The most recent excessive fee suit involves a multiple employer plan—and takes aim at the plan’s target date fund selection.
That wasn’t the only fiduciary shortcoming alleged, of course, in a suit that cited “losses to the Plan caused by Defendants’ conflicted and imprudent selection of investments and services for the Plan.”
This time plaintiff Lawanda Lasha House Johnson, “individually and on behalf of all other similarly situated persons and the Profit Sharing Plan of Quest Diagnostics Incorporated” has filed suit (House Johnson v. Quest Diagnostics Inc., D.N.J., No. 2:20-cv-07936, complaint 6/29/20) against Quest Diagnostics Incorporated, the Profit Sharing Plan of Quest Diagnostics Incorporated Benefits Administration Committee, the Profit Sharing Plan of Quest Diagnostics Incorporated Investment Committee, and “Does No. 1-20, who are currently unknown members of the Committees.”
Suite ‘Spot’
The suit notes that in addition to Quest, four other employers appeared to cosponsor the $3.9 billion plan, which covered nearly 56,000 participants. The suit states that the plan lineup offers a suite of 13 target date funds, and that “since at least December 2010, the Plan has offered the Fidelity Freedom fund target date suite.” The suit explains that, among its several target date offerings, Fidelity’s two most popular are the Freedom funds (the Active suite”) and the “substantially less costly” Freedom Index funds (the “Index suite”).
Interestingly enough, the plaintiff here was represented by Shepherd, Finkelman, Miller & Shah LLP and Law Offices of Sahag Majarian—the former previously represented the plaintiffs in another case involving a multiple employer plan, as well as excessive fee suits involving Safeway and Gucci.
As you might expect, the plaintiffs here took issue with the plan’s TDF choice, claiming that, “Defendants failed to compare the Active and Index suites and consider their respective merits and features,” and that “a simple weighing of the benefits of the two suites indicates that the Index suite is a far superior option, and consequently the more appropriate choice for the Plan.” The claim that while those two families “have nearly identical names and share a management team,” the Active suite “invests predominantly in actively managed Fidelity mutual funds,” but the Index suite “places no assets under active management, electing instead to invest in Fidelity funds that simply track market indices.”
QDIA Conflicts
Of course, the main issue of concern to the plaintiff is that the Active suite is “dramatically more expensive than the Index suite, and riskier in terms of both its underlying holdings and its asset allocation strategy”—and the defendants’ “decision to add the Active suite over the Index suite, and the failure to replace the Active suite with the Index suite at any point during the Class Period” was characterized as a “a glaring breach of their fiduciary duties.”
That decision, the plaintiff alleges, was exacerbated by the positioning of that choice as the plan’s qualified default investment alternative (QDIA). “Indeed, from 2016 to 2018, 37-41% of the Plan’s assets were invested in the Active suite,” the suit points out.
The suit also claims that the Active suite “chases returns by taking higher levels of risk that render it unsuitable for the average retirement investor, including participants in the Plan, and particularly those whose savings were automatically invested through the QDIA.” Noting that at first glance, the equity glide paths of the two fund families appear nearly identical… the plaintiff claims that “the Active suite subjects its assets to significantly more risk than the Index suite, through multiple avenues,” notably its reliance on active management. And the plaintiff argues that the Institutional Premium share class for each target year of the Index suite “charges a mere 8 basis points (0.08%), the K share class of the Active suite—which the Plan offers—has expense ratios ranging from 42 basis points (0.42%) to 65 basis points (0.65%).” All of which, she alleges, means that “in 2018 alone, the Plan could have saved approximately $8 million in costs—which Plan participants unreasonably paid for to their detriment.”
Remittance Says
While the bulk of the arguments were directed at the QDIA choice, that wasn’t the only fiduciary shortcoming alleged here. The plaintiff also took issue with the recordkeeping fees paid by the plan (also to Fidelity), alleging that while “it is Defendants’ responsibility to ensure that Plan recordkeeping expenses and all other expenses of the Plan are reasonable—which plainly was not the case in the instance of the Plan.” They make that claim by stating as a “contractually required amount” $31/participant from 2014 through 2018, and $30/participant from July 1, 2018 on.
Their claim that Fidelity was paid more than that is apparently based on their allegation that Fidelity did not remit to participants “the full amount of excess revenue sharing it received,” which the suit claims amounted to approximately $330,997 in 2018 and $388,662 in 2017. The suit goes on to state that “Defendants likely also overpaid Fidelity for recordkeeping services in other pertinent years as well since they clearly failed to maintain a system to ensure that Fidelity was not overpaid.”
Tied in with those allegations, the suit notes that the defendants “failed to utilize the cheapest share class for some of the investment options offered within the Plan, presumably to account for the revenue sharing included in the higher fee (which, as demonstrated above, was needlessly excessive).”
Committee ‘Calls’
This suit, as others of late, also takes the corporation and the committees to task for, among other things:
- failing to monitor and evaluate the performance of their appointees or have a system in place for doing so, standing idly by as the Plan suffered enormous losses as a result of the appointees’ imprudent actions and omissions with respect to the Plan;
- failing to monitor their appointees’ fiduciary processes, which would have alerted a prudent fiduciary to the breaches of fiduciary duties described herein, in clear violation of ERISA; and
- failing to remove appointees whose performance was inadequate in that they continued to maintain imprudent, excessively costly, and poorly performing investments within the Plan, all to the detriment of the Plan and its participants’ retirement savings.
All in all, the suit concludes by stating that “as a consequence of these breaches of the fiduciary duty to monitor, the Plan suffered substantial losses,” and that “had Quest and the Committees discharged their fiduciary monitoring duties prudently as described above, the losses suffered by the Plan would have been minimized or avoided entirely.”
“Therefore, as a direct result of the breaches of fiduciary duties alleged herein, the Plan and its participants have lost millions of dollars of retirement savings.”
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.
