Think we were done with multibillion-dollar plans getting sued for excessive fees and fiduciary breaches? Think again.
This time the suit (Marks v. Trader Joe’s Co., C.D. Cal., No. 2:19-cv-10942, complaint 12/30/19) has been filed against fiduciaries of Trader Joe’s Company Retirement Plan by plaintiffs Nicolas R. Marks and Lorri Bowling (both ex-participants, as it happens) for allegedly “breaching its ERISA fiduciary duties in the management, operation and administration of the Plan.”
Once again, we’re talking about a large plan ($1,629,409,314 as of Dec. 31, 2018, and some 46,600 participants), one that the plaintiffs argue had “tremendous bargaining power to demand low-cost administrative and investment management services and well-performing, low cost investment funds,” but instead “chose inappropriate, higher cost mutual fund share classes and caused the Plan to pay unreasonable and excessive fees for recordkeeping and other administrative services.”
More specifically, they allege that they failed to limit recordkeeper Capital Research's asset-based fees to a reasonable amount, a breach they claim “cost the Plan millions of dollars over the course of the relevant time period.”
Mind you, the suit acknowledges that “Trader Joe's has not disclosed to Plan participants the precise amount of fees and/or income Capital Research collects from the Plan,” but “Trader Joe's has disclosed that Capital Research receives "direct" and "indirect" fees and compensation” – and therefore “Discovery is need to identify exactly how much Capital Research is collecting, however, even with the limited information available to Plan participants it is apparent that Capital Research's fees and compensation is excessive.”
This seems to be in no small part a conclusion drawn because of the asset-based revenue sharing payments, which these plaintiffs (as have many other litigants) allege “…bear no relation to a reasonable recordkeeping fee and can provide excessive compensation.” Also cited was Trader Joe's decision to pay for Capital Research’s recordkeeping services by offering retail Investor share classes of American Funds rather than lower priced Institutional class shares.
‘Fail’ Cites
The plaintiffs claim that Trader Joe's failed to negotiate a better deal with Capital Research, either “to cap the amount of revenue sharing to a reasonable fee or ensure that all unreasonable fees were returned to the Plan, as other loyally and prudently administered plans do…”. The plaintiffs also claim that while “prudent fiduciaries of large defined contribution plans put the Plan’s recordkeeping and administrative services out for competitive bidding at regular intervals of approximately three years, and monitor recordkeeping costs regularly within that period,” and that “a competitive bidding process for the Plan’s recordkeeping services would have produced a reasonable recordkeeping fee for the Plan,” the plan’s fiduciaries failed to “seek competitive bids, and negotiate proper rebates of unreasonable fees,” and that, they say “was a breach of their duty of prudence to the Plan and caused the Plan to pay excessive recordkeeping fees.”
All in all, the plaintiffs claim that over the past six years, “the Plan paid the following recordkeeping fees in the amount of roughly $140 per participant,” whereas they argue that “a reasonable recordkeeping fee for the plan is $40 per plan participant.”
As if that were not enough, the plaintiffs state that, “in what is tantamount to an admission of excessive fees and a breach of the duty of prudence, at the end of each fiscal year, Capital Research returns a portion of the excessive fees that it has been collecting on a monthly basis from the Plan and its participants” – and that the monies returned should have been in participant accounts and invested during that period.
In sum, the plaintiffs here allege that “Trader Joe’s breached its fiduciary duty of prudence” by (among other things):
- paying Capital Research unreasonable recordkeeping fees;
- failing to adequately leverage the Plan's size to properly reduce fees;
- failing to seek competitive bids for recordkeeping services during the relevant time period; and
- allowing Capital Research to collect and keep excessive fees from Plan participants on a monthly basis, invest that money for the benefit of Capital Research, only to refund a portion of the money (excessive fees) to the Plan at the end of the fiscal year.
They also challenged Trader Joe’s for failing “to implement or follow any rational process for monitoring the performance of the Committee or determining whether the Committee was fulfilling its fiduciary duties.”
The plaintiffs here are represented by Solouki & Savoy LLP, Wenzel Fenton Cabassa PA, and Michael C. McKay.
