A new excessive fee suit has been filed—one that purports to represent a class of some 5,000 employers participating in a multiple employer plan, or MEP.
The suit was filed in the U.S. District Court for the District of New Jersey by McCaffree Financial Corp., individually as a participating employer co-sponsor and a fiduciary of the ADP TotalSource Retirement Savings Plan, which has filed suit “on behalf of the Plan and a class of similarly-situated participating employer co-sponsors or other fiduciaries, against ADP, Inc., ADP TotalSource Group, Inc., as well as the administrative committee of the ADP TotalSource Retirement Savings Plan and its members. The suit also names the plan’s investment advisor (401K Advisors, Inc. n/k/a NFP Retirement) for breach of their fiduciary duties.
The suit claims that there are “…many indications that Defendants have severely breached their fiduciary duties of prudence and/or loyalty to the Plan.” As of Dec. 31, 2018, the defendant plan had 114,254 participants with account balances and assets totaling over $4.44 billion, and alleges that the defendants:
(1) allowed unreasonable recordkeeping/administrative expenses to be charged to the Plan;
(2) failed to adequately monitor the Plan’s recordkeeper and its affiliates, who the ADP Defendants have permitted to design an investment menu unreasonably favorable to them despite the recordkeeper’s clear conflicts of interest; and (along with NFP Retirement),
(3) selected, retained and/or otherwise ratified high-cost and poorly performing investments, when more prudent alternative investments were available at the time that they were chosen for inclusion within the Plan and throughout the relevant period.
With regard to the first claim, the plaintiffs acknowledge that they have “…been unable to conduct a complete evaluation of the Total Plan Cost (“TPC”) of the Plan as the expense ratios for five of the collective trust investment options are not publicly available.” Nonetheless, they allege that even a partial calculation “indicates that the Plan’s TPC is outrageous and significantly above the market average for similarly-sized and situated 401(k) plans.” More specifically, the suit claims that the most recent Brightscope/ICI study published in June 2019 indicates that the average TPC for a plan with over $1 billion in assets was 0.28% of net assets as of 2016, whereas their calculation of the fees for the plan in question ranges between 0.65% to 0.78% of net assets.
That, they claim “caused the Plan to incur annual overpayments of fees of at least $16.4 million to $22.2 million (without even taking into account expenses and payments related to the five undisclosed collective trust investment options),” which the suit argues would make that gap even larger. Moreover, their estimates assume the lowest cost share class for each option—“if the Plan is, in fact, invested in any of the more expensive share classes of its mutual fund options,” the suit points out, “the TPC will be even higher and even more objectively outrageous in nature.”
Citing the 401(k) Averages Book, the plaintiffs allege that “the average cost for recordkeeping and administration in 2017 for plans much smaller than the Plan (plans with 100 participants and $5 million in assets) was $35 per participant.” And thus, they continue, “given its size, and resulting negotiating power, with prudent management and administration, the Plan would have unquestionably been able to obtain a per-participant cost significantly lower than $35 per participant.” By their calculations, however, the per-participant fees paid by the ADP program ranged from $79.76/per participant to $124.28/participant during the period in question, aside from the administrative costs that they claim as a percentage of plan assets, ranged from 0.29% to 0.42% from 2014-2018. All in, the plaintiffs allege that, “given the size of the Plan, this difference resulted in annual overpayments of fees of between $440,000 and $6.22 million, not including payments related to investment management.”
The plaintiffs point to this gap as a de facto evidence of a fiduciary breach, though they go on to assert that “in connection with the exorbitant recordkeeping and administrative fees, the ADP Defendants also appear to have given Voya carte blanche in designing the Plan’s investment menu so as to permit Voya to extract the most fees possible.” More specifically, they allege that the defendants “could have, and should have, demanded non-proprietary funds to avoid any potential or realized conflicts of interest.”
Indeed, they argue that “many of the Plan’s investment options are objectively imprudent, separate and apart from the apparent excesses with respect to the Plan’s recordkeeping and administrative fees and relationship with Voya, which the Plan entered into at Defendants’ behest.” As many of these suits have, these defendants also criticized the use of actively managed funds, but they held up for special criticism Voya’s target date collective trusts going so far as to claim that these “should not be offered as investment options in a plan of the Plan’s size (and likely not in any retirement plan offered in the United States),” both because of their cost (39 basis points) and performance.
To make the case that the funds were not widely used, they suit notes that, “as of December 31, 2019, the Voya Target Solution Collective Trusts only had a total of $2.6 billion in assets under management. Of that $2.6 billion, the Plan held $1.49 billion, or 57% of the total assets under management.”
Finally, the plaintiffs say that as Voya is “also the Plan’s recordkeeper, and, as detailed above, is receiving exorbitant recordkeeping and administrative fees for its services, indicates that the ADP Defendants had other motivations besides the interests of the Plan and its participants in selecting and retaining Voya’s target date investment options.”
Much of the remainder of the 37-page suit is devoted to walking through the performance and costs of other funds on the menu, restating that “it is objectively imprudent to select and retain an investment option that does not consistently (or, at a minimum) outperform its benchmark.”
However, when it comes to litigation involving MEPs, interestingly enough, Schlichter Bogard & Denton has a web page separate from its firm page that indicates it “is currently investigating ADP TotalSource's practices in administering retirement plans.” The site also mentions investigations in the multiple employer plans (MEPs) of Pentegra and TriNet.