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Judge Rebuffs 401(k) Excessive Fee Settlement

Litigation

A proposed excessive fee suit settlement has been rejected by the court.

The settlement in question was for $2.55 million, and it involves allegations regarding the $1.9 billion 401(k) plan of Teva Pharmaceuticals USA Inc. While there wasn’t anything particularly unusual about the suit or its allegations—it was filed in December 2019 on behalf of the three former participant-plaintiffs by Capozzi Adler PC, which has been quite active in recent months—“The plan had substantial bargaining power regarding the fees and expenses that were charged against participants’ investments. Defendants, however, did not try to reduce the plan's expenses or exercise appropriate judgment to scrutinize each investment option that was offered in the plan to ensure it was prudent.”

More specifically, the plaintiffs here argued that “the realistic maximum damages are between $3.3 million and $17.6 million, which is based on Plaintiffs’ allegations the Plan funds were invested in the wrong share class of the T.Rowe Price target date funds for much of the Class Period and the Plan fiduciaries failed to convert these same target date funds to the lowest cost collective trusts by the start of the Class Period.”

For their part, and as articulated in the settlement proposal, the defendants “vigorously contest these figures. Indeed, Defendants have maintained —even if they were deemed liable on Plaintiffs’ fiduciary-breach claims—the named Plaintiffs and a significant percentage of the members of the putative class would have no damages at all, based on the strong performance of the investment options offered through the Plan during the relevant period and the reasonableness of the Plan’s recordkeeping fees.”

In April Judge Mark E. Kearney of the U.S. District Court for the Eastern District of Pennsylvania had ruled that the case presented by the plaintiffs was sufficient to state a claim for fiduciary breach under the Third Circuit’s 2019 opinion in Sweda v. Univ. of Pa., which resurrected an excessive fee claim at appeal that had been decided in favor of the university’s fiduciary defendants at the lower court (a hearing on the appeal was later denied by the state’s supreme court, leaving the judgment in place).

The Settlement

The settlement proposal put forth the customary arguments in favor of the court’s approval: that it was the result of arm’s length negotiations, that it represented a fair recovery for the alleged injured party, that the risks (and costs) of continued litigation were fraught with potential disaster for both parties, and that ultimately it would be a more efficient use of judicial resources to approve than to continue the litigation. 

The settlement proposal called for a Settlement Class Notice to be sent via First Class mail, postage prepaid, to the last known address of each Settlement Class Member within (30) days of the Court’s order granting preliminary approval of the Settlement, which would, along with “other litigation-related documents such as a list of frequently asked questions and the Settlement Agreement with all of its Exhibits, will be posted on a dedicated Settlement website established by Plaintiffs’ counsel.” The plaintiffs’ counsel also agreed to “establish and monitor a dedicated, toll-free Settlement telephone number with an Interactive Voice Response system which will have answers to frequently asked questions and also provide to Settlement Class Members the opportunity to leave a voicemail for Class Counsel should they have any additional questions regarding the Settlement.”

The settlement proposal claimed that “the combination of direct mail and publication of the Settlement Notice on a dedicated website should cause actual notice to reach a very high percentage of affected Plan participants and beneficiaries.”

The Issue?

However, in this particular case, and in the settlement proposal presented, Judge Kearney had an issue regarding “distributional fairness” in how the current plan of allocation outlined the process of notification. He also noted “concerns with notices of objections, notices sent by electronic mail to known e-mail addresses, and clarifying the process through which notices sent by mail will be resent upon return.” That said, his order noted that “counsel believes they can address in a subsequent motion”—and provided them with the opportunity to do so by “promptly filing a renewed Motion and accompanying Memorandum with a revised Settlement Agreement and/or Plan of Allocation as warranted to specifically address our concerns.”

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