ADP MEP Draws Schlichter Scrutiny

For the second time in a week, suit has been filed against the fiduciaries of the $4.4 billion ADP TotalSource Retirement Savings Plan—but with some interesting twists, including allegations about the use of “confidential plan participant data for profit.”

Earlier last week, suit had been brought by a participating employer in ADP’s multiple employer plan (MEP)—and if most of the allegations were similar, and the venue (the U.S. District Court for the District of New Jersey) and the named defendants (ADP TotalSource, Inc., Automatic Data Processing, Inc., the ADP TotalSource Retirement Savings Plan Committee, NFP Retirement, Inc., and John Does 1–40) identical, this time the plaintiffs were participants (Beth Berkelhammer and Naomi Ruiz)—participants represented by none other than the law firm of Schlichter Bogard & Denton[i] (and Spiro Harrison).

The Allegations

At a high level, the allegations made in this suit (Berkelhammer v. ADP TotalSource Group Inc., D.N.J., No. 20-cv-05696, complaint filed 5/7/20) were that the ADP defendants:

• breached their fiduciary duties and engaged in prohibited transactions by failing to monitor and control the Plan’s recordkeeping fees and causing the Plan to pay excessive fees;
• breached their fiduciary duties and engaged in prohibited transactions by unlawfully paying themselves from Plan assets; and
• selected and retained imprudent investments in the Plan (higher cost—“though it is difficult to discern the share classes or total Plan investment alternative expense ratios from available data, preliminary calculations indicate that Defendants’ failure to include the least-expensive shares of identical investments in the Plan resulted in losses to participants of nearly $9 million” and lower performing).

Another common point of contention; reliance on asset-based fees to cover the recordkeeping costs. “Although paying for recordkeeping with an asset-based fee is not a per se violation of ERISA,” the plaintiffs acknowledge here, they go on to note that “it can lead to excessive fees if not monitored and capped by the plan fiduciary.” Moreover, asserting that “if a fiduciary allows the plan recordkeeper to be compensated with an asset-based fee then the payments can become excessive based on an increase in plan assets alone.” While the suit once again embraces the premise that recordkeeping charges should be per-participant, they note that significant increases in asset values can produce “large increases in asset-based fees for services which have not changed,” but that “if plan assets decline, participants will not receive a sustained benefit of paying lower fees, because the recordkeeper will demand that the plan make up the shortfall through additional direct payments.”

The suit also treads familiar grounds raised in other cases brought by the Schlichter law firm (first raised in a suit involving Shell’s 401(k) and subsequently in one involving Liberty Mutual), bringing in for (unfavorable) reference the recordkeeping fees paid by comparable plans, specifically Nike, New Albertsons and Fidelity.

The plaintiffs claims that the defendants “failed to analyze whether the direct and indirect  compensation paid to Voya and its affiliates was reasonable compared to market rates for the same services,” and also that they “failed to retain an independent third party to appropriately assess the reasonableness of Voya’s compensation in light of the services rendered to the Plan.” The suit claims that in 2015, the plan paid Voya at least $6.8 million in recordkeeping fees, which they claim amounts to an average of $91.36 per participant—and that a year later that had risen to an average of $117 per participant. However, the plaintiffs claim that “…at maximum the reasonable recordkeeping fee for the Plan would have been …an average of $30 per-participant from 2014 to 2015 and $25 per-participant from 2016 to 2018.”

New Angles

There were also a couple of new angles, specifically that the defendants:

• breached their fiduciary duties and engaged in prohibited transactions by causing the Plan to pay excessive managed account fees (“lower-cost alternatives, such as balanced funds or target date funds, are prudent alternatives, which provide the objective of participants being able to avoid having to make frequent decisions about asset allocations”); and
• breached their fiduciary duties and engaged in prohibited transactions by allowing the Plan’s service providers to collect and use Confidential Plan Participant Data for profit.

The latter is an issue first introduced in the 403(b) university suits (the first introduced in August 2016 by the Schlichter firm, though the data issue didn’t emerge until the suit against Vanderbilt University in 2018). Specifically outlined here was the use of plan participants’ “highly confidential data, including social security numbers, financial assets, investment choices, and years of investment history to aggressively market lucrative non-Plan retail financial products and services, which enriched the service providers at the expense of participants’ retirement security.”

The plaintiffs allege that the “entities that provide services to defined contribution plans have an incentive to maximize their fees by putting their own higher-cost funds in plans, collecting the highest amount possible for recordkeeping and managed account services, rolling Plan participants’ money out of the Plan and into proprietary IRAs, soliciting the purchase of wealth management services, credits cards and other retail financial products, and maximizing the number of non-plan products sold to participants.” They claim that “for each additional dollar in fees paid to a service provider, participants’ retirement savings are directly reduced by the same amount, and participants lose the potential for those lost assets to grow over the remainder of their careers.”

Because of this, the plaintiffs allege that “fiduciaries must be cognizant of providers’ self-interest in maximizing fees, and cannot simply accede to the providers’ desires and recommendations—e.g., by including proprietary funds and managed account services that will maximize the provider’s fees without negotiating or considering alternatives,” and that “…fiduciaries must negotiate as if their own money and information is at stake.”

