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Capozzi Adler Takes Aim at Another Big 4 Accounting Firm

Litigation

Taking a page (literally) from its recent excessive fee suit against the fiduciaries of the Deloitte 401(k) Plan, a litigation firm has made nearly identical claims against another of the “Big 4.”

This one was filed by plaintiffs Marc J. Ritorto, Hilton Hee Chong, Paul J. Burroughs and Richard O’Driscoll (represented by the aforementioned Capozzi Adler PC) against the on behalf of the 44,600-participant, $6 billion KPMG 401(k) Plan against the plans’ fiduciaries, which include KPMG, LLP and the Board of Directors of KPMG, LLP[i] and its members during the Class Period and the KPMG Pension Strategy and Investment Committee and its members during the Class Period for breaches of their fiduciary duties.

As noted above, the 36-page filing (Ritorto v. KPMG, LLP, D.N.J., No. 2:21-cv-19330, complaint 10/26/21) replicates not only the arguments, but also large parts of the text from the 29-page filing in a suit against the fiduciaries of the Deloitte 401(k). And yes, in the filing in the U.S. District Court for the District of New Jersey, they characterized the participant administrative and recordkeeping fees in the KPMG plan as “astronomical[ii] when benchmarked against similar plans.”

Once again—and consistent with this brand of litigation—the plaintiffs acknowledge that they “…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 or monitoring recordkeeping and administration costs, because this information is solely within the possession of Defendants prior to discovery.” One slightly different flavor—though this was also mentioned in the Deloitte suit—is that “…in an attempt to discover the details of the Plans’ mismanagement, on August 23, 2021, the Plaintiffs wrote to KPMG requesting, inter alia, meeting minutes from the Committee. By Letter dated September 27, 2021, KPMG denied Plaintiffs’ request for these meeting minutes.” 

And so—and this is not unusual—they continue “for purposes of this Complaint, Plaintiffs have drawn reasonable inferences regarding these processes based upon the numerous factors set forth below.”

‘Benched’ Marks

Not usual for this genre, but somewhat different from the angle pursued in Deloitte, as a comparison point/benchmark, the plaintiffs cite a total plan cost measure “that includes all fees on the audited Form 5500 reports as well as fees paid through investment expense ratios” developed by BrightScope and the Investment Company Institute. They then turned to a 2017 study by ICI “which calculated the average total plan costs from hundreds of 401(k) Plans ranging in size from the smallest plans having less than 1 million dollars in assets all the way up the nation’s largest plans with assets under management of more than 1 billion dollars.” Then, looking at plans that have over $1 billion, the suit asserts that “the ICI determined that the average total plan cost or TPC for 401(k) Plans with over 1 billion dollars in assets under management is .22% of total plan assets.” 

In addition, citing it as “one indication that the Plan was poorly run,” according to the plaintiffs, “it had a TPC of more than .47%, or, in other words, more than 113% higher than the average.”

However, turning back to the original “playbook” (but changing the names), the plaintiffs cite “[t]he fact that the Plan has stayed with the same recordkeeper, namely, Merrill, over the course of the Class Period, and paid the same relative amount in recordkeeping fees, 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 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.”

By way of validating their point, the suit presents a table that purports to show that “the Plan was paying higher recordkeeping fees than its peers,” presenting (based on Form 5500 data) “a few well managed plans having more than 30,000 participants and approximately $3 billion dollars in assets under management.” Based on that comparison, the plaintiffs argue that “…with over 44,000 participants and over $6 billion dollars in assets in 2019, should have been able to negotiate a recordkeeping cost in the low $20 range…” Moreover, they go on to allege that the plan’s total recordkeeping costs “…are clearly unreasonable as some authorities[iii] have recognized that reasonable rates for jumbo plans typically average around $35 per participant, with costs coming down every day.”

They also took issue with the plan’s fee structure, which they claim was a combination of revenue sharing and a flat fee to pay for recordkeeping services that they argue was a “worst-case scenario” that cost plan participants as much as $98 per person, per year.

Investment (Mis)Management?

Recordkeeping charges weren’t the only point of contention, however, as the plaintiffs go on to state that “the Defendants could not have engaged in a prudent process as it relates to evaluating investment management fees.” More specifically, they claim that, “in some cases, expense ratios for the Plan’s funds were 864% above the ICI Median (in the case of PIMCO All Asset A) and 282% above the ICI Median (in the case of PIMCO Income A) in the same category. The high cost of the Plan’s funds is also evident when comparing the Plan’s funds to the average fees of funds in similarly-sized plans.” And this “failure to select funds that cost no more than the average expense ratios for similar funds in similarly-sized plans cost Plan participants millions of dollars in damages,” the suit alleges.

The claims here diverge in another way from the Deloitte arguments (though not from a focus of other, similar litigation) in taking aim at a “flawed investment monitoring system resulted in the failure to identify available lower-cost share classes of many of the funds in the Plan during the Class Period.” The suit claims that “there is no good-faith explanation for utilizing high-cost share classes when lower-cost share classes are available for the exact same investment,” going on to claim that “because the more expensive share classes chosen by Defendants were the same in every respect other than price to their less expensive counterparts, the more expensive share class funds could not have:

  • a potential for higher return, 
  • lower financial risk, 
  • more services offered, or
  • greater management flexibility.” 

“In short,” the plaintiffs claim, “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,” though no proof was offered for this assertion. “Simply put, a fiduciary to a jumbo defined contribution plan such as the Plan can use its asset size and negotiating power to invest in the cheapest share class available.” 

The suit further claims that the failure to replace “several of the higher cost and underperforming funds which in 2019 housed over $1.2 billion dollars in participant assets,” which they claim “had nearly identical lower cost alternatives during the Class Period”—and by that, they mean another common target in this kind of litigation: actively managed funds. “Two of the above funds, in particular,” they argue, “performed drastically worse than most of their peers. As of the first quarter of 2021, the Morgan Stanley Inst Global Real Est I fund was worse than 92% of its 198 peers at the three year mark, 99% worse than 188 of its peers at the 5 year mark.”

In sum, the suit treads familiar ground on familiar grounds against a common target of such litigation—multibillion-dollar 401(k)s. 

And at this rate, the folks running the plans of the remaining two Big 4 accounting firms (PricewaterhouseCoopers and Ernst & Young) might well be the next targets…

We shall see…

NOTEIn 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.


[i] As always, it’s worth remembering—as this suit does—that those who appoint the fiduciaries are, themselves, fiduciaries. “Under ERISA, fiduciaries with the power to appoint have the concomitant fiduciary duty to monitor and supervise their appointees. Accordingly, each member of the Board during the putative Class Period (referred to herein as John Does 1-10) is/was a fiduciary of the Plan, within the meaning of ERISA Section 3(21)(A), 29 U.S.C. § 1002(21)(A) because each had a duty to monitor the actions of the Committee.”

[ii] Beyond these cases, it’s not the first time 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. And it’s not the only litigation firm to do so.

[iii] The authorities are not identified, however.

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