather than a money market fund, but whether the plan fiduciaries considered a stable value fund option and came to a reasoned decision for continuing to provide the money market fund instead. She noted that in these circumstances the plaintiff has the obligation to provide the factual grounds supporting his entitlement to relief – and, finding those missing, dismissed this claim.

And so, the case moves forward. BNA Bloomberg reports that the plaintiffs plan to file an amended complaint on the stable value charges.

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