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Fiduciary Breach Suit Has RK Fee Focus


Claiming that “all national recordkeepers, like Fidelity, Empower, Schwab, etc., have the capability to provide recordkeeping services at relatively little cost,” a new excessive fee suit has been filed.

This suit was brought[i] against plan fiduciaries on behalf of the Knight-Swift Transportation Holdings, Inc.  Retirement Plan by participant-plaintiffs Robert Hagins and Tommie Woodard for breaching its fiduciary duties of prudence in violation of the Employee Retirement Income Security Act (ERISA). The plan in question had $432,416,489 in assets and 14,426 total participants as of Dec. 31, 2021. 

More specifically, the suit (Hagins v. Knight-Swift Transportation Holdings, Inc., D. Ariz., No. 2:22-cv-01835, complaint 10/26/22) alleges that rather than “leveraging the Plan’s tremendous bargaining power to benefit participants and beneficiaries, Defendant caused the Plan to pay unreasonable and excessive fees for recordkeeping and other administrative services. Defendant also selected and retained for the Plan high priced investments when identical investments were available to the Plan at a fraction of the cost.” The suit continues by arguing that the defendant’s “mismanagement of the Plan constitutes a breach of the fiduciary duty of prudence”—and that “defendant’s actions (and omissions) were contrary to actions of a reasonable fiduciary and cost the Plan and its participants millions of dollars.”

‘Essentially the Same’

Now, as for that recordkeeper, the suit notes that Principal Life Insurance Company was the recordkeeper for the plan—and “has been the recordkeeper during all relevant times.” The suit also notes that “substantially all of the Plan’s investments are shares of mutual and/or collective trust funds managed by Principal (or its affiliates).” And, perhaps seeking to preempt the type of judicial dismissals of such cases of late for failing to state a plausible claim (generally on the conclusion that it is not sufficient to simply allege fees paid by plans of similar size), the plaintiffs here claim that “Nearly all recordkeepers in the marketplace offer the same range of services. The services are essentially the same.” 

Beyond that, the suit claims that “the market for recordkeeping is highly competitive, with many vendors equally capable of providing a high-level service,” and concludes that “as a result of such competition, vendors vigorously compete for business by offering the best price, rather than differentiating themselves based on the quality or range of services offered.” Which, of course, might come as a surprise to those who do, in fact, seek to differentiate themselves on something more than price alone.

The plaintiffs continue to stake out suppositions as facts. Next, they noted that “the cost of providing recordkeeping services primarily depends on the number of participants in a plan, rather than the range of services provided to the plan,” and that “because recordkeeping expenses are driven by the number of participants in a plan, most plans are charged on a per-participant basis.” The suit goes on to state—arguably without controversy—that plans with large numbers of participants “can and do take advantage of economies of scale by negotiating a lower per-participant recordkeeping fee.” 

‘Charge’ Call

However, they go right from that claim to stating—again likely eying that dismissal ground again—that “the cost of providing recordkeeping services primarily depends on the number of participants in a plan, rather than the range of services provided to the plan”—going on to connect to that claim that “most plans are charged on a per-participant basis.”

Now, having laid out some detail about the revenue-sharing process (and, as all of these cases do, acknowledging that the practice is “not per se imprudent,” but go on to state “however,  when (as here) revenue sharing is left unchecked, it can be devastating for plan participants”—describing it as “a way to milk large sums of money out of large plans….” The suit then proceeds to claim that the plaintiffs’ individual accounts in the Plan suffered losses because, “in fact, each participant’s account was assessed an excessive amount for recordkeeping and administrative fees, which would not have been incurred had Defendant discharged its fiduciary duties to the Plan and reduced those fees to a reasonable level.” 

A ‘Proper’ RFP?

The plaintiffs argue that “there is nothing to indicate that Defendant has undertaken a proper RFP since 2016. If Defendant had undertaken an RFP to compare Principal’s compensation with those of others in the marketplace, Defendant would have recognized that Principal’s compensation during the Class Period has been (and remains) unreasonable and excessive.” The suit also takes issue with the float allegedly earned by Principal when participant contribute or withdraw money and that money flows through a Principal clearing account (for 2-5 days) for which Principal earns interest. While admitting they have no idea how much Principal gained via this flow, the suit nonetheless states that the “defendant breached its fiduciary duty of prudence by allowing Principal to receive excessive and unreasonable compensation from Plan participants and without even knowing the amount of compensation Principal collects from interest on participant money.” 

Additionally, the suit takes issue with what it claims the Plan paid Principal ($1,209,051) in “direct compensation” during 2021—math that they allege amounts to $83.81 per participant in “direct compensation” for recordkeeping services in 2021 ($1,209,051 / 14,426 = $83.81)—though that doesn’t include “indirect compensation” via revenue sharing, float interest, etc. that Principal collects from the Plan. Indeed, the suit claims that the total amount of recordkeeping fees paid by the Plan (both through direct and indirect payments) currently is at least $200 per participant annually—when it then states that “a reasonable fee ought to be no more than $25 per participant annually.”

Ultimately, the suit argues that the fiduciary defendants here “either engaged in little to no examination, comparison, or benchmarking of the recordkeeping/administrative fees of the Plan to those of other similarly sized 401(k) plans, or it was complicit in paying grossly excessive fees.” The suit argues that if they had “conducted a meaningful examination, comparison, or benchmarking, as any prudent fiduciary would, Defendant would have known that the Plan was compensating Principal at an inappropriate level.”

The suit also took issue with the investment choices of the plan, noting that “there is no good-faith explanation for selecting and retaining the higher-priced and poorly performing share classes when the lower-priced and better performing share classes were available. The Plan did not receive any additional services or benefits based on it stagnate continuation of the more expensive share classes. The only difference between the two was higher price and lower returns.”

We’ll see what the court here has to say.

NOTEIn 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.    


[i] Wenzel Fenton Cabassa PA, McKay Law LLC, and Morgan & Morgan PA represent the proposed class.