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Excessive Fee Suit Treads New Ground(s)


A new excessive fee suit makes some of the same claims, but relies on different arguments, turning not only to government filings, but also making very precise arguments about plan expenses and portfolio diversification.

This most recent suit (Fleming v. Rollins, Inc., N.D. Ga., No. 1:19-cv-05732, complaint filed 12/23/19) targets both the Rollins 401(k) Savings Plan and the Western Industries Retirement Savings Plan – some 13,300 participants and approximately $730 million in assets, according to the suit, which alleges – as most of these suits do – that, “despite the massive size of the Plans, many of the mutual fund options were high-priced retail share classes designed for small individual investors.” The Atlanta-based firm provides pest control services and protection against termite damage, rodents and insects (Orkin is a subsidiary of Rollins).

Plaintiff here Marcia G. Fleming claims that she “…and all participants in the Plans suffered financial harm as a result of the imprudent, arbitrary and excessive fee structures in the Plans because Defendants’ inclusion of those options deprived participants of the opportunity to grow their retirement savings by investing in prudent options with reasonable fees, which would have been available in the Plans if Defendants had satisfied their fiduciary obligations,” and worse, that “all participants continue to be harmed by the ongoing inclusion of these imprudent and excessive cost options and payment of excessive recordkeeping fees.”

Forms Substance

While the allegations are reminiscent of those in other, similar suits, this one cites as evidence “…Defendants’ own certified annual plan Forms 5500 filed under penalties of perjury to the Internal Revenue Service (IRS) and Department of Labor (DOL) for the ten (10) plan years of 2009 to 2018.” This, of course, is due to “Defendants’ sole possession of critical plan and trust records such as meeting minutes, investment policies, board resolutions, etc. limits the Plaintiffs’ abilities to ascertain facts and transactions relating to 1) damages, 2) disloyalties and 3) imprudent behavior of the Defendants,” according to the suit.

The suit acknowledges that “the Plaintiff’s 2019 benefit statement shows that the Defendants realized their prior errors and finally acted to remove the burdensome retail share classes and replace them with their cheaper institutional share alternatives sometime in 2019. But their action in this regard has does nothing to 1) repair the harm to the thousands of separated employees that withdrew millions of dollars, or 2) repair the accounts of current employees for the 2014, 2015, 2016, 2017 and 2018 plan years of prohibited transactions and trust damages.”

And while they are not parties to the suit, the plaintiff alleges that the plan’s fiduciaries “transacted in a prohibited manner under ERISA” by making “excessive payments during the ten years of 2009 to 2018” to 1) NFP; 2) James E. Bashaw/LPL; 3) Alliant and 4) Prudential.

Correlation ‘Cause’

The suit also treads some new ground in making arguments that the investment funds on the menu are ill-diversified, specifically that “the Plans’ equity funds have a 90% correlation with no provision to make available to participants less-correlated foreign bond, real estate, commodity funds, etc.”

The suit claims that determining what fees were reasonable for a large plan (like this one) “requires soliciting bids from competing providers. In large plans with over 10,000 participants, benchmarking based on fee surveys alone is inadequate.” Moreover, they claim that “prudent fiduciaries of defined contribution plans, thus, obtain competitive bids for recordkeeping at regular intervals of approximately three years,” something they claim the defendants here did not do.

Moreover, they take the defendants to task for “selecting service providers such as the broker dealer LPL where the representative James E. Bashaw cleared commissions/fees from the Plan” – who, they claim, “was terminated in 2014 for “FAILURE TO FOLLOW FIRM POLICIES AND INDUSTRY REGULATIONS,” and who they also allege previously had a “breach of fiduciary” allegation in the year 1988. “Despite this, Defendants allowed Mr. Bashaw to serve as a Plan fiduciary, and paid him and LPL almost $440,000 between 2010 and 2013 as reported in the Plans’ Form 5500s.”

FINRA ‘Fan’?

