June has already been a busy month for 401(k) litigation, and the law firm of Capozzi Adler PC, has filed yet another such suit.
Earlier last month they filed suit against Aegis Media Americas Inc.—the firm that brought suit about a year ago against the BTG International Inc. Profit Sharing 401(k) Plan, earlier this year the $2 billion health technology firm Cerner Corp., and less than a month ago Pharmaceutical Product Development, LLC Retirement Savings Plan, and Gerken v. ManTech Int’l Corp. Oh, and Capozzi Adler happens to be one of the three law firms specifically named in at least one P&C insurer’s policy renewal questionnaire, alongside Schlichter Bogard & Denton LLP and Nichols Kaster PLLP.
This time the plaintiffs are Mary K. Boley, Kandie Sutter and Phyllis Johnson, who are suing on behalf of the other participants in the King of Prussia, Pennsylvania-based Universal Health Services, Inc., Retirement Savings Plan. With some $1.9 billion in assets (and nearly 42,000 participants), the plaintiffs here argue that the plan “had substantial bargaining power regarding the fees and expenses that were charged against participants’ investments. Defendants, however, did not try to reduce the Plan’s expenses or exercise appropriate judgment to scrutinize each investment option that was offered in the Plan to ensure it was prudent.”
At a high level, the suit (Boley v. Universal Health Servs., Inc., E.D. Pa., No. 2:20-cv-02644, complaint 6/5/20) claims that the plan fiduciaries breached their duty to the plan and participants by “(1) failing to objectively and adequately review the Plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; and (2) maintaining certain funds in the Plan despite the availability of identical or materially similar investment options with lower costs and/or better performance histories.” And then, they allege that “to make matters worse, Defendants failed to consider lower cost collective trusts[i] that were available to the Plan as alternatives to certain mutual funds in the Plan.” The suit claims that those actions “were contrary to the actions of a reasonable fiduciary and cost the Plan and its participants millions of dollars.”
In addition, the suit picks up on a theme that has been emerging with some frequency in cases brought by the Capozzi law firm, specifically that “like other companies that sponsor 401(k) plans for their employees, UHS enjoys both direct and indirect benefits by providing matching contributions to Plan participants,” specifically the tax deduction they receive (for making contributions to the plan), and that in making those contributions, they not only are able to “attract and retain talent at their company. By hiring and retaining employees with a high caliber of talent, [a company] may save money on training and attrition costs associated with unhappy or lower-performing workers.” In sum, they claim that “given the size of the Plan, UHS likely enjoyed a significant tax and cost savings from offering a match.”
The suit pointed to the retention of “several actively-managed funds” … ”despite the fact that these funds charged grossly excessive fees compared with comparable or superior alternatives, and despite ample evidence available to a reasonable fiduciary that these funds had become imprudent due to their higher costs relative to the same or similar investments available.” Not only that, but they claim that “this fiduciary failure decreased participant compounding returns and reduced the available amount participants will have at retirement.” The suit claims that “at least 20 out of the Plan’s 31 funds (65%) were much more expensive than comparable funds found in similarly-sized plans (plans having over a billion dollars in assets),” and that their expense ratios “…in some cases were up to 203% (in the case of the Northern Small Cap Value fund) and 218% (in the case of the MSIF Small Cap Growth IS fund) above the median expense ratios in the same category.”
In essence, the plaintiffs here allege that “defendants failed in their fiduciary duties either because they did not negotiate aggressively enough with their service providers to obtain better pricing or they were asleep at the wheel and were not paying attention. Either reason is inexcusable.”
The plaintiffs also take issue with the revenue-sharing practices of the plan, a program they allege that “over the years, this arrangement of placing revenue sharing funds into a Revenue Account before disbursement to pay for Plan expenses deprived Plan participants of use of their money and millions of dollars in lost opportunity costs.” Instead, they argue that “a more prudent arrangement in this case would have been to select available lower cost investment funds that used little to no revenue sharing and for the Defendants to negotiate and/or obtain reasonable direct compensation per participant recordkeeping/administration fees.”
And then, “to make matters worse,” the plaintiffs allege, “in 2017 the Plan fiduciaries added two new funds but failed to prudently investigate whether the funds were the lowest-cost share class available.” This “failure to do so was because either Defendants did not negotiate aggressively enough with their service providers to obtain better pricing or they simply were not paying attention,” they claim.
The plaintiffs described the plan’s structure as “rife with potential conflicts of interest because Fidelity and its affiliates were placed in positions that allowed them to reap profits from the Plan at the expense of Plan participants.” Here, of course Fidelity was both trustee of the plan, and recordkeeper (though a different affiliate company).
In sum, the plaintiffs allege breaches of fiduciary duty for:
- failing to monitor and evaluate the performance of the Committee Defendants or have a system in place for doing so, standing idly by as the Plan suffered significant losses in the form of unreasonably high expenses, imprudent choices of funds’ class of shares, and inefficient fund management styles that adversely affected the investment performance of the Funds’ and their participants’ assets as a result of the Committee Defendants’ imprudent actions and omissions;
- failing to monitor the processes by which Plan investments were evaluated, the Committee Defendants’ failure to investigate the availability of lower cost share classes, and the Committee Defendants’ failure to investigate the availability of lower-cost collective trust vehicles; and
- failing to remove Committee members whose performance was inadequate in that they continued to maintain imprudent, excessively costly, and poorly performing investments within the Plan, and caused the Plan to pay excessive recordkeeping fees, all to the detriment of the Plan and Plan participants’ retirement savings.
And as a result, they allege that the “Plan suffered millions of dollars of losses,” and if they hadn’t, “Plan participants would have had more money available to them for their retirement.”
[i]In fact, at one point the suit claims that it was “a clear indication of Defendants’ lack of a prudent investment evaluation process was their failure to identify and select available collective trusts.”