An excessive fee suit decision that starts out noting that the “defendants are fiduciaries of a 401(k) plan that, between 2016 and 2022, substantially reduced the recordkeeping fees charged to plan participants” doesn’t bode well for the plaintiffs.
And in fact, the very next sentence—from U.S. District Judge Stephen H. Locher—noted that, “Nonetheless, Plaintiffs accuse Defendants of breaching their fiduciary duties, arguing that a prudent fiduciary would have achieved even greater fee reductions” before concluding that the “Plaintiffs have not adduced sufficient evidence to allow a reasonable factfinder to conclude Defendants failed to act in a reasonably prudent manner, and thus GRANTS Defendants’ Motion for Summary Judgment.”
In his decision (Rodriguez v. Hy-Vee, Inc., S.D. Iowa, No. 4:22-cv-00072, 3/7/24), Judge Locher noted that the Committee met two to four times per year during the class period (essentially from 2016 to 2023), and that the Investment Subcommittee met three to four additional times during the same period. He noted that minutes were taken at both—and that in advance of each meeting members not only received an agenda, but minutes from the prior meeting, and supporting materials.
Disagree ‘Able’
Judge Locher acknowledged that the parties disagreed on the issue of recordkeeping fees; the Hy-Vee defendants claiming that the Committee as a whole made decisions about fees while the participant-plaintiffs allege that those decisions were made almost entirely by past and present Chief Financial Officers Michael (“Mike”) Skokan and Andy Schreiner, respectively. Regardless, Judge Locher noted that the Committee provided an update to the Board of Directors every year, as required by the Charter, and that recordkeeping fees were at least discussed at seven Board meetings between 2016 and 2022 (the plaintiffs[i] question the depth of those discussions, apparently).
Judge Locher also noted that the parties disagreed as to whether the Committee relied on Board members’ knowledge to inform decision-making as to recordkeeping fees. He also noted that not only did the Board receive annual fiduciary duty training during the class period, but that the Committee and Investment Subcommittee also regularly received information about their fiduciary responsibilities, as well as legal and regulatory developments affecting retirement plans, from Principal and independent consultant DeMarche Associates, Inc.
Judge Lochan then proceeded to recount testimony relative to discussions about fee negotiations, acknowledging that the plaintiffs disputed the accuracy of the testimony, as well as the frequency of the discussions. “Regardless,” Judge Lochan noted, “it is undisputed that Hy-Vee’s recordkeeping fees per plan participant have fallen from a high of $92.64 in 2007 to $36.93 as of March 31, 2021.”
Special Considerations
Of a special note, Judge Lochan stated that Hy-Vee is employee-owned, and that as a result, the plan required services relating to the Hy-Vee Stock Fund. Not surprisingly, the parties here (also) dispute whether and to what degree the employer stock component of the Plan adds complexity to Plan administration. But Judge Lochan said what was undisputed was that because Hy-Vee’s stock is privately held, the stock value is based on book value, and to determine the stock price, there is an annual “true-up process.” The plaintiffs here claimed that was “an investment process that is unrelated to this litigation,” but Judge Lochan explained that part of the matching process the recordkeeper (Principal) had to calculate and allocate that contribution, subject to plan limits that it coordinated with the manager of the Stock Fund. In sum, Judge Lochan seemed persuaded that the interactions were sufficiently essential and complex.
Then there was the impact of Hy-Vee’s “fairly transient employee population consisting of, inter alia, employees who work only one day per week, seasonal workers, college students who may work only during breaks, employees who quit without notice, and others who may leave one store for another or work in two different locations.” Here too, Judge Lochan took pains to outline the large number of reconciliations and transactions required for plan administration.
‘Administrative Challenges’
Judge Lochan then turned to the “administrative challenges” associated with the Hy-Vee plan, which covered Hy-Vee and seven affiliated companies. He noted that there were multiple payrolls, different frequencies, and that various payroll processing software was used.
Having laid that groundwork, Judge Lochan moved to the issue of recordkeeping and administrative fees, describing various processes employed over the years, essentially transitioning to a “zero-revenue-sharing” model. He further explained that there was some reduction in the plan’s recordkeeping fee between March 2016 and January 2021, “although the parties dispute the size of the reduction and how it came into existence.” He explained that part of the reduction related to a fee associated with services provided by Wilshire Associates, who provided investment advisory services and Principal added one basis point annually onto total Plan assets to pay Wilshire’s fee.”
He further explained that Hy-Vee paid for DeMarche’s 401(k) consulting services out of corporate assets and without charging the plan—and that the plan committee relied on DeMarche as an independent source to help evaluate fees, and met with them annually to review them.
Additionally, he noted that Principal also provided Annual Plan Reviews to the Committee and Investment Subcommittee that addressed recordkeeping services and fees, among other topics—and that the topic of recordkeeping fees and/or Principal’s services was addressed at 20 different Committee and/or Investment Subcommittee meetings between 2016 and 2022 (although, as you might expect, “the parties dispute the extent of the discussion at these meetings”). That notwithstanding, Judge Lochan listed a pretty extensive list of conversations between committee members and at those meetings regarding the issue of fees, and the prospects of lowering them.
