A social media name brand now finds itself “linked” to a 401(k) excessive fee suit.
The plaintiffs here (Bailey v. LinkedIn Corp., N.D. Cal., No. 5:20-cv-05704, complaint 8/14/20) are two former and one current participant of the LinkedIn Corporation 401(k) Profit Sharing Plan and Trust. For the most part the allegations made here are the “usual” suspects—criticisms regarding the use of something other than the lowest priced share class, the choice of active management when suitable passive alternatives were (ostensibly) available, a reliance on mutual funds when (less expensive) collective investment trusts existed—not to mention issues with revenue sharing, claims of improper dealings with the recordkeeper and a general failure to “leverage the size of the Plan to negotiate for lower expense ratios for certain investment options maintained and/or added to the Plan during the Class Period…”
Said another way, the plan defendants are accused of “…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 similar investment options with lower costs and/or better performance histories.”
While examples are provided, and comparisons to benchmarks offered (though they’re median expense ratios in broad categories), the plaintiffs claim that the “mismanagement of the Plan, to the detriment of participants and beneficiaries, constitutes a breach of the fiduciary duties of prudence and loyalty, in violation of 29 U.S.C. § 1104. Their actions were contrary to actions of a reasonable fiduciary and cost the Plan and its participants millions of dollars.”
The plan size also matters here ($817 million as of 2018), in that the plaintiffs also claim that “given the size of the Plan, LinkedIn likely enjoyed a significant tax and cost savings from offering a match.”
That said, the suit admits that “plaintiffs did not have 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 collective trusts) necessary to understand that Defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA until shortly before this suit was filed.”
While the suit largely covered familiar territory in its allegations, there were a couple of unusual references. First the plaintiffs note that “several months prior to filing this lawsuit, Plaintiffs requested pursuant to ERISA §104(b)(4) that the Plan administrator produce several Plan governing documents, including any meeting minutes of the relevant Plan investment committee(s), which potentially contain the specifics of Defendants’ actual practice in making decisions with respect to the Plan, including Defendants’ processes (and execution of such) for selecting, monitoring, and removing Plan investments.” However, they go on to claim (as though it were unusual) that their request for meeting minutes was “…denied because the Plan Administrator determined that this document, among certain others requested, was not required to be provided under ERISA.”
As a result, they say the “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.”
The plaintiffs did, however, acknowledge 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 thus, “for purposes of this Complaint, Plaintiffs have drawn reasonable inferences regarding these processes based upon (among other things) the facts set forth herein.”
As for revenue-sharing, the suit—while acknowledging that “utilizing a revenue sharing approach is not per se imprudent”—goes on to note that “unchecked, it is devastating for Plan participants.” The suit goes on to claim that “over the years, the arrangement of placing revenue sharing into an account before disbursement to pay for Plan expenses, at the Plan Sponsor’s discretion with regards to amount and timing, deprived Plan participants of use of their money and millions of dollars in lost opportunity costs. This arrangement was completely unnecessary given that the Plan’s fiduciaries could bargain for a per participant/capita fee as numerous large plans have done with Fidelity.”
Indeed, they cite a recent case involving Fidelity where “Fidelity has acknowledged the ability of plan fiduciaries to negotiate per participant/capita fees.”
Ultimately, the suit concludes 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. Here, the Plan’s Trustee is Fidelity, and an affiliate of Fidelity performs the recordkeeping services for the Plan.”
Returning to their earlier allegations, the plaintiffs claim that “this conflict of interest is laid bare in this case where lower-cost Fidelity collective trusts and index funds—materially similar or identical to the Plan’s other Fidelity funds (other than in price)—were available but not selected because the higher cost funds returned more value to Fidelity.” In other words, “there appears to be no reasonable justification for the millions of dollars collected from Plan participants that ended up in Fidelity’s coffers,” and that “the Company, and the fiduciaries to whom it delegated authority, breached their duty of undivided loyalty to Plan participants by failing to adequately supervise Fidelity and its affiliates and ensure that the fees charged by Fidelity and its affiliates were reasonable and in the best interests of the Plan and its participants. Clearly, Defendants failed this aspect of their fiduciary duties.”
The plaintiffs are represented by Capozzi Adler PC and Rosman & Germain LLP. The former has had a busy year, having recently filed suit against Universal Health Services, Inc., and before that Aegis Media Americas Inc., about a year ago 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.
How will the arguments here fare in court? We shall see…