PEO 'Petard'

In making their case, the plaintiffs point out that “a key selling point for PEOs that offer their clients the opportunity to join a multiple employer defined contribution plan is the ability to leverage the assets and efficiencies of the whole group to drive down costs,” and that “plans that bundle together employers offer significant cost efficiencies, because costs are spread across a larger participant and asset base.” Taking pages (literally) from promotional materials regarding MEPs, the suit cites the “substantial economies of scale and cost efficiencies” of that platform, and note that “MEPs may provide the ability for employers to transfer fiduciary responsibility and oversight to a single, centralized entity.”

The suit notes that in 2019, an asset-based fee of 0.32% of all Plan assets was deducted as part of the expense ratio of each investment alternative in the plan to fund this plan account, and that the plan pays Voya’s recordkeeping fees from these revenue sharing funds, but not only that “the ADP Defendants caused the Plan to pay any remaining revenue sharing, after administrative expenses are paid, to ADP TotalSource,” but that these payments are “wholly unconnected to any services that ADP TotalSource provides to the Plan.” The plaintiffs allege that “all these excess amounts were Plan assets, since they constituted excessive fees generated from participant investments, and should have been restored to the Plan.” They claim that, from 2014-2018 “the ADP Defendants took for themselves out of these Plan assets nearly $10 million in putative reimbursement of administrative costs in the following amounts per year.”

The plaintiffs also claim that “each Adopting Employer separately pays ADP TotalSource fees under their respective Client Services Agreements for the costs to maintain payroll and other services—a component of the PEO arrangement,” that ADP TotalSource must maintain detailed records regarding each of the Adopting Employers’ employees—and that not only are these recordkeeping and other tasks “duplicative of the typical core recordkeeping and administration functions provided to defined contribution plans,” but that the fees that the ADP Defendants collect from the Plan (and its participants) for administration are “wholly duplicative of other fees that Participating Employers must pay as a condition of joining the PEO.” All in all, they claim that had “Defendants performed their fiduciary duties, the Plan would not have suffered over $13.5 million in losses from May 2014 through 2019, accounting for lost investment opportunity.”

Data Driven?

The suit claims that retirement plan participants “have an absolutely reasonable expectation that their Confidential Plan Participant Data will be protected by the plan sponsor and not disclosed outside of the plan for non-plan purposes,” and that “allowing a retirement plan’s recordkeeper to exploit Confidential Plan Participant data is contrary to plan participants’ best interests because the recordkeeper has the advantage of employer approval of it selection for the Plan and the implicit endorsement of these non-plan services and products, without competition.”

Instead, the plaintiffs argue that the participants’ data here “was made available to conflicted sales representatives who had access to their personal details, including at vulnerable times in their lives, such as contemplating rollovers or other major investment decisions, under the imprimatur of employer-sponsored Plan approval.” They go on to state as fact that “plan participants’ valuable Confidential Plan Participant Data, a Plan asset, was transferred to a party in interest…” entitling the Plan to complete disgorgement of the profits generated therefrom.” However, arguing in the alternative, they allege that “even if Confidential Plan Participant Data were not a Plan asset, permitting the use of Confidential Plan Participant Data is a fiduciary breach…”

As for that managed account, the suit alleges that “defendants allowed Voya to decide the Plan’s managed account provider not based on merit, but because Voya requested that Voya Retirement Advisors provide managed account services.” They also take issue with the structure where Voya Retirement Advisors “limits its investment recommendations to the investment alternatives available in the Plan, a far smaller number, and many of which are its own proprietary funds,” and that the amount the plan’s participants paid to Voya Retirement Advisors for managed account services “rose dramatically between 2014 and 2018, from approximately $770,000 to $2.3 million.”

Relief Brief

As for what the plaintiffs are seeking:

• A finding and declaration that “Defendants have breached their fiduciary duties,” that the “Defendants are personally liable to make good to the Plan all losses to the Plan resulting from each breach of fiduciary duty, and to otherwise restore the Plan to the position it would have occupied but for the breaches of fiduciary duty.”
• A determination of the method by which those losses should be calculated—and for the defendants to “provide all accountings necessary to determine the amounts Defendants must make good to the Plan.”
• Remove the fiduciaries who have breached their fiduciary duties and “enjoin them from future ERISA violations.”
• To “surcharge against Defendants and in favor of the Plan all amounts involved in any transactions which such accounting reveals were improper, excessive and/or in violation of ERISA.”
• To “reform” the plan so that it includes “only prudent investments,” such that it obtains “bids for recordkeeping and to pay only reasonable recordkeeping expenses,” to “obtain bids for managed account services and to pay only reasonable managed account service fees if the fiduciaries determine that managed account services is a prudent alternative to target date or other asset allocation funds.”
• Oh, and to certify the class, appoint the plaintiffs as a class representative, Schlichter, Bogard & Denton LLP[ii] as Class Counsel—and to award fees and costs.

Stay tuned.