Capozzi Adler Makes a Third Excessive Fee ‘Run’ at 401(k) Plan

Loaded up with a fresh set of plaintiffs, a familiar plaintiffs’ attorney is having yet another “go” at plan fiduciaries in an excessive fee suit.

The law firm in question is none other than Capozzi Adler PC[i] (and Johnson Fistel LLP), which filed a similar (identical?) suit against this same Cumulus Media Inc.'s 401(k) plan in 2020. In that case, Cumulus managed to win a dismissal due to a release agreement the named plaintiff signed when he left the company. Beyond that, a previous run about a year earlier at the Cumulus 401(k) plan was dismissed on summary judgement because the claims alleged were not raised on a timely basis under terms of the plan.[ii]

However, they’ve rounded up a new set of plaintiffs—Demarland Dean, Kimberly Van DeCreek, Bradley Kirk, Reynolds Leutz, Tondarious Rothchild, Jason Jones and John W. Bower—arguing that the $185 million plan (as of 12/31/18) breached the duties they owed to the Plan and to the plaintiffs (as well as the other participants of the Plan 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; 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; and (3) failing to control the Plan’s   recordkeeping costs.” More specifically (Dean v. Cumulus Media, Inc., N.D. Ga., No. 1:22-cv-04956, complaint docketed 12/16/22) that “Defendants failed to utilize the lowest cost share class for many of the mutual funds within the Plan despite their lower fees”—oh, and they also have issue with the failure to consider collective trusts (at least for most of the period in question).

That latter part is key—because the plan fiduciaries DID make changes. The suit alleges that in late 2019, “after purported consultation with Sageview Advisory Group, almost six years into the Class Period, wholesale changes were made to the Plan.” Around November 12, 2019, some investment options offered through the Plan were no longer offered, and the share classes of four investment options offered through the Plan were changed—share classes that the suit alleged “offered participants the same investment strategy and risk, but the overall expenses were lowered.” At the same time the suit notes that plan participants were told that beginning on Dec. 1, 2019, quarterly revenue credits “may be allocated to your account based on the investments you hold during the prior quarter.” 

However, the plaintiffs say that those changes were “far too little and too late as the damages suffered by Plan participants to that point had already been baked in.” More than that, the suit claims that even those changes “may not have cured the Company’s fiduciary breaches because there is no evidence that at any time during the Class Period, the Company undertook a standardized, routine, critical review of the Plan investment options—i.e., it did not undertake a prudent process in evaluating the Plan’s investment options.”

No Evidence as Evidence?

That said, here the plaintiffs claim that “as part of its investigation of this action, Plaintiffs requested, pursuant to ERISA § 104(b), operative Plan governing documents,” and that “the documents received by Plaintiffs did not indicate the existence of an investment policy statement or the existence of any committee appointed to monitor the Plan’s investment options on a periodic basis.” And from this inference (and the allegations made thereafter), “defendants’ mismanagement of the Plan, to the detriment of participants and beneficiaries, constitutes a breach of the fiduciary duties of prudence in violation of 29 U.S.C. § 1104,” actions “contrary to actions of a reasonable fiduciary and cost the Plan and its participants millions of dollars.”

The suit states (as most of these do these days) that “having never managed a large plan such as the Plan, Plaintiffs lacked actual knowledge of reasonable fee levels and prudent alternatives available to plans. Plaintiffs did not and could not review the Plan’s investment committee meeting minutes or other evidence of Defendants’ fiduciary decision making, or the lack thereof”—and that “for purposes of this Complaint, Plaintiffs have drawn reasonable inferences regarding these processes….”

The plaintiffs claim that the expense ratios for funds used by the plan were “up to 72% above the median expense ratios in the same category”—disclaiming even that assessment as conservative because it refers to data from ICI from 2015 (noting that expense ratios would have declined by 2020).  They also took issue with the plan’s use of the “Wilmington Trust collective trust versions of BlackRock LifePath Index Retirement Funds.” Their issue here? That the plan could have acquire the same investments at a lower fee by going direct to BlackRock. There was also the issue of lower share classes of the same funds being available, according to the plaintiffs.

The plaintiffs also had issues with the fees charged by Fidelity, the plan’s recordkeeper. The suit states that “there is no evidence that the Defendant negotiated to lower recordkeeping costs given that the recordkeeping costs have increased during the Class Period”—by a calculation presented in the table, going from $70/participant in 2014 to $269/participant in 2018, though the latter number includes the impact of “indirect payments to Fidelity through revenue-sharing.” That trend notwithstanding, the plaintiffs turn to the 401(k) Averages Book for a measure of reasonability ($5/participant, they claim for a plan of comparable size, with $43/participant at the high end).

In essence, the claims are the same—but the participants alleged to have suffered injury such that they can serve as the named plaintiffs in the case—are different.

Will it matter to the court? Stay tuned.