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‘Astronomical’ RK Fees Again Cited in Suit

Litigation

Another excessive fee suit has been filed—with the plaintiffs represented by a familiar name.

This time the target were the fiduciaries of the approximately $700 million Pharmaceutical Product Development, LLC Retirement Savings Plan in a suit filed in the Eastern District of North Carolina by plaintiffs Karl Kendall, Suzanne Rainey and Vincenzo Pernice, who are represented[i] by Capozzi Adler PC—a name that has begun emerging in this type of litigation. 

In fact, that firm was one of three specifically highlighted in a recent emphasis on 401(k) litigation as part of insurance policy renewals (see Insurance Renewal Contains Excessive Fee Questionnaire). 

This latest suit hits most of the notes familiar in excessive fee litigation; claims that the fiduciaries failed to utilize the lowest cost share class, failed to consider collective trusts, commingled accounts, or separate accounts as alternatives to the mutual funds, opted for more expensive active management when passive alternatives would suffice, and that, ultimately, during the Class Period, “the Plan lost millions of dollars in offering investment options that had similar or identical characteristics to other lower-priced investment options.”

‘Astronomical’

The suit—which claims that the total amount of recordkeeping fees paid throughout the Class Period on a per participant basis was “astronomical”—goes on to state that the Plan’s recordkeeping costs “were at all times well above the $5 average cost per participant of plans that were a fraction of its size in terms of assets under management.” The suit claims that the “Plan’s direct compensation recordkeeping costs (and overall recordkeeping costs) should have been much lower given its size.” By the way, this same plaintiffs’ law firm has previously employed the “astronomical” adjective in another recent case as well (see ‘Astronomical’ RK Fees, Investment Choices Draw Suit).

The plaintiffs claim that the plan averaged around $20 per participant in direct fees paid to the recordkeeper between 2014 and 2018, which they claim was “well above the average of plans a fraction of its size.” The suit goes on to claim that, “if all the indirect revenue sharing reported on the Plan’s form 5500 (or even a fraction of it) were paid to the recordkeeper, then prior to any rebates, the per participant recordkeeping fee would have ranged from $54 to $143 during the Class Period.”

The 49-page suit (Kendall v. Pharm. Prod. Development, LLC, E.D.N.C., No. 5:20-cv-00157, complaint 4/15/20) is relatively light on specifics, but does note that the funds in the Plan have stayed “relatively unchanged since 2014,” and then, taking 2018 as an example year, claims that the majority of funds in the Plan (“at least 13 out of 21 or more than 60%) were much more expensive than comparable funds found in similarly sized plans (plans having between $500m and $1b in assets).” Indeed, the suit claims that the expense ratios for funds were in some cases up to 127% (in the case of the PIMCO Real Return Inst’l—Domestic Bond Fund) above the median expense ratios in the same category…”

Actual Knowledge

It is not uncommon for plaintiffs to assert that they only recently came to an awareness of the alleged acts of malfeasance as they seek to plant a marker for establishing the statute of limitations, and perhaps even more so following the recent decision by the U.S. Supreme Court regarding “actual knowledge” (you will perhaps recall that ERISA’s six year statute of limitations on such things is trimmed to three from when the injured party has “actual knowledge” of the activities. Here the plaintiffs took pains to not only disavow “knowledge of all material facts (including, among other things, the investment alternatives that are comparable to the investments offered within the Plan, comparisons of the costs and investment performance of Plan investments versus available alternatives within similarly-sized plans, total cost comparisons to similarly-sized plans, information regarding other available share classes, and information regarding the availability and pricing of separate accounts and collective trusts),” but also that they lacked “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.” Moreover, the suit notes that, “having never managed a large 401(k) plan such as the Plan, Plaintiffs lacked actual knowledge of reasonable fee levels and prudent alternatives available to such plans,” and that they “did not and could not review the Committee meeting minutes…”

“There is no good-faith explanation for utilizing high-cost share classes when lower-cost share classes are available for the exact same investment,” according to the suit. “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.”

The plaintiffs also charged the defendants with “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.”

In summary, the suit claims that the “defendants could have used the Plan’s bargaining power to obtain high-quality, low-cost alternatives to mutual funds, in order to negotiate the best possible price for the Plan. By failing to investigate the use of alternative investments such as collective trusts or separate accounts, Defendants caused the Plan to pay millions of dollars per year in unnecessary fees.”

Hardly an unusual or unique argument. We’ll have to see how it fares in this case.


[i]The plaintiffs are also represented by Matheson & Associates PLLC.

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