And then Judge Lochan turned to the issue of a request for information (RFI) that Hy-Vee asked DeMarche to conduct, which included recordkeeping proposals on both a flat fee (per-participant) and percentage fee (asset-based) basis. Judge Lochan noted that in a report from that process “DeMarche explained that a per-participant fee can be a problem in the retail industry due to turnover and smaller employee balances; in other words, many employees end up paying a higher percentage under a per-participant fee model,” concluding that while either method would be appropriate, it was ultimately decided that the asset-based structure was the most appropriate for the Plan “due to the number of participants with small balances.” The RFI (it was considered tantamount to an RFP due to the detail, apparently) went to 11 recordkeepers, though some declined due to the plan complexities, others dropped from consideration due to concerns about the privately held employer stock, and others had issues with proprietary funds, among other things.
Eventually, having evaluated its proposals against two other submissions, it was decided to remain with Principal, along with a reduction in recordkeeping fees. A year later (November 2021) the committee “discussed additional steps resulting in a reduction in recordkeeping fees,” and the next August the topic of reducing fees by removing physical mailings was broached.
Motion for Summary Judgment
After noting the standards for granting requests for summary judgment and ERISA breach of fiduciary standards, Judge Lochan commented that “although the parties quibble about semantics, the record reflects the following undisputed facts relating to the plan’s recordkeeping fees:
(i) Principal provided plan administration services, including recordkeeping services, throughout the class period;
(ii) Principal was qualified to do so;
(iii) DeMarche, an independent consultant, provided information and advice to the Committee and Investment Subcommittee throughout the class period about recordkeeping fees and other matters pertinent to the plan;
(iv) the topic of recordkeeping fees was raised repeatedly at Committee and Investment Subcommittee meetings during the class period;
(v) Hy-Vee obtained six separate fee benchmarking reports from Fiduciary Decisions between 2018 and 2022, all of which showed Principal’s recordkeeping fees to be lower than the benchmark;
(vi) the recordkeeping fee as measured in basis points—i.e., as a percentage of assets—went down four times between 2016 and 2022;
(vii) the recordkeeping fee as measured in raw dollars per participant fluctuated modestly during the class period but ended up roughly $6 (or 14%) lower in 2021 than it was in 2016;
(viii) the Committee conducted a competitive RFI in 2020 during which 9 of 10 potential alternatives to Principal for recordkeeping services either chose not to respond at all (usually due to concerns about the complexity of Hy-Vee’s Plan) or provided a bid for recordkeeping services that was higher than Principal’s; and
(ix) Principal ended up essentially matching the pricing offered by the one bidder—Voya—whose bid was lower.”
All of these “undisputed facts are enough to warrant summary judgment in Defendants’ favor,” he wrote, explaining that he reached that conclusion for several reasons, most notably that “the record shows the Committee had adequate processes in place to monitor and evaluate the reasonableness of recordkeeping fees throughout the class period.” He cited the record as also showing that the Committee was cognizant of the drivers of the recordkeeping fees—including, e.g, the cost of the Retire Secure program—and considered whether the benefits of the program outweighed the costs”—and, of course, the record also showed “fee reductions, which points towards prudence.” He then commented that, “Finally, and perhaps most importantly of all, the Committee initiated an extensive RFI process in 2020 to help determine whether there were better alternatives in the marketplace to Principal, ultimately concluding there were not.”
He then noted that, “When these processes are combined with the fact that the Plan’s recordkeeping fees went down during the class period on both a percentage and raw dollar basis, there is simply no basis for a reasonable factfinder to conclude that Defendants breached their fiduciary duties.”
Beyond that, Judge Lochan found that the plaintiffs had failed to identify “meaningful benchmarks against which to compare the Plan’s recordkeeping fees,” commenting that while comparator plans had been put forth, “careful review shows that none of them allow for the apples-to-apples comparison required under Eighth Circuit precedent.” Judge Lochan noted that the recordkeepers for the comparators had declined to bid on Hy-Vee’s recordkeeping, that the fee comparisons provided were only for a single year of the class period, and also questioned the math that produced the fee calculations.
“Otherwise, the fiduciaries of only a small handful of 401(k) plans in each category—e.g., the cheapest four or five large plans in the entire country—would be entitled to summary judgment on breach of fiduciary duty claims,” he said. “This cannot possibly be the appropriate standard.”
Mathematical Reality
“It is a mathematical reality that some subset of a given class of 401(k) plans will have smaller recordkeeping fees than all the others,” he wrote. “It does not follow, however, that all fiduciaries of 401(k) plans that are not in that subset have arguably breached their fiduciary duties to a sufficient degree that requires a trial.”
“No reasonable factfinder could conclude that Defendants breached their fiduciary duties in their handling of recordkeeping fees,” Judge Lochan wrote as he granted the Hy-Vee defendants motion for summary judgment—and denied as moot the defendants’ motion to exclude the plaintiffs’ expert witness.
What This Means
Judge Lochan presented plenty of process detail as a preface to his ruling—not to mention the “proof” of the efficacy of that process in the actual results produced in terms of declining recordkeeping fees. While that would almost certainly be sufficient to win at trial, the threshold is a bit lower at that motion for summary judgment—essentially asking for the judgment of the court without going to trial. To that end, the lack of “meaningful” benchmarks—a standard that has emerged fairly recently in this type of litigation—proved to be sufficient in Judge Lochan’s estimation.
[i] Capozzi Adler PC and Bowman, DePree & Murphy LLC represent the plaintiffs.
