The parties in an excessive fee suit involving proprietary funds have come to terms on a settlement agreement.
The suit, filed in October 2015 in U.S. District Court in Santa Ana, CA, by plaintiffs Aleksandr Urakhchin and Nathan Marfice, charges that participants in PIMCO’s 401(k) pay more than 75% more in fees that the average U.S. 401(k) plan because they are given a choice of only PIMCO and Allianz funds.
The suit also alleges “a pattern and practice of adding new and unproven mutual funds as investment options within the Plan shortly after the new funds are launched,” and that the plan fiduciaries “even use the Plan’s default investment option as a mechanism for providing seed money to these funds.” Moreover, while other so-called “excessive” fee judgments have looked favorably on the availability of a self-directed brokerage account (SDBA) alongside a proprietary fund menu (e.g., Hecker v. Deere), in this case the plaintiffs argued that “…those who choose to utilize an SDBA are typically assessed an account fee and a fee for each trade.”
Under the terms of the proposed settlement (Urakhchin v. Allianz Asset Mgmt. of Am., L.P., C.D. Cal., No. 8:15-cv-01614-JLS-JCG, motion for preliminary settlement approval 12/26/17), Allianz (more specifically Allianz Asset Management of America) will pay $12,000,000 into a common fund for the benefit of class members (defined as all participants and beneficiaries of the plan at any time during the class period (10/7/2009 through 12/26/2017), excluding defendants, their directors and any employees with responsibility for the plan’s investment or administrative functions). Under the terms of the agreement, that settlement would be allocated pro rata among approximately 5,600 class members “in proportion to their account balances in the Plan during the Class Period – after deduction of any attorneys’ fees, expenses, and class representative awards approved by the Court.”
Moreover, the settlement also provides for an independent consultant to review the investment options in the plan, and for what is described as “other prospective relief.” The settlement says that for a period of no less than three years from the settlement agreement’s effective date, Allianz will retain an “unaffiliated investment consultant” to provide an “annual evaluation of the Plan’s investment lineup and review the Plan’s investment policy statement.”
Additionally, the settlement says that any revenue sharing amounts received by the plan’s recordkeeper (currently Charles Schwab & Co., Inc.) on investments held by plan participants will be rebated to participants’ plan accounts, and that the plan’s investment committee meeting minutes will include a description of the investment committee’s rationale for the inclusion of any new designated investment alternative in the plan’s investment lineup.
The plaintiffs note (as all such settlement agreements do) that “this is a fair and reasonable recovery,” not only in “light of the attendant risks of litigation,” but that it is “well within the range of negotiated settlements in similar ERISA cases” – and that the defendants do not oppose the settlement.
The agreement notes that the plaintiffs’ expert, Dr. Pomerantz, calculated total plan wide losses (including losses due to both allegedly excessive fees and investment underperformance) under four different models, and that for three of those four models, “the estimated losses fell within a relatively narrow range of between $39.5 million and 47.0 million” (with the fourth model generating a higher estimate of $65.3 million). He also attempted to break out the losses due to excessive fees based on various scenarios, including comparisons to other plans (based on data from the Investment Company Institute) and comparisons to other popular funds and Vanguard index funds, and that under most of those scenarios, the estimated “excess fee” damages also fell within a range of between $15.2 million and $24.1 million (with the index funds comparison generating a higher excess fee estimate of $41.0 million).
Therefore, the plaintiffs’ state that the negotiated $12 million recovery exceeds 20-25% of the total estimated losses under the majority of the models, “and a higher percentage if one were to look only at that portion of his analyses that focus on fees.” As other settlements have, they cite the uncertainty of success, specifically noting the case of Brotherston v. Putnam Investments, LLC, where Putnam prevailed in a similar excessive fee suit involving the use of proprietary funds, and where a federal judge found that the plaintiffs not only failed to identify any specific circumstances in which the company and its 401(k) plan put their own interests ahead of the interests of plan participants, but that the plaintiffs failed to show how Putnam’s allegedly imprudent actions resulted in losses that required compensation.
As for the attorney’s “cut,” the settlement agreement notes that while counsel will file a motion for attorneys’ fees, costs and administrative expenses, “in no event shall Class Counsel seek more than 25% of the Qualified Settlement Fund as attorneys’ fees.”
Now we’ll see what Judge Josephine L. Staton of the U.S. District Court for the Central District of California makes of the case.