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‘Astronomical’ Fees Targeted by Capozzi Adler in 403(b) Plan Suit


Another multibillion-dollar plan—this one a faith-based, not-for-profit health care organization and clinical care network—finds itself in the crosshairs of a Capozzi Adler lawsuit.

Plaintiffs Lawanda Holmes, Ani M. Miller and Brittany E. Roxbury (“by and through their attorneys”) filed suit against the fiduciaries of the $1.5 billion Baptist Health South Florida, Inc. 403(b) Employee Retirement Plan.

The plaintiffs—represented by Matthew Fornaro of Matthew Fornaro PA and Donald R. Reavey and Mark K. Gyandoh of Capozzi Adler PC[i]) claim that the defendants breached their duties as ERISA fiduciaries 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; 
  2. “maintaining certain funds in the Plan despite the availability of identical or similar investment options with lower costs and/or better performance histories; and 
  3. “failing to control the Plan’s recordkeeping costs.”

Administrative Start

Prior to initiating this action—and in a step unusual in such litigation to date—the Plaintiffs claim to have exhausted their administrative remedies. More specifically, the suit notes that they delivered and received confirmation of their administrative demand—but got no response, and so they declared that the “failure to respond within the time prescribed by the SPD deems Plaintiffs’ administrative claim exhausted.”

Having been “…denied meaningful access to the administrative review scheme because their attempt to exhaust their administrative remedies has been ignored. Second, the thrust of the Complaint is that the Plan fiduciaries failed in their obligation to prudently select and monitor the Plan’s investment options resulting in damages to the Plan and its participants. The SPD makes no specific provision to advance such a claim through the administrative process.” 

Investment Policy ‘Statements’

The Plan’s Investment Policy Statement enumerates the responsibilities of the Committee, and—according to the suit, it says that “the Committee must evaluate fund performance and the appropriateness of the Plan’s fees at least every quarter,” and that it must among other things, “evaluate each investment fund in terms of the performance compared to relevant market indices and peer groups.” In addition, the Committee must evaluate the “[r]easonabnleness of fees and costs associated with each investment fund.” 

Now, despite the allegations, the suit admits that “Plaintiffs did not have and do not have actual knowledge of the specifics of Defendants’ decision-making process with respect to the Plan, including Defendants’ processes (and execution of such) for selecting, monitoring, and removing Plan investments, because this information is solely within the possession of Defendants prior to discovery.” That said, “for purposes of this Complaint, Plaintiffs have drawn reasonable inferences regarding these processes based upon the numerous factors set forth below.”

‘Astronomical’ Fees

The plaintiffs here took issue with revenue-sharing (“although utilizing a revenue sharing approach is not here is no good-faith explanation for utilizing high-cost share classes when lower-cost share classes are available for the exact same investment”), claiming that the “administrative and recordkeeping fees were astronomical when benchmarked against similar plans.” Their reference source for this 23,000+ participant plan was the NEPC 2019 Defined Contribution Progress Report, and its findings based on 121 DC plans (average plan $1.1 billion in assets and 12,437 participants)—and the 401(k) Averages Book. The suit notes that the former found that no plan with more than 15,000 participants paid more than $50/participant whereas they claim that the plan in question charged anywhere from $118 to $158/participant during the period in question. The latter—admittedly focused on smaller plans—to make the point that a plan with 2,000 participants and $200 million in assets has an average recordkeeping and administration cost (through direct compensation) of (only) $5 per participant—on their way to an assertion that “reasonable rates for jumbo plans typically average around $35 per participant “with costs coming down every day.”

RFP Claims

They also take issue with the plan’s decision to stay with the same recordkeeper, while paying the “same relative amount in recordkeeping fees”—noting that “there is little to suggest that Defendants conducted an RFP at reasonable intervals” to determine whether the plan could obtain better recordkeeping and administrative fee pricing from other service providers “given that the market for recordkeeping is highly competitive, with many vendors equally capable of providing a high-level service.” As other such lawsuits have alleged, they state as fact “an RFP should happen at least every three to five years as a matter of course, and more frequently if the plans experience an increase in recordkeeping costs or fee benchmarking reveals the recordkeeper’s compensation to exceed levels found in other, similar plans.”

It wasn’t just recordkeeping fees that came in for scrutiny—the plaintiffs also took issue with the investment fund charges. “The Defendants could not have engaged in a prudent process as it relates to evaluating investment management fees,” the suit alleges, claiming that “in some cases, expense ratios for the Plan’s funds were 343% above the ICI Median (in the case of T. Rowe Price Retirement 2045) and 110% above the ICI Median (in the case of JPMorgan Small Cap Value I) in the same category.” They also claimed that “the high cost of the Plan’s funds is also evident when comparing the Plan’s funds to the average fees of funds in similarly-sized plans.” 

‘Class’ Actions

And if that weren’t enough, the suit alleges that “several of the plan’s funds with substantial assets were not in the lowest fee share class available to the plan”—going on to note that “there is no good-faith explanation for utilizing high-cost share classes when lower-cost share classes are available for the exact same investment.” The plaintiffs state that “more expensive share class funds could not have (1) a potential for higher return, (2) lower financial risk, (3) more services offered, (4) or greater management flexibility. In short, the Plan did not receive any additional services or benefits based on its use of more expensive share classes; the only consequence was higher costs for Plan participants.”

Extending that theme, the suit also alleged that “several of the funds in the plan had lower cost better performing alternatives in the same investment style,” going on to state: “A prudent fiduciary should have been aware of these better preforming lower cost alternative and switched to them at the beginning of the Class Period. Failure to do so is a clear indication that the Plan lacked any prudent process whatsoever for monitoring the cost and performance of the funds in the Plan.”

Oh—and it wasn’t just the plan fiduciaries targeted—but also the folks that appointed them! These “Monitoring Defendants” were accused of breaching their fiduciary monitoring duty by, among other things: 

  1. “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 as a result of the Committee Defendants’ imprudent actions and omissions;
  2. “failing to monitor the processes by which Plan investments were evaluated, their failure to investigate the availability of lower-cost share classes; and 
  3. “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, all to the detriment of the Plan and Plan participants’ retirement savings.”  

“As a consequence of the foregoing breaches of the duty to monitor, the Plan suffered millions of dollars of losses. Had the Monitoring Defendants complied with their fiduciary obligations, the Plan would not have suffered these losses, and Plan participants would have had more money available to them for their retirement.”

Once again, the allegations are familiar, the plan size large. How the court will view these claims remains to be seen.

NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you’ll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.

[i] Capozzi Adler PC has been one of the more active litigants of late. It had a busy 2020, having filed suit against LinkedInUniversal Health Services, Inc., and before that Aegis Media Americas well as the $2 billion health technology firm Cerner Corp., as well as Pharmaceutical Product Development, LLC Retirement Savings PlanGerken v. ManTech Int’l Corp—and the appeal of losses at the district court in a case involving Salesforce. In May 2021, they also filed suit against the $5.3 billion Humana Retirement Savings Plan, and in June against the $2.3 billion Wake Forest University Baptist Medical Center