Another Plan ‘Panned’ by Capozzi Adler

Capozzi Adler PC has filed another excessive fee suit, claiming that the plan fiduciaries’ actions were “contrary to actions of a reasonable fiduciary and cost the Plan and its participants millions of dollars.” 

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. Earlier this 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. 

The target this time is the $839 million 401(k) plan of defense contractor ManTech International Corp., sued in the Eastern District of Virginia (Gerken v. ManTech Int’l Corp., E.D. Va., No. 3:20-cv-00350, complaint 5/15/20) by four former employees. The allegations are familiar: The plan “had substantial bargaining power regarding the fees and expenses that were charged against participants’ investments,” but “…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.”

Match ‘Makings’

This case—and this new wave of litigation—does make some unique points, notably that the employer here “enjoys both direct and indirect benefits by providing matching contributions to Plan participants,” that they are “…generally permitted to take tax deductions for their contributions to 401(k) plans at the time when the contributions are made,” and that “…it is well-known that “[o]ffering retirement plans can help in employers’ efforts to attract new employees and reduce turnover.” Ultimately, the point is that “given the size of the Plan, ManTech likely enjoyed a significant tax and cost savings from offering a match.”

Beyond that, and consistent with the excessive fee litigation genre, the plaintiffs here allege that the defendants:

• “included and retained in the Plan many mutual fund investments that were more expensive than necessary and otherwise were not justified on the basis of their economic value to the Plan”
• “failed to have a proper system of review in place to ensure that participants in the Plan were being charged appropriate and reasonable fees”
• “failed to leverage the size of the Plan to negotiate for (1) lower expense ratios for certain investment options maintained and/or added to the Plan during the Class Period and (2) lower recordkeeping and administrative fees”
• “retained several actively-managed funds as Plan investment options 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 high costs”

Other Allegations

The suit claims that “a signification portion of funds in the Plan, almost half, were much more expensive than comparable funds found in similarly sized plans,” and takes issue with the choice of mutual fund option, rather than either collective trusts or separate accounts,” as well as the use of active rather than less-expensive passive strategies. With regard to the latter, the plaintiffs characterized them as “closet index funds because they charge as if they are actively managed but vary little from the index benchmark.”

The plaintiffs here criticize, though do not out-and-out condemn[i] the use of revenue sharing. They also criticize the longevity of the relationship with the plan’s recordkeeper (Fidelity), with “…no evidence Defendants have undertaken an RFP since 2004 in order to compare Fidelity’s costs with those of others in the marketplace.” The plaintiffs further claim that what they determined was the recordkeeping fees paid by the plan (“on average between $65-$90 for each year during the Class Period”) was “clearly unreasonable as they are well above recognized reasonable rates for large plans,” although in support of that notion, they rely on a series of cases and the assertions of plaintiffs’ experts in those cases.[ii]

And while not a party to the suit, the plaintiffs allege that “the structure of this Plan is 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,” citing the provider’s role as trustee and recordkeeper, as well as investment manager, and its brokerage link, going on to note that “…even when Plan participants roll out of the Plan because they have ended employment with the Company, they are subject to an automatic rollover where their funds are rolled over into an IRA managed by Fidelity Investments.”

What’s Next?

While there are a couple of new elements raised, for the very most part this is a recitation of all the customary elements that these suits dredge up. Will these allegations hold up under scrutiny? Will this defendant push back, or will they settle—or will they push back and then settle? Or might they stand in, take it to court and prevail?

Time will tell.