As if that weren’t enough, they note that “despite receiving over $100,000 per year on average between the trusts, Bashaw and LPL failed to show that they added any material value by maintaining actively managed predominantly retail share class investments.” Instead, they argue that “this FINRA regulated broker should have helped the Defendants avoid imprudent fund and share classes by using tools such as FINRA’s own free mutual fund cost analyzer to help select prudent investment options and appropriate share classes for the size of the Plans.”

The suit also took issue with the default of participants into the GoalMaker models, alleging that they were “harmed financially for at least the past decade due to the imprudent and expensive retail share classes selected by the Defendants.” Instead, they argue “a prudent fiduciary would have sought low-cost passively managed investments and invested in the institutional-class shares for each mutual fund rather than have remained in retail class shares.”

“Defendants should have monitored these investments more diligently and removed them more quickly,” the suit notes, “given that, on average, 20% of Rollins employees left the company in the five year period between 2014 and 2018.” As a consequence, they claim that about $250,000 “left the Plan due to those employee separations during that period and that represents assets of participants who have been irreparably harmed by excessive costs and imprudent investments.” How much? Well, the suit claims that funds chosen by Defendants cost about $1,300,000 in expenses during plan year 2014, and that “funds were available that replicated the benchmarks’ returns for under $300,000” – that means, of course, that the lower fee choice “would have saved the participants at least $1,000,000 in expenses and avoided active manager risk in that one year alone.”

“To put it another way, Defendants ensured the participants’ biweekly contributions and the associated matched dollars were repeatedly bet on the horse with a 600lb jockey (100 basis points or ~1%/yr fund costs) versus betting on a horse with a 60lb jockey (i.e., carrying only 10 basis point average annual cost.”

Deviation Detailed

With regard to the selection of the T. Rowe Price New Horizon fund, the plaintiffs allege that, prior to 2009, the defendants chose that fund that, “according to its prospectus-stated objective and Russell 2000 Growth prospectus benchmark, was supposed to fill a portfolio’s ‘small cap growth’ category,” but that the defendants “…failed to monitor this fund prudently and, therefore, overlooked (if not ignored) that the manager deviated from the fund’s stated objective to cause it to drift into a mid-cap stock category.” As a result, they allege “participants who thought they were diversifying by putting some dollars into small stocks and mid-size stocks became potentially overweighted in the mid-cap categories.”

‘Bad’ Timing?

The plaintiffs charged the plan fiduciaries with replacing one fund on the menu with one that “had fewer than 15 years of performance history and was twice as expensive as the DODBX fund at the time the conduct was performed,” going on to state that, “if a fund change was mandated by the IPS, Defendants should have sought a lower cost option…”. And as if that weren’t enough, the plaintiffs say the defendants “also chose the wrong time to make the change,” as the replacing fund’s “short period of outperformance” over the fund it was replacing shortly thereafter “gave way to underperfomance in eight of the next ten years.” This decision alone they say cost participants more than $10 million through 2018.

The suit states that in 2014 the plan’s investment menu “did not include low correlation investments such as short-term government bonds, global bonds, emerging markets, emerging markets bonds and commodities, etc.” – and, “unlike the multiple fixed income asset classes illustrated in the correlation matrix, Defendants offered participants just one fixed income mutual fund.” They go on to note that “participants had no other low correlation bonds to choose from (short term, long term or international bonds) or other low-correlation investment choices (REITs, emerging market, etc.).”

‘Party’ Problems

These suits routinely challenge revenue-sharing practices, and take issue with asset-based fees for participant recordkeeping services. But these plaintiffs criticize the defendants for not only not receiving any offsetting credits, but that by allowing the plans’ recordkeeping costs to be paid from asset-based revenue sharing sources (rather than by the number of participants), they embraced an approach that “allowed Prudential to potentially receive systematic pay increases from both Plans due, in large part, to participant contributions, employer matches and capital appreciation, dividends and interest.” 

