A federal judge has tossed an excessive fee suit, failing to find much relevance in the plaintiffs’ expert’s perspectives.
This case involved some familiar parties but with some unusual characteristics. The target of this particular suit – filed in the fall of 2020 – was TriNet, a “provider of full-service human resources (HR) solutions for small- and medium-sized businesses.” The plaintiffs, in this case, were participants in a multiple employer plan (MEP) sponsored by TriNet – and they were represented by the law firm of Capozzi Adleri – a name that has arisen with some regularity (one might say “notoriety” in a growing series of excessive fee suits, including a couple of others involving MEPs).
The Allegations
As one might expect, the allegations here are relatively familiar if the plan type itself is not. It’s alleged that by the participant-plaintiffs in the TriNet Select 401(k) Plan (Shiqiong Huang, Chris R. Stokowski, Everett Uhl, and Mark J. Hearon) that (in the words of Judge Virginia M. Hernandez Covington in the US District Court for the Middle District of Florida (who had sanctioned the class action, and now is ruling on the motion to dismiss) “the authorities responsible for overseeing the Plan breached their fiduciary duties under ERISA in two respects: (1) by selecting high-cost, underperforming investment options and (2) by causing the Plan participants to pay excessive recordkeeping fees”.
She further noted that “at the beginning of the Class Period, the Plan had 8,417 participants,” though the number of participants “steadily climbed: 11,877 in 2017, 14,420 in 2018, 16,167 in 2019, and 18,200 in 2020. Further, and as noted above, the Plan is a multiple-employer plan ("MEP") with more than 1,200 participating employers”.
The Process(es)
Judge Covington (Huang v. TriNet HR III, Inc., 2023 BL 142000, M.D. Fla., No. 8:20-cv-02293, 4/26/23) also commented that “the Plan's Investment Policy Statement established guidelines for the selection, monitoring, and removal of investment options, including identifying qualitative and quantitative factors to consider,” that the committee was “…advised during the Class Period by two independent investment advisors with significant investment expertise: NFP Retirement ("NFP") until February 2016, and DiMeo Schneider ("DiMeo") from 2016 onward”. Moreover, that before each committee meeting “…the Plan's investment consultant distributed materials containing detailed information regarding the Plan's investments and potential alternatives,” and that those reviews “…contained a scorecard that evaluated the Plan's funds relative to their benchmarks and peer groups across numerous criteria, and identified any funds for the RC to "watch" or "discuss" based on those factors.”
Moreover – and at this point, you can see where Judge Covington’s head was at – “the scorecards consistently indicated that the Plan's investments had below-average fees relative to peers.” She also noted that “throughout the Class Period, the Plan offered participants a broad range of investment strategies with differing management styles and risk-return characteristics.”
And, unlike many of these excessive fee suits where plaintiffs allege there was no effort at conducting a review of services, much less a formal request for proposal (RFP) Judge Covington recounted not one, but three separate such evaluations (with NFP in 2015, where the committee chose MassMutual, which submitted the lowest price quote of the three responding recordkeepers – AND negotiated a further price reduction before retaining its services, with DiMeo in 2018 – where again MassMutual provided the lowest price and the RC concluded that the existing structure with MassMutual as the recordkeeper was "working well”, and in 2021, again with DiMeo, where two finalists (Empower and Transamerica) provided “nearly identical” price quotes – results of which were discussed at 4 separate committee meetings, ultimately leading to a decision to consolidate the recordkeeping services for TriNet III and the Plan, securing Empower as the vendor for both – a decision that Judge Covington noted “resulted in a fee reduction for the Plan”.
Expert “Import”
That said, most of the court’s determinations focused on the testimony of expert witnesses; three for the fiduciary defendants (Steven Case, Dr. Jennifer Conrad, and Peter Swisher) and one for the plaintiffs, Frances Vitagliano. With regard to the former, Judge Covington commented that Case, a former investment consultant, opined that the RC's processes for monitoring the Plan's investment options and recordkeeping expenses were "consistent with best fiduciary practices,” while Dr. Conrad, a tenured professor of finance at the Kenan-Flagler Business School, University of North Carolina at Chapel Hill, explained that (1) fees of index funds "are not meaningful benchmarks for actively managed funds' fees," and (2) that it is appropriate to include actively-managed options in retirement plans because research indicates that active management produces superior results in certain market conditions”.
