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Costco Suit Targets RK Fees, Lack of RFPs


A $15 billion 401(k) plan has found itself in the crosshairs of litigation that targets not only its recordkeeping fees, but the (lack of a) process to review them—as well as those that appointed the committee. 

The suit, filed in the U.S. District Court for the Eastern District of Wisconsin on behalf of plaintiff Dustin S. Soulek (Dustin Soulek v. Costco Wholesale Corp. et al., case number 1:20-cv-00937, in the U.S. District Court for the Eastern District of Wisconsin) alleges that the Costco plan fiduciaries “breached the duties they owed to the Plan, to Plaintiff, and to the other participants of the Plan by, among other things: (1) authorizing the Plan to pay unreasonably high fees for recordkeeping; (2) 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 (3) maintaining certain funds in the Plan despite the availability of identical or similar investment options with lower costs, and/or better performance histories.” 

The latter apparently includes the inclusion of “…more costly ‘actively managed funds’ rather than ‘index funds’ that offered equal or better performance at substantially lower cost” among the 42 options offered by the plan. The suit also claims that “the administrative fees charged to Plan participants were consistently greater than the fees of most comparable 401(k) plans, when fees are calculated as cost per participant or when fees are calculated as a percent of total assets.”

RFP Rearview

While recordkeeping fees are a regular bone of contention in this type litigation, this particular suit (the proposed class is represented by Walcheske & Luzi LLC) invokes the conclusions of the court in the recent case of Ramos v. Banner Health, where Judge Martinez found it “highly significant that Banner has not undertaken a single RFP in nearly 20 years, despite the recognized utility of an RFP for assessing reasonableness of fees.”

How did Costco’s approach match up? Well, the suit claims—with no substantiation beyond the allegation—that, “Upon information and belief, Defendants did not use a competitive bid process for recordkeeping services for a substantial period of time.”

As for the fees that were paid, the suit claims that, from the years 2014 to 2018, recordkeeping costs paid to T. Rowe Price, “as disclosed on the 5500 Forms, rose 500% from around $1,000,000 per year in 2014, to $6,000,000 per year in 2018, while number of participants only went up 21%. Although these costs on the surface are already unreasonable, these costs could actually be higher due to revenue sharing arrangements and indirect compensation.”

Actual Knowledge

Setting the stage for a potential statute of limitation challenge in view of the recent determination of the U.S. Supreme Court on an “actual knowledge” standard, the suit states that the “plaintiff had no knowledge of Defendants’ process for selecting investments and monitoring them to ensure they remained prudent. Plaintiff also had no knowledge of how the fees charged to and paid by the Plan participants compared to any other funds. Nor did Plaintiff know about the availability of lower-cost and better-performing (and other essentially identical) investment options that Defendants did not offer because Defendants provided no comparative information to allow Plaintiff to evaluate and compare Defendants’ investment options.”

Investment Inferences

Regarding the plan investments, the suit alleges that the Costco defendants were not a prudent fiduciary because:

  • they did not make a reasoned decision to offer specific funds or share classes to the Plan participants as described herein; and
  • they failed to continuously monitor the investment performance of its plan options against applicable benchmarks and peer groups, and they failed to identify and replace underperforming investments with better performing and reasonably priced options.

As for investment costs, here the suit rests on “…reasonable inferences from the facts set forth herein, during the class period Defendants failed to have an independent system of review in place to ensure that the Plan participants were charged appropriate and reasonable fees for the Plan’s investment options.” 

Corporate Culpability?

It’s not unusual for these suits to cast a wide net of potential defendants, and this one is no exception. But here the suit spends more time and text than is generally dedicated to outlining the fiduciary responsibilities of those who appoint those fiduciaries, including the parent company, explaining that “defendants had the authority to appoint and remove members of the Benefits Committee and were aware that the Benefits Committee had critical responsibilities as fiduciaries of the Plan,” that “Costco had a duty to monitor the Benefits Committee to ensure that the Benefits Committee was adequately performing its fiduciary obligations, and to take prompt and effective action to protect the Plan in the event that the Benefits Committee was not fulfilling those duties.” 

The suit also claims that Costco “…had a duty to ensure that the Benefits Committee possessed the needed qualifications and experience to carry out their duties (or use qualified advisors and service providers to fulfill their duties); had adequate financial resources and information; maintained adequate records of the information on which they based their decisions and analysis with respect to the Plan’s investments; and reported regularly to Costco.”

And thus, according to the suit, Costco breached its fiduciary duties by, among other things:

  • “Failing to monitor and evaluate the performance of the Benefits Committee or have a system in place for doing so, standing idly by as the Plan suffered significant losses in the form of unreasonably high expenses, choices of fund’s class of shares, and inefficient fund management styles that adversely affected the investment performance of the funds’ and their participants’ assets as a result of the Administrative Committee imprudent actions and omissions.”
  • “Failing to monitor the process by which Plan investments were evaluated, and failing to investigate the availability of lower-cost share classes.”
  • “Failing to remove Benefits Committee members whose performance was inadequate in that they continued to maintain imprudent, excessively costly, and poorly performing investments within the Plan, and caused the Plan to pay excessive recordkeeping fees, all to the detriment of the Plan and Plan participants’ retirement savings.”

The suit concludes by claiming that “…the consequences of the foregoing breaches of the duty to monitor, the Plan suffered millions of dollars of losses,” and that “had Costco complied with its fiduciary obligations, the Plan would not have suffered the losses, and Plan participants would have had more money available to them in retirement.”

Will those allegations be sufficient? 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.