As for those fees, the suit claims that “Prudential’s per participant recordkeeping fees increased 88% from 2009 through 2018, while the number of participants increased by just 48%.” Not only do they claim that there was no justification for asset-based fees for this service, but that this “should have been reported on the Schedule H, line 4d, Schedule G and IRS Form 5330 for each year in which the overpayment to Prudential occurred” – overpayment in this case being the differential between the per participant theory and asset-based fee reality. 

As for that differential, they cite the 401k Averages Book (17th edition) to determine that “$54 per annum per participant is considered a high recordkeeping cost for plans with assets above $100M.” And since “Rollins’ 2018 total fee to Prudential of $875,000 divided by the 12,463 participants with account balances equals $70 per annum per participant” – that, they say, is “30% over the high fee threshold listed in the 401k Averages Book.”

And, to rub some salt in those wounds, they make another relatively obscure argument – they note that “Defendants never checked ‘YES’ for non-exempt transactions with a party in interest on Schedules H, line 4d for all plan years,” and point out that in order to avoid checking “YES,” fees must be “necessary for operation of the plan” and if so, they must be “reasonable” – meaning the provider “can make a reasonable profit and must disgorge excesses back to the trust to avoid a United States Department of Labor (DOL) tax of 20% or U.S. Treasury/Internal Revenue Service (IRS) prohibited transaction excise tax of 15% per plan year involved.”

Now, in case you were wondering where they were going with that line of argument, they go on to explain that the fund managers’ lag behind their own funds’ prospectus benchmarks totaled $12,888,776, and allege that the portion of that lag “due to wasted managers’ fees equals $2,677,884.” They then note that “where a manager’s costs provide no value to Plan participants, these fees are not necessary and therefore prohibited transactions that should be rebated to Plan participants investing in this fund by the Defendants.”

They also allege that the plan fiduciaries “permitted arbitrary payments to service providers to the Plans,” citing payments to Prudential for recordkeeping services that they say rose from $115,412 in direct compensation in 2017 to $506,841 in 2018, direct payments for investment advisory services to National Financial Partners (NFP) of $59,162 in 2009 that two years later rose to $110,596 (allegedly for performing the same function), and that they approved an “87% pay increase to a new investment advisor that added no additional value or performed additional work” – because “the investment menu remained virtually the same.”

What’s Next?

Now, that’s quite the laundry list of specific, detailed accusations – but to wrap it all up, the plaintiff asks the court to take a series of actions, including (but not limited to) the following.

  • Find and declare that Defendants have breached their fiduciary duties (as described in the suit). 
  • Find and declare that Defendants committed prohibited transactions and require amendments to 2014 to 2018 Forms 5500 filings to include omitted Schedules G and Forms 5330 to pay required IRS and DOL tier 1 and tier 2 excise taxes related to excessive payments. 
  • Find and adjudge that Defendants are personally liable to make good to the Plans all losses to the Plans resulting from each breach of fiduciary duty, and to otherwise restore the Plans to the position it would have occupied but for the breaches of fiduciary duty.
  • Determine the method by which Plan losses under 29 U.S.C. §1109(a) should be calculated.
  • Order the Defendants to pay to the Plans the amount equaling all sums received by Prudential as a result of recordkeeping, revenue sharing, and investment management fees.
  • Order Defendants to provide all accountings necessary to determine the amounts Defendants must make good to the Plans under §1109(a).
  • Remove the fiduciaries who have breached their fiduciary duties and enjoin them from future ERISA violations.
  • Reform the Plans to include only prudent investments.
  • Reform the Plans to obtain bids for recordkeeping and to pay only reasonable recordkeeping expenses.
  • Require the fiduciaries to select investments and service providers based solely on the merits of those selections, and not to serve the interests of service providers.

The suit also seeks to certify the class action, appoint the Plaintiff as class representative, and appoint Paul J. Sharman, Esq. of The Sharman Law Firm LLC as Class Counsel, among other things.

Stay tuned.