Swisher, described as “an expert in MEPs with nearly ten years' experience administering and selecting recordkeepers for a large MEP,” opined that the RC followed best practices in conducting competitive bidding through the 2015 RFP, 2018 RFI, and 2021 RFP, that recordkeeping fees for single-employer plans are not comparable to those for MEPs, that the process of onboarding new client employers "is a substantial cost for MEP recordkeepers," and that based on the data utilized by Plaintiffs' expert, the TriNet Plans paid some of the lowest recordkeeping fees of any MEP in the market and noted that all MEPs paid more than $30 per participant.
But it was the plaintiffs’ expert – Mr. Vitagliano – with his "35 years of experience in the record-keeping and administration business and the related asset management processing” that occupied most of Judge Covington’s attention. Despite experience in establishing a MEP, work in the design, implementation, and pricing of the record-keeping system used to record keep and administer the NPG MEP (which, it was noted, closed in the 1980s), and responding to RFPs for vendor services “Mr. Vitagliano admitted that he does not have experience issuing RFPs or evaluating responsive bids,” she explained.
“Experience” Emphasis
Instead, Judge Covington said that “he relied on his experience and considered a (1) 1998 consultant study submitted to the Department of Labor, (2) a survey of eight government plans for the State of North Carolina, and (3) the recordkeeping expenses he calculated for two single-employer plans: Federal Thrift Savings Plan (5 million participants) and the Mallinckrodt Pharmaceuticals Retirement Savings and Investment Plan (5,362 participants), and one multi-employer plan, Amalgamated Transit Union National 401(k) Pension Plan (17,000 participants)” – and concluded that:
(1) The Plan's recordkeeping fees were unreasonable because they exceeded $30 per participant (plus $3 to $6 in additional "administrative" fees), which is the reasonable rate for both the TriNet III and TriNet IV Plans.
(2) The committee and its consultants were "imprudent and likely negligent" when they conducted the 2015 RFP for recordkeeping services – ostensibly because it “did not include any "independent" or "unbundled" recordkeepers.”
The defendants had moved to exclude the expert report and testimony of Vitagliano.
Admission “Offices”
After recounting the criteria for evaluating the admission of an expert witness (that it be both relevant and reliable, and that the court assess whether “(1) the expert is qualified to testify competently regarding the matters he intends to address; (2) the methodology by which the expert reaches his conclusions is sufficiently reliable as determined by the sort of inquiry mandated in Daubert; and (3) the testimony assists the trier of fact, through the application of scientific, technical, or specialized expertise, to understand the evidence or to determine a fact in issue” – with the expert’s proponent bearing the burden of showing “by a preponderance of the evidence, that the testimony satisfies each of these requirements.”
Not to mention the criteria for considering a motion for summary judgment (a decision without going through discovery and a trial).
The fiduciary defendants here argued that Vitagliano made several statements that “undermined his qualifications, methodology, and final conclusions” – that he hadn’t compared the Plan's fees to those of any other MEP, that most of the plans he considered in deriving his reasonable recordkeeping fee were not similar in size or structure to the Plan, and that he did not consider the size or type of plans when he chose to include in his report the North Carolina plans and that he did not know how many participants each plan had. Moreover, he acknowledged that an MEP would have higher recordkeeping costs than a single-employer plan of the same size and that multiemployer plans differ from MEPs (among the former was a plan included in his comparisons).
But perhaps the most damning admission by Vitagliano was that he "did not undertake an analysis of the costs incurred by . . . MassMutual in servicing [the Plan]” and that with regard to the 2015 RFP, the Defendants solicited bids from at least one unbundled recordkeeper – to which he acknowledged that TriNet was "not at all" at fault for the "very reasonable and rational" decision of that vendor not to bid. Nor, despite his criticism, did he identify any other recordkeepers to which the Defendants should have sent the RFP”. Indeed, Judge Covington noted, “Mr. Vitagliano admitted that he himself was not "up on" the current recordkeeper market and instead would "depend upon the . . . expertise in that area" of a specialized recordkeeping consultant, Siegel company.”
RFP Rationale
Not surprisingly then, Judge Covington found that Vitagliano was “not qualified to testify competently,” commenting that “The bottom line is that, despite his experience in other areas within this field, Mr. Vitagliano has never conducted an RFP, has not responded to an RFP in nearly forty years, and acknowledged that he would need to rely on a consultant to determine the best way to conduct the process.”
As to the reliability of his opinions, Judge Covington agreed with the fiduciary defendants that “Vitagliano has not satisfactorily explained his methodology.” More specifically, that he “…does not detail how his knowledge and experience led him to calculate the fees for the relevant time period, or why those numbers are reasonable in light of any features of the Plan. Without more, this conclusory statement of applied knowledge of the industry's practices is insufficient under Rule 702 because "'general references' to an expert's 'experience' do not provide a reliable basis for his proposed testimony." In sum, more than a reference to “experience” would not suffice – and he was no more compelling in justifying the rationale behind the plans he had alleged were valid comparators (many of which he acknowledged during his deposition were “not comparable in size or type to the Plan.).
