Commenting that “the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers,” another excessive fee suit has been filed—against a plan smaller than typical for this genre.
This time it’s plaintiff Jim Gramstad who, “individually and as a representative of participants and beneficiaries of the Ventura Foods, LLC Profit-Sharing 401(k) Plan…for breaching their fiduciary duties in the management, operation and administration of the Plan” in the U.S. District Court for the Central District of California.
The plan in question isn’t particularly large—in fact, considering that the vast majority of plans targeted thus far have had in excess of a billion dollars in assets, this one—at $322,701,158 in assets (as of 12/31/21) and 2,954 participants—is downright modest in size.
Specifically, the plaintiff[i] here (Gramstad v. Ventura Foods LLC, C.D. Cal., No 8:22-cv-02290, complaint 12/21/22) claims that the fiduciary defendants breached their fiduciary duties of prudence and loyalty to the Plan by:
a. Overpaying for covered service providers (the suit claims that “by paying variable direct and indirect compensation fees through revenue sharing arrangements with the funds offered as investment options under the Plan, which exceeded costs incurred by plans of similar size with similar services and which were in excess of and not tethered to the services provided”);
b. Offering and maintaining funds with higher-cost share classes when identical lower cost class shares were available and could have been offered to participants;
c. Retaining and offering poorly performing funds within the Plan “which failed to meet or exceed industry standard benchmarks,” including Morningstar category indices and best fit indices as determined by Morningstar;
d. Deprived participants of compounded returns through the excessive costs and investment in expensive underperforming funds; and
e. Failing to maintain and restore trust assets.
Recordkeeping Claims
As an example, the suit claims that in 2016, the Plan paid Transamerica approximately $718,000 “even though Transamerica had provided the same services for approximately $584,516 the year before.” This matters, because just ahead of that the suit asserts the “greatest cost incurred in incorporating a new retirement plan into a recordkeeper’s system is for upfront setup costs.” The next big assertion is that “based on the number of Plan participants and the assets in the Plan, a reasonable recordkeeping fee for the Plan is approximately $40 per participant” (apparently citing the 15th Annual NEPC 2020 Defined Contribution Plan & Fee Survey) (in 2013, the Defendants chose Transamerica to serve as the Plan’s recordkeeper with Gallagher to serve as investment advisor from 2012 to the present). The suit goes on to claim that “based on the direct and indirect compensation levels shown on the Plan’s Form 5500s filed with the Department of Labor covering the years between 2013 and 2022, the Plan paid much more than a reasonable fee for Transamerica and Gallagher’s services, resulting in the Plan paying millions of dollars in excessive fees….”
The next assertion made by the plaintiff is that “the Plan did not receive any unique services or at a level of quality that would warrant fees greater than the competitive fees that would be offered by other providers,” before proceeding to state that “the market for defined contribution recordkeeping services is highly competitive, particularly for a Plan like the Ventura Foods Plan with large numbers of participants and large amounts of assets.”
‘Proof’ Statements?
Now, having asserted that the plan paid fees that were unreasonable, the plaintiff notes that the participants as a result “realized lower returns on their investments because they paid higher fund operating expenses”—and that “the clear explanation for this is that Defendants have a flawed and reckless provider selection process that is “tainted by failure of effort, competence, or loyalty.” They go on to claim that “in most years, many of the funds offered to the participants had less expensive share classes available”—and that “defendant’s use of higher cost share classes[ii] to pay service provider costs is the most inequitable, inefficient and expensive method available,” that “defendants clearly failed to use the Plan’s bargaining power to leverage its CSPs to charge lower administrative fees for the Plan participants,” and “…failed to take any or adequate action to monitor, evaluate or reduce their service provider fees….”
They add to their list of assertions by commenting that “defendants may seek to explain that they offered higher cost share classes with higher fee burdens by pointing to the Plan’s ability to use those fees for revenue sharing arrangements. But this does not justify the increased fees and lost returns imposed on Plan participants.” Rather, (and here another assertion emerges), they assert that “empirically speaking, revenue sharing burdens on mutual fund investors are always more costly than the revenue sharing credit offered by the corresponding mutual fund share class.”
They then assert that “defendants did not systemically and regularly review or institute other processes in place to fulfill their continuing obligation to monitor Plan investments and reduce Plan costs, or, in the alternative, failed to follow the processes…,” offering as evidence their conclusion that “…offering of higher cost share classes as Plan investment options when lower cost options of the same funds were available,” because the comment that “a prudent fiduciary conducting an impartial review of the Plan’s investments would have identified the cheaper share classes available and transferred the Plan’s investments in the above-referenced funds into the lower share classes at the earliest opportunity.” Their failure to do so “resulted in millions of dollars of damages to participants,” the suit claims.
Their issues here extend to the stable value offering in the plan—as it was tied to the financial strength of a single insurer (in this case Prudential).
“Because retirement savings in defined contribution plans are intended to grow and compound over the course of the employee participants’ careers, poor investment performance and excessive fees can dramatically reduce the amount of benefits available when the participant is ready to retire,” the suit asserts.
Stay tuned.
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.
