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COVID-19 Doesn’t Slow Schlichter Suit


America may be sheltering in place—but 401(k) excessive fee litigation continues.

This time the target was the $7 billion, 50,500+ participant plan of Liberty Mutual. The suit was filed by on behalf of a half-dozen participants and ex-participants of that plan by none other than Schlichter Bogard & Denton LLP. 

The allegations made here (Ahmed v. Liberty Mut. Grp., D. Mass., No. 3:20-cv-30056, complaint 4/10/20) mirrored those made in other such suits; that rather than “…using the Plan’s bargaining power to benefit participants and beneficiaries,” they instead “…allowed unreasonable expenses to be charged to participants for administration of the Plan and for managed account services, and retained poorly performing investments that similarly situated fiduciaries removed from their plans.”

‘Choice’ Words

The suit, filed in the District of Massachusetts, also claimed that the plan fiduciaries (there is a long list, including John Doe’s 1-40) “selected and retained imprudent investment options in the Plan.” Their specific targets were the Sterling Mid-Cap Value Portfolio and the Wells Fargo Government Money Market Fund, in both cases arguing not only underperformance and higher fees, but a conflict of interest. 

Specifically, the suit claims that the defendants retained the Sterling Mid-Cap Value Portfolio “despite the fact that it had grossly underperformed its benchmark and similar mid-cap value funds for years,” and that they did so to “advance Liberty Mutual’s business interests rather than participants’ interests” because they say that “Liberty Mutual has extensive business relationships with Sterling’s parent company, BB&T, and its subsidiaries.” 

To add insult to injury, the plaintiffs also claim that the Liberty 401(k) plan and BB&T’s (Sterling Capital’s parent company) 401(k) plan “were the only two defined contribution plans with over $1 billion in assets that included the Sterling Mid-Cap Value Portfolio in their plans during the class period.” The net impact to the plan? The plaintiffs claim that if the plan had gone with “a passively managed fund in the same asset class with lower fees and a superior performance history, the Plan would have avoided nearly $33 million in losses from April 2014 until present.”

Stable, Valued

The plaintiffs also had issues with the selection and retention of the Wells Fargo Government Money Market Fund “as the only stable income investment option in the Plan despite the fact that stable value funds provide a similar stable income option with much higher returns in all markets.” Indeed, the suit claims that the “historically abysmal returns and greater risk of the Money Market Fund in comparison to a stable value fund demonstrates, at the most basic level, that the Money Market Fund was an imprudent capital preservation investment and failed to provide meaningful retirement benefits to Plan participants.”

This suit also challenged the use of asset-based fees (rather than a fixed, per participant fee), and the apparent lack of a competitive bid for those recordkeeping services. The suit claims that “experts in the field agree that the most certain way to determine the least compensation a plan must pay for a desired level of recordkeeping services is to put the plan’s recordkeeping services out for competitive bidding on a regular basis,” and that “prudent fiduciaries do this every three years” (though this assertion has been rebuffed by courts in other districts).” The suit further claims that “since at least January 1, 2014, the Defendants failed to analyze whether the direct and indirect compensation paid to Hewitt and Fidelity, including revenue sharing Hewitt received from Financial Engines, was reasonable compared to market rates for the same services.” Moreover, they take issue with the fiduciaries’ alleged failure to “retain an independent third party to appropriately benchmark Hewitt and Fidelity’s compensation.”

Basis ‘Points’

And then there were the specific fees. The suit claims that the plan paid Hewitt a recordkeeping fee of 5 basis points, “…which amounted to millions of dollars each year, from at least 2013 until 2018 during a period of dramatic decreases in recordkeeping fees across the market and dramatic growth in assets in the Plan.” The plaintiffs cite the plan’s Form 5500 to note that in 2013 the Plan paid Hewitt $3,206,947 in recordkeeping fees or roughly .05% of the Plan’s $6.4 billion dollars in assets, and that the plan’s March 5, 2018 fee disclosure “demonstrates that the Plan continued to pay the same 5 bps fee—during a period when it notes that the assets in the Plan increased from $6.4 billion dollars to $7.1 billion dollars, thereby increasing the recordkeeping fees with no additional services.”

The plaintiffs argue that, “based on the Plan’s features, the nature and type of administrative services provided by the Plan’s recordkeepers, the number of Plan participants (roughly 50,000–54,000), and the recordkeeping market, at maximum the reasonable recordkeeping fee for the Plan would have been $1.26 million to $1.6 million per year (an average of $30 per-participant from 2014 to 2015 and $25 per-participant from 2016 to 2018).” This, they argue is “consistent with the fees of Nike, New Albertson’s, Fidelity, and other large plans recordkept by Hewitt, Fidelity, Vanguard, and other prominent recordkeepers after requests for proposal during the period.”

Connectivity ‘Charges’

The suit also takes issue—as other Schlichter firm filed suits have with the asset-based fee structure between the recordkeeper (Hewitt) and managed account provider Financial Engines (neither are names as parties in this suit), with the latter rebating 25% to 30% of their asset-based advice fee with the former, “even though Hewitt provided no investment advice.” And since Hewitt didn’t provide advice, the plaintiffs argue that this fee “can only be categorized as a recordkeeping fee,” but that “Hewitt provided no recordkeeping service to Financial Engines or the Plan participants to justify this asset-based payment from Plan participants.”

Now, the plaintiffs note that Hewitt refers to these additional asset-based recordkeeping charges as “Data Connectivity” charges—something the suit says has been charged to plan participants since at least 2009, though those payments have hardly remained static. According to the suit, the payments to Hewitt have “grown vastly since that time, ranging from at least $62,992 in 2009 to over $400,000 by 2016—a greater than 635% increase.” This suit challenges—as other suits involving this structure have—the essence of these charges—turning to Financial Engines sales literature to contend that this “recordkeeper data connectivity is a onetime charge, not a recurring one, and not one based on the amount of assets in a Plan.”

“Even though ERISA fiduciaries are obligated to monitor service providers’ compensation from all sources, the Defendants never inquired about or accounted for the payments Hewitt received from Financial Engines for recordkeeping services, much less their profits from those payments, as their fiduciary duty required them to do,” the suit claims.

All in all, this “failure to monitor, control and ensure that participants were charged only reasonable fees for recordkeeping services caused the Plan to lose over $9.8 million due to unreasonable recordkeeping fees and lost investment opportunity,” according to the suit. 

What This Means

There’s a lot of work that goes into organizing and preparing to file this type litigation, and the folks at the Schlichter law firm have, once again, done a thorough (96-page) job of making their case. For the very most part, the allegations made have a familiar ring, and once again the target is a multi-billion dollar 401(k) plan. 

Time will tell if they will have resonance in this case, if settlement (often on the day of trial—see On Trial Date, Schlichter Strikes Another SettlementInvesco Strikes a Deal in Excessive Fee Suit and SEI Settles Excessive Fee Suit) is in the cards, or if the defendants will push back, and have their day in court (see American Century and CenturyLink).