‘Astronomical’ RK Fees, Branded CITs Draw Excessive Fee Suit

Just when you thought all the $1 billion 401(k) plans had been sued… another one shows up.

This time the target is none other than the American Red Cross, sued by four of the 22,000 participants (with account balances) in the plan that had over $1.2 billion in assets at the end of 2019 (according to the suit). 

This suit, filed on behalf of those four plaintiffs by Capozzi Adler PC[i] (and the Law Offices of Christopher M. Battista) is a bit lighter on specific allegations than most excessive fee litigation, and consumes only 26 pages (Tracy v. Am. Nat’l Red Cross, D.D.C., No. 1:21-cv-00541, complaint 3/2/21). The case presented is relatively straightforward; plan participants paid higher fees than participants in a “jumbo” 401(k) plan should have.

Mal Fee ‘Sense’

However, unlike most in this litigation arena, the suit draws in several points of comparison for the excessive fee allegation, including these three:

1. A 2019 ranking by BrightScope as “…having one of the highest overall plan costs of any Plan with over 500 million dollars in assets under management.” If one embraces that ranking (and methodology)—as the plaintiffs apparently do—“BrightScope finds that the average participant would have to work an additional 18 years and will have lost at least $45,000 as a result of the Plan’s high costs.”
2. The NEPC 2019 Defined Contribution Progress Report—which the suit says “found that the majority of plans with over 15,000 participants paid slightly more than $40 per participant recordkeeping, trust and custody fees,” and that “…no plan with over 15,000 participants paid more than $68 per participant.”
3. The 401(k) Averages Book—a source that has cropped up in other suits. While the suit acknowledges that this focuses on “much smaller plans than the Plan, it is nonetheless a useful resource because we can extrapolate from the data what a slightly bigger plan like the Plan should be paying for recordkeeping.” Here they note that, according to the book, a plan with 200 participants and $20 million in assets has an average recordkeeping and administration cost (through direct compensation) of $12 per participant.

Not to mention, drawing from other, similar litigation, this suit concludes that “the Plan’s total recordkeeping costs are clearly unreasonable as some authorities have recognized that reasonable rates for large plans typically average around $35 per participant, with costs coming down every day.”

‘Astronomical’

As for how that compares to the Red Cross plan—well, the plaintiffs described the participant administrative and recordkeeping fees as “astronomical” when benchmarked against similar plans. In fact, according to the suit, the per participant cost of the plan went from $136.34 in 2016 to $232.16 in 2017, slipping back to $207.67 by 2019.

The plaintiffs raised the issue of the plan’s use of revenue-sharing (“resulted in a worst-case scenario for the Plan’s participants because it saddled Plan participants with above-market recordkeeping fees”), and—while acknowledging they didn’t have access to “knowledge of all material facts”[ii]—they inferred that the plan fiduciaries were remiss in either not conducting a request for proposal (RFP) (or not doing it effectively) to “remain informed about overall trends in the marketplace regarding the fees being paid by other plans, as well as the recordkeeping rates that are available.” 

Backing up that claim, the suit notes that “…although the Plan changed its recordkeeper in 2016, recordkeeping costs actually were higher after the change,” which they state “strongly suggests that Defendants failed to conduct a proper and effective RFP at any time prior to 2015 through the present—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.”

Brand ‘Hex’?

Lastly, and a relatively unique claim was that during 2019 “…all the funds available for investment by participants needlessly bore the Red Cross name at great expense and detriment to Plan participants”—which, the suit lays out in a table, allegedly cost participants an additional $1,130,204,940 relative to the “unbranded” version of the same collective investment trusts (CITs) utilized. “There is no good-faith explanation for utilizing branded funds when lower-cost unbranded products are available for the exact same investment,” the suit claims, going on to state that “because the branded products chosen by Defendants were the same in every respect other than price to their less expensive counterparts, the more expensive branded 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,” they write, “the Plan did not receive any additional services or benefits based on its use of more expensive branded funds; the only consequence was higher costs for Plan participants.”

Stay tuned…