Judge Covington cited what she deemed a similar situation as in Pledger v. Reliance Tr. Co., where the court barred the testimony of the plaintiffs' expert, who opined on the reasonableness of the recordkeeping fee charged by the retirement plan at issue. “There, the court found that the expert, who had decades of experience in the recordkeeping industry, had not utilized a reliable methodology in determining a reasonable fee for the plan,” she wrote, going on to comment that that expert “relied on a fifteen-year-old table noting the fees for plans a fraction of the size of the plan at issue and the data from several Form 5500s with fees that did not support his fee estimate”.
Oh – and if that were not enough, Judge Covington noted that Vitagliano “did not compare the Plan to any other MEPs, instead relying on single and multiemployer plans as comparators - despite recognizing that such plans are not, in fact, comparable to MEPs.” She concluded that “Mr. Vitagliano has not demonstrated that his methodology is reliable, and his testimony is excluded. Therefore, Defendants' Daubert Motion is granted”.
Summary “Judgement”
With regard to the motion for Summary Judgement, Judge Covington noted that the claims for breach of fiduciary duty were based on two theories: (1) that Defendants imprudently selected underperforming, high-cost investment options and (2) that Defendants caused the Plan participants to pay excessive recordkeeping fees.
Noting that the plaintiffs rely solely on Mr. Vitagliano's report to demonstrate that the 2015 RFP, 2018 RFI, and 2021 RFP processes were flawed and that the recordkeeping costs were excessive, she stated that here the plaintiffs “have not put forth any evidence demonstrating that Defendants breached their fiduciary duties. In fact, the undisputed record evidence shows the opposite. The RC monitored the Plan's recordkeeping fees, conducting three competitive searches for recordkeepers during the Class Period and conducting regular benchmarking exercises in the interim”. Moreover, she pointed to the fee reductions that resulted from the 2015 RFP and the 2021 RFP and concluded that “this Court joins the refrain of other district courts that have found evidence of regular, competitive searches compelling evidence that there was no breach of fiduciary duty.”
And – even if they had, she explained, “they have no evidence of loss causation. Plaintiffs have not offered specific facts showing that the Plan's recordkeeping costs were excessive. Again, the only evidence to which they cite is Mr. Vitagliano's report, which the Court will not consider. Indeed, the only evidence regarding the reasonableness of the recordkeeping fees comes from Defendants' expert, Mr. Swisher, who concludes that the Plan paid some of the lowest recordkeeping fees of any MEP in the market, and noted that all MEPs paid more than $30 per participant”.
“At best”, Judge Covington wrote, “Plaintiffs have demonstrated that a different type of retirement plan could have paid lower recordkeeping fees for a different package of services. This showing is insufficient to avoid summary judgment”.
On the investment-related claims, Judge Covington commented simply that “plaintiffs have not met their burden to avoid summary judgment on their investment-related claims”, as they “did not cite to any facts that specifically controvert those Defendants included in their statement of material facts related to the investment selection process,” and that there was “…substantial evidence that Defendants prudently monitored the Plan during the class period. The RC regularly met, received detailed reports regarding the performance of Plan investments, and discussed which funds should be included in the Plan,” further commenting that “plaintiffs' failure to present evidence of a loss stemming from such alleged imprudence is fatal to their claims” – and also granted summary judgment on those claims.
That said, the plaintiffs here were given 30 days after the entry of the judgment to appeal the decision.
What This Means
Perhaps most obviously, this case serves as a reminder of the importance of making sure that the individuals hired as experts can actually fulfill that role for the issue(s) under consideration.
Beyond that, some of the “admissions” regarding Multiple Employer Plans (MEPs) with regard to cost and complexity structures will no doubt be eye-opening to some (and affirming to others – see PEPs—Hot or Not? The Pros and Cons of Pooled Employer Plans) – including other recent suits regarding multiple employer plans.
It’s another example of a plaintiffs’ case unable to progress past the motion for summary judgment because its claims of fees that are excessive aren’t substantiated by evidence that the plans it's compared to are, in fact, comparable. But ultimately, and significantly, it’s validation that plans that have in place a documented, thoughtful review process (and this one had substantiated results) can prevail - even when they can’t prevent this type of litigation.
- Nevin E. Adams, JD
