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Capozzi Adler Takes a ‘Shot’ at a $5 Billion Plan


One of the most active ERISA litigation firms has, once again, targeted one of the nation’s largest 401(k) plans.

This time the firm is representing Kena Moore, Timothy K. Sweeney, Russell A. Hohman, Susan M. Smith and Veronica Cargill who have filed suit on behalf of participants in the $5.354 billion Humana Retirement Savings Plan.

The claims in the 27-page filing are familiar, specifically that the plan fiduciaries “breached the duties they owed to the Plan, to Plaintiffs, and to the other participants of the Plan by, inter alia, (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 administrative and recordkeeping costs.”

Indeed, most of the filing is a simple recitation of the standards to which ERISA fiduciaries are held. One aspect that was unique: quoting from the plan’s Investment Policy Statement that reportedly notes that the “Committee must: “[t]wice a year, or more frequently as the Committee in its sole discretion may determine is otherwise necessary or appropriate, the Committee will evaluate the performance of each Investment Option.” Moreover, the IPS also reportedly states that each fund in the Plan must be evaluated based on, among other things, its: “[r]eturn compared to the peer group and its benchmarks; ... [f]ees and expenses; [and] [a]dherence to stated investment style ... .” 

That said, most of the criticism was directed at two specific fund holdings which, according to the suit, as of 2019, held more than $488 million in assets, and “were more expensive than comparable funds found in similarly sized plans (plans having more than 1 billion dollars in assets).” The suit alleges that the expense ratios for these two funds were up to 200% (in the case of Delaware Small Cap Value Class I) and up to 169% (in the case of PIMCO Total Return Fund Class A) above the median expense ratios in the same category. Additionally, the share classes used “were not in the lowest share class,” according to the plaintiffs.

Now, there’s a potential issue with relying on averages or medians as fee comparisons without the context of anything beyond asset values, but the suit claims that median-based and average-based comparisons “still understate the excessiveness of the investment management fees of the Plan funds because many prudent alternative funds were available (which Defendants failed to consider) that offered lower expenses than the median and average fees”—oh, and those median/average comparisons were from 2017 “when expense ratios would have been higher than today given the downward trend of expense ratios the last few years.”

Moreover, the plaintiffs assert (with no apparent support for the 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 (1) a potential for higher return, (2) lower financial risk, (3) more services offered, (4) or greater management flexibility. In short, 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.” 

The plaintiffs further claim that, according to the plan’s 2019 5500, the Plan was paying over $60 per participant in administrative and recordkeeping costs in 2019 (and in 2017 and 2018, the per participant costs were even higher, being more than $66 per participant and $64 per participant, respectively, according to the suit). By way of buttressing their excessive fee claims, the plaintiffs refer to the NEPC 2019 Defined Contribution Progress Report (121 DC plans - 71% Corporate; 20% Healthcare, and 9% Public, Not-for-Profit and other), which states that the majority of plans with over 15,000 participants paid, on average, slightly over $40 per participant in recordkeeping, trust and custody fees. The suit also cites the recent stipulation by Fidelity that a Plan with tens of thousands of participants and over $1 billion in assets could command recordkeeping fees as low as $14-$21.

And, as yet another point of reference, the suit cites an ICI Study that indicates that the median total plan cost for plans over $1 billion is 0.22% of total assets in a plan, while the suit claims that the total costs for the Humana plan during the Class Period ranged from a high of 0.51% in 2018 to a low of 0.45% in 2017, and were 0.46% in 2019. “There’s little question the plan was paying at least 100% more in total plan costs than its peers,” the plaintiffs assert.

Capozzi Adler PC had a busy 2020, having filed suit against LinkedInUniversal Health Services, Inc., and before that Aegis Media Americas well as the $2 billion health technology firm Cerner Corp., and less than a month ago Pharmaceutical Product Development, LLC Retirement Savings PlanGerken v. ManTech Int’l Corp—and the recent appeal of losses at the district court in a case involving Salesforce.  

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.

Will this court be persuaded? Time will tell.

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.