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Excessive Fee Suit Alleges Fiduciary ‘Abdication’

A new excessive fee suit claims that plan fiduciaries “abdicated” their responsibilities, allowing the plans’ trustee to “…to lard the Plans with high-cost mutual funds.”

The most recent excessive fee suit involves both the 401(k) and 403(b) plans of Allina Health System, which have nearly $2.3 billion in assets and 47,500 participants, according to the complaint. The suit (Larson v. Allina Health Sys., D. Minn., No. 0:17-cv-03835, complaint filed 8/18/17) claims that the fiduciary-defendants “did not try to reduce the Plans’ expenses or exercise appropriate judgment to scrutinize each investment option that was offered in the Plans to ensure it was prudent.”

‘Rubber Stamps’

Instead, the plaintiffs claimed that this “abdication of responsibility" enabled Fidelity, the 401(k) plan trustee and custodian of the 403(b) plan, as well as the recordkeeper for both plans, to “lard the Plans with high-cost, non-Fidelity mutual funds through which Fidelity received millions of dollars in revenue sharing payments, while also giving Fidelity discretion to add any Fidelity mutual fund that Fidelity had available, regardless of whether the funds were duplicative of other options, had high costs, were performing poorly, or were otherwise inappropriate as retirement savings options for the Plans’ participants.” The plaintiffs state that Fidelity selects the menu of investment options available under the plans, “subject only to ‘rubber stamp’ approval by the Company and/or Retirement Committee for inclusion and/or retention in the Plans.”

The suit notes that while Fidelity was responsible for performing recordkeeping services for two defined contribution plans, plaintiffs (who have clearly never been recordkeepers) allege that, since the plans were “administered in an identical fashion, this fact had ‘virtually no effect’ on the level of services that FMTC was required to provide to the Plans compared to the services it would have had to provide to a single plan.” Moreover, since the 403(b) plan was frozen to new contributions and participants near the beginning of the class period, they claim that Fidelity only had to process contributions and investment elections for one plan.

Between the beginning of 2011 and the end of 2015, Allina’s 403(b) plan maintained between $925.4 million and $1.08 billion in assets, and currently has more than 19,500 participants. As for the 401(k) plan, the suit notes that between the beginning of 2011 and the end of 2015, it maintained between $371.7 million and $1.19 billion in assets, and currently has more than 28,000 participants. All in all, the plans’ combined “jumbo” status should have given the fiduciaries significant bargaining power, but they didn’t take advantage of it, according to the suit.

‘Staggering’ Number of Options

The suit charges that the plans in question “regularly had more than 300 separate mutual fund options, most of which were Fidelity’s own mutual funds that charged ‘retail prices’ or were funds that paid a portion of the investment management fee to Fidelity.”

Plaintiffs alleged that having more than 300 fund options diluted the bargaining power of both plans such that participants paid higher fees for those options – and that the “vast majority of these options were either managed by Fidelity-affiliated companies or provided a significant portion of their investment management fees to Fidelity-affiliated companies,” investments they claim were “…included at the request of Fidelity in order to benefit Fidelity, not because they were expected to outperform or otherwise be superior to other comparable investments.”

The plaintiffs referred to this as a “staggering number of investment options, well outside industry norms,” and alleged that the sheer number of options “negated the ability of the Plans to invest in lower-cost institutional shares of identical investments because the Plans’ money was spread over hundreds of options, which lowered the amount of money for each option such that only more expensive shares of the funds were available to the participants for purchase.” This meant that, according to plaintiffs, “Fidelity was able to charge higher fees, far higher than the Plans would pay if the Plans limited the number of investment options as prudent fiduciaries do. The decision to include hundreds of options thus benefitted Fidelity, at the expense of the Plans.” Moreover, plaintiffs allege that the amount of options also made it “nearly impossible for Defendants to review the Plans’ options on a regular and systematic basis to assess their prudence” – and then go on to note that the plan fiduciaries “admit they failed to evaluate the non-core options.”

As further evidence, the plaintiffs claim that, with a single exception, “the funds that were removed were removed because the individual fund manager closed the fund and liquidated its assets due to poor performance and/or lack of interest from investors,” that the defendants “continued to offer the options until they were closed, and often, immediately added (if it was not already in the Plans) the fund from the same manager in which the former options’ monies were directed if investors failed to liquidate their investment on their own.”

Other Parties

The suit also references, but does not name as defendants, Fidelity and ProManage, LLC, “the firm appointed by the Company to provide investment management services with respect to assets held in the individual Plan accounts of Participants who do not elect to opt out of the ProManage Service,” although the suit does note that both plans share the same qualified default investment and a set menu of options, with funds allocated by a default investment mix “provided by” ProManage, while alleging that “the inclusion of the ProManage PROgram and participants’ automatic inclusion provided participants with minimal benefit for the amounts charged.”

Bottom Line

All in all, the suit alleges a breach of fiduciary duty by the defendants in:

  • including higher cost investment options in the plans that were detrimental to participants;

  • allowing Fidelity to select its own proprietary funds for the plans, as well as other funds paying fees to Fidelity for inclusion in the plans;

  • failing to use the plans’ high levels of assets to negotiate lower fees for certain funds and/or use collective trusts or other investment vehicles that could have lowered administrative expenses while providing substantially similar investments;

  • failing to monitor and control the plans’ recordkeeping costs;

  • failing to use the plans’ bargaining power to negotiate lower managed account expenses;

  • maintaining multiple money market funds during a sustained period in which all the money market funds earned negligible or even negative returns; and

  • failing to switch higher cost and poorly performing investment options for nearly identical, or similar, cheaper and better performing options available in the market.

Other Failures Alleged

The suit also alleges that the defendants breached their fiduciary duties by “failing to adequately monitor other persons to whom they had delegated the management and administration of the Plans’ assets, despite the fact that such Defendants knew or should have known that such other fiduciaries were failing to manage the Plans and their investment portfolios in a prudent and loyal manner as required by ERISA,” and failed to provide adequate disclosures to participants in the plans regarding the fees and expenses charged to them by third-party providers by: (1) failing to properly identify fees and expenses charged against individual accounts; and (2) failing to properly identify the source of the fees and expenses so charged.

The suit concedes that plaintiffs “did not have knowledge of all material facts (including, among other things, the cost of the investments in the Plans relative to alternative investments that were available to the Plans but not offered by the Plans, or the fact the options were chosen by, or for the benefit of, Fidelity, and not by the Defendants or for the Participants) necessary to understand that Defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA, until shortly before this suit was filed,” nor did they have (or currently have) “actual knowledge of the specifics of Defendants’ decision-making processes with respect to the Plans, including Defendants’ processes for selecting, monitoring, retaining, and removing Plan investments, because this information is solely within the possession of Defendants prior to discovery.”

Moreover, having never managed jumbo 401(k) plans, “Plaintiffs lacked actual knowledge of reasonable fee levels and prudent alternatives available to such Plans,” and “did not and could not review Committee Meeting Minutes or other evidence of Defendants’ fiduciary decision making, or the lack thereof,” and thus have drawn what they claimed to be “reasonable inferences” regarding these processes.