Another billion-dollar plan finds itself in the crosshairs of an excessive fee lawsuit, raising some allegations common to this litigation – with a couple of new twists.
The suit, Creamer v. Starwood Hotels & Resorts Worldwide Inc. (C.D. Cal., No. 2:16-cv-09321), filed Dec. 16, 2016 in the U.S. District Court for the Central District of California, charged that Starwood Hotels & Resorts Worldwide Inc. “caused Plan participants who invested in index funds to pay seven times more than a reasonable fee due to multiple layers of fees. It failed to follow the express written instructions of Plan participants. It failed to make adequate disclosure concerning its practice of revenue sharing. Further, it failed to include a stable value fund instead of a money market fund in the investment option” – and it “ignored explicit instructions of Plan participants as to how their retirement money should be invested. It intentionally and consciously chose investment options which subjected Plan participants to poor performance and high fees.”
As of Dec. 31, 2015, the plan had assets of $1,226,298,526 and 43,580 participants, according to the suit.
Excessive Fee Claims
The suit claims that, at about the same time as the Tibble decision, Starwood managed to cut the fees of its fund offerings cut in half, reducing them an average of 40 basis points (.40%). Proving that no good deed goes unpunished, plaintiffs point out that, “This means that for the prior five years, an unnecessary $20 million in fees were incurred by Plan participants – 40 basis points times $1 billion in assets equals $4 million per year in excess fees or $20 million over a five year period.”
The plan’s Brightscope rating was invoked, with the plaintiffs noting that the difference in Starwood’s rating compared with the top BrightScope rating for peer plans means that “sixteen years of additional work was required by Starwood employees to reach the same level of savings as peer plan participants,” and that therefore Starwood participants lost savings of $110,871 per participant, or $5 billion collectively, as compared to the highest ranking peer plan.
The plaintiffs here, as have plaintiffs in other excess fee litigation, charged that the assessment of asset-based recordkeeping fees, rather than per participant, resulted in unnecessary fees, charged that the plan sponsor failed to disclose to participants its revenue-sharing arrangements, and challenged the use of a money market fund, rather than a stable value offering.
Stable Value Shortcoming
Starwood’s Plan had $133 million sitting in a money market fund “earning a measly .65 percent a year and nothing in any stable value fund,” according to the suit. Plaintiffs claim that Vanguard’s Battelle Stable Value Fund had a five-year return of 2.94%, or 2.29% more than the Starwood’s Plan’s money market. “An enhanced performance of 2.29% on $133 million over six years equals lost income to Plan participants of $18 million,” according to the suit.
The plaintiffs claimed that the defendants subjected participants to two layers of fees that were seven times larger than comparable Vanguard funds, specifically through its holdings of BlackRock LifePath Index funds ($280 million of the plan’s $1.2 billion in assets) which, according to the suit “just hold other BlackRock index funds.”
Failure to Follow
However, perhaps the most unusual aspect of this particular lawsuit had to do with its claim that plan fiduciaries failed to follow participant instructions. They cite as an example the experience of plaintiff Charles Creamer who, according to the suit, in 2010 elected to have his contributions diversified over six separate funds, “but Starwood ignored that directive and put 100% of Creamer’s money into a single fund, the BlackRock LifePath 2050 Index Fund.” The suit claims that the same thing happened in 2011, 2012, 2013, 2014, and 2015 – and then, in 2016, Starwood “finally put 12% of Creamer’s money into the six funds that he had selected – JP Morgan Dividend Real Return, T Rowe Price Large Cap Value, Vanguard Institutional Index, Hartford Mid Cap, Manning & Napier Overseas, and Victory Integrity Small Cap Value” – but still left 88% of Creamer’s money in the LifePath 2050 Fund “that he had not even selected.” One can only surmise that there was some flaw in how plaintiff Creamer submitted those instructions or how they were interpreted – but the suit offers no perspective on that.