A new excessive fee suit targets, among the usual “suspects,” what plaintiffs allege are “the obscenely high-fee, chronically underperforming GoalMaker funds…”
The plaintiffs in this case are Martin P. Moler, John T. Czahor and Kathleen D’Ascenzo, who, by and through their attorneys,[i] on behalf of the nearly $400 million University of Maryland Medical System 401(a) Defined Contribution Plan (with some 12,000 participants) and $462 million UMMS Voluntary 403(b) Plan (9,625 participants), “themselves, and all others similarly situated, allege” that the fiduciary defendants “breached the duties they owed to the Plans, to Plaintiffs, and to the other participants of the Plans” by:
- failing to prudently review the Plans’ investment portfolio with due care to ensure that each investment option was prudent in terms of performance and cost;
- failing to prudently select investment share classes for many of the funds within the Plans;
- imprudently selecting and retaining funds[ii] in the Plans despite the availability of similar investment options with lower fees and/or better performance histories;
- imprudently including and recommending the abusive “GoalMaker” asset allocation service furnished by Prudential Insurance Company; and
- imprudently failing to ensure the Plans’ recordkeeping and total expenses[iii] were reasonable and not excessive.
The suit (Moler v. Univ. of Maryland Med. Sys., D. Md., No. 1:21-cv-01824, 7/22/21) alleges that “plaintiffs and all participants in the Plans suffered financial harm as a result of the imprudent administration of the Plans because Defendants’ selection and retention of poorly performing, high-cost, and imprudent investments 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 that “all participants continue to be harmed by the ongoing inclusion of these imprudent options.”
‘Usual’ Suspects
Not surprisingly, the breaches alleged touch all the usual “suspects”—active versus passive, mutual funds versus collective investment trusts, share classes deemed inappropriate for the size of the plan, and—of course—allegations that the funds selected were significant underperformers relative both to benchmarks, and to available alternatives.
That said, it’s the “GoalMaker” service that comes in for special scrutiny as “abusive and deceptive,” which the suit claims “funneled participants’ retirement savings into overpriced investment products and into investments that paid kickbacks to Prudential Insurance Company,” directing “investments away from the reliable, low-cost index funds in the Plan’s investment menu available from reputable providers that did not pay substantial kickbacks to Prudential,” and that, in turn, they say “resulted in the participants paying excessive investment management fees, administrative expenses, and other costs over the Class Period, resulting in participants losing millions of dollars in retirement savings.” They describe the service as the “proverbial wolf in sheep’s clothing,” claiming that it is “…designed and used to funnel participants into expensive and poorly performing investments.”
QDIA Claims
The plaintiffs go on to note that “prudent fiduciaries are also informed of two unrelated lawsuits[iv] filed in federal courts that raise awareness to the GoalMaker abuses described herein. Yet, Defendants imprudently took no action to protect the Plans’ participants retirement savings.” The designation of the service as the plan’s Qualified Default Investment Alternative (QDIA) compounded the issues, according to the suit, as that status meant that “a significant portion of the Plans’ assets were invested through GoalMaker.”
The plaintiffs argue that “there is no good-faith explanation for utilizing high-cost share classes when lower-cost share classes are available for the exact same investment,” and claim that “the Plans did not receive any additional services or benefits based on its selection of more expensive share classes; the only consequence was higher costs for Plan participants.” Moreover, while the suit acknowledges that “…the higher-cost share classes may have enabled the Plans to defray some of the administrative costs of the Plans through revenue sharing,” the plaintiffs summarily conclude that “…the value of the administrative costs that could have been defrayed do not outweigh the excessive payments made to Prudential and/or the opportunity cost to Plaintiffs of investing that money rather than paying it to Prudential.”
One unusual angle here: The suit claims that the “defendants offered only one stable value fund which was under-performing and expensive and defendants allowed GoalMaker to place substantial percentages of holdings into this sub-par stable value fund.”
Ultimately, the plaintiffs here argue that, “as a direct and proximate result of the breaches of fiduciary duties alleged herein, the Plans suffered millions of dollars in losses due to excessive costs and lower net investment returns. Had Defendants properly discharged their fiduciary obligations, the Plans would not have suffered these losses, and the Plans’ participants and beneficiaries would have had more money available to them for their retirement.”
The claims here are familiar—the merits? Well, we shall see.
[i] The plaintiffs in this case are represented by Tycko & Zavareei LLP, Edelson Lechtzin LLP, and McKay Law LLC.
[ii] The plaintiffs allege that the plans’ imprudent investment options during the Class Period included: (1) Prudential’s Principal Preservation Separate Account; (2) Principal’s Mid Cap Blend, Diversified Real Estate Institutional, and High Yield Bond A; (3) American Funds Euro-pacific Growth; (4) Cohen & Steers Realty; (5) Diamond Hill Large-Cap; (6) Gabelli Small-Cap Growth A; (7) John Hancock Disciplined Value Mid-Cap R2; (8) Mass Mutual Sel Mid Growth R5; (9) Metropolitan West Total Return Bond Class M; (10) Oppenheimer Developing Markets; (11) Oakmark Fund I; (12) T.Rowe Price Blue Chip Growth; (13) Voya Small Cap Opportunity; (14) MFS New Discovery Value R6; (15) Artisan Mid-Cap Inst.; and (16) Virtus Ceredex SCV Eq. A.
[iii] The plaintiffs argue that “In this case, the outside limit of a reasonable recordkeeping and related administrative fees for the Plans would have been no more than $30-$40 per participant, per year for each Plan. However, in 2018 the Plans’ participants paid over $124.00 per year for such services. In 2019, the Plans’ participants paid over $85.00 per year for such services.”
[iv] Two we’ve previously reported on—though and as noted above, they are unrelated—can be found here: GoalMaker Targeted in New Excessive Fee Suit and Excessive Fee Suit Treads New Ground(s). Of course, defendants have prevailed in other suits regarding GoalMaker—see Pru Prevails in Pay-to-Play Suit, Prudential Prevails Again Over Pay-to-Play Allegations and Robo RICO Suit Dismissed.
