Capozzi Adler Makes More ‘Astronomical’ Allegations

Capozzi Adler has filed suit against another multibillion-dollar 401(k)—calling Vanguard’s fees “astronomical.”

Granted, that was “when benchmarked against similar plans”—and in this case similar plans was strictly a function of (arguably) comparable size. That said, the suit—filed by Rupinder Singh, Jeffrey S. Popkin, Joni Walker and Jenny Mark on behalf of the Deloitte 401(k) Plan, and the Deloitte Profit Sharing Plan with the 401(K) Plan and the PSP Plan—is a mere 29 pages long, in contrast to the jumbo plans it targeted—some $7.3 billion (the 401(k) plan) and $7.2 billion (the PSP plan) in assets at the end of 2020.

The plaintiffs’ allegations[i] here—brief though they were—were familiar: that they failed to control the Plans’ administrative and recordkeeping costs, and that the resulting mismanagement of the Plans, “to the detriment of participants and beneficiaries, constitutes a breach of the fiduciary duty of prudence, in violation of 29 U.S.C. § 1104”—and that it “cost the Plans and its participants millions of dollars. ”

Now the plaintiffs here (Singh et al. v. Deloitte LLP et al., case number 1:21-cv-08458, in the U.S. District Court for the Southern District of New York) admit—as is common in such litigation these days—that they “did not have and do not have actual knowledge of the specifics of Defendants’ decision-making process with respect to the Plans, including Defendants’ processes (and execution of such) for monitoring the Plans’ fees”—but base their claims on what they put forth as fees charged to Deloitte participants in comparison to other, ostensibly comparable plans. And thus, “for purposes of this Complaint, Plaintiffs have drawn reasonable inferences regarding Defendants’ decision-making processes based upon the numerous factors set forth below.”

‘Astronomical’ Allegations

Now, it’s not the first time[ii] the Capozzi Adler firm has affixed the “astronomical” label to 401(k) fees—having previously done so in suits involving the $1.5 billion Baptist Health South Florida, Inc. 403(b) Employee Retirement Plan, the $1.2 billion 401(k) plan of the American Red Cross, the $700 million Pharmaceutical Product Development, LLC Retirement Savings Plan, and the $2 billion plan of Cerner Corp., though it’s not the only litigation firm to do so.

The suit states as fact that “the cost of recordkeeping services depends on the number of participants (or participant accounts), not on the amount of assets in the participant’s account,” and thus posits that “…prudent fiduciaries negotiate a fixed dollar amount for the recordkeeper’s annual compensation, usually based on a rate of a fixed dollar amount per participant rather than as a percentage of assets” (for this they cite a Mercer Best Practices report). Moreover, the suit notes that economies of scale mean that large plans get lower effective rates per participant than smaller plans, and that plans with 5,000 participants or more can obtain much lower rates per participant than a plan with 500 participants.

“Thus, the Plans, with over 89,000 participants and over $14.5 billion dollars in assets in 2019, should have been able to negotiate a recordkeeping cost in the low $20 range from the beginning,” the suit claims.

While they didn’t use the word “commodity,” the suit claims that “nearly all recordkeepers in the marketplace offer the same range of services and can provide the services at very little cost. In fact, several of the services, such as managed account services, self-directed brokerage, Qualified Domestic Relations Order processing, and loan processing are often a profit center for recordkeepers. Numerous recordkeepers in the marketplace are capable of providing a high level of service and will vigorously compete to win a recordkeeping contract for a jumbo defined contribution plan.”

Vanguard ‘Vicissitudes’

The suit goes on to claim that “…using a mixture of revenue sharing and direct costs to pay for recordkeeping resulted in a worst-case scenario for the Plans’ participants because it saddled the Plans’ participants with above-market administrative and recordkeeping fees throughout the Class Period” (Vanguard acted as the recordkeeper throughout the Class Period). The plaintiffs then cited several ostensibly comparable plans (at least in size)—which charged from $21/participant to $34/participant, and thus the plaintiffs asserted the Plans, with over 89,000 participants and over $14.5 billion dollars in assets in 2019, should have been able to negotiate a recordkeeping cost in the low $20 range from the beginning

Oh—and the suit holds out as “particularly noteworthy that Vanguard, who is the recordkeeper for the Plans, was the recordkeeper for two of the plans identified above where recordkeeping fees were dramatically less than for the Plans.”

The suit also cites—as other, similar litigation has, the NEPC 2020 Defined Contribution Progress Report, which they say included an average plan of $1.1 billion in assets and 12,437 participants, and found that “…the majority of plans with over 15,000 participants, to use a conservative number, paid slightly over $40 per participant recordkeeping, trust and custody fees.” Moreover, the plaintiffs say that “the worst performing plans reviewed by the NEPC with over 15,000 participants paid no more than $60 per participant, but clearly Deloitte should have been able to negotiate a fee well below this mark.”

‘Staying’ Power?

While not able to conclusively assert that the plan fiduciaries hadn’t conducted any kind of due diligence regarding the plan provider, the suit points to “The fact that the Plans have stayed with the same recordkeeper, namely Vanguard since at least 2004, paid an increasing amount in recordkeeping fees from 2018 to the present, and paid outrageous amounts for recordkeeping from 2015 to 2017 (nearly 3x the amount similarly-situated plans paid), there is little to suggest that Defendants conducted a RFP at reasonable intervals—or certainly at any time prior to 2015 through the present—to determine whether the Plans 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.”

In sum, they state that therefore, “the Defendants could not have engaged in a prudent process as it relates to evaluating investment management fees.”

There were also specific allegations about certain funds, with the suit noting that “in some cases, expense ratios for the Plans’ funds were 420% above the ICI Median (in the case of T.Rowe Price Spectrum Mod GR Allc Fund) and 110% above the ICI Median (in the case of T.Rowe Price In'l Small Cap Equity Trust C) in the same category.” The suit goes on to note that “the high cost of the Plans’ funds is also evident when comparing the Plans’ funds to the average fees of funds in similarly-sized plans.”

The plaintiffs also asked the court to require Deloitte, the board and its retirement committee to disgorge their plan gains, for prejudgment interest and attorney fees.

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.