Another excessive fee suit targets recordkeeping fees, actively managed funds, and a custom target-date fund series.
The suit here (Locascio v. Fluor Corp., N.D. Tex., No. 3:22-cv-00154, complaint 1/24/22) was filed by former participants Deborah Locascio and David Summers on behalf of the Fluor Corporation Employees’ Savings Investment Plan “…and a class of similarly-situated participants” against their former employer, the Board of Directors of Fluor Corporation (who appointed the…), the Fluor Corporation Benefits Administrative Committee, the Fluor Corporation Retirement Plan Investment Committee and “Does No. 1-30, who are members of the Committees or other fiduciaries of the Plan and whose names are currently unknown” for breach of their fiduciary duties” under ERISA.
As of Dec. 31, 2020, the plan in question had 15,062 participants with account balances and assets totaling approximately $3.45 billion, according to the suit, which alleges that the defendants:
- “failed to fully disclose the expenses and risk of the Plan’s investment options to participants;
- “allowed unreasonable expenses to be charged to participants; and
- “selected, retained, and/or otherwise ratified high-cost and poorly-performing investments, instead of offering more prudent alternative investments when such prudent investments were readily available at the time Defendants selected and retained the funds at issue and throughout the Class Period.”
The suit (the participant-plaintiffs here are represented by Miller Shah LLP and Fee, Smith, Sharp & Vitullo LLP) goes on to explain that the Plan’s investment alternatives are “custom options set up as separate accounts that are managed either exclusively for the Plan or on a commingled basis for the Plan and other institutional investors,” each of which “…operates under guidelines established between the Fluor Corporation Master Retirement Trust (‘Master Trust’) and the respective investment manager appointed by the Investment Committee.” The suit also acknowledges that the plan operates, in part, as an employee stock ownership plan, with participant investments in a unitized stock fund (they are prohibited from investing more than 20% of their account balance in the stock fund, and that does not appear to be at issue in this suit).
Recordkeeping Claims
During the period in question there were two different recordkeepers—both of which come in for criticism: Voya Financial, which served as the Plan’s recordkeeper since mid-2017, following termination of Aon Hewitt, which had served as the plan’s recordkeeper from the beginning of the Class Period. The plan assets were held during the Class Period in the Master Trust by the primary custodian of the Plan, the Northern Trust Company (who is not named as a party in this suit).
With regard to the recordkeeping fees, the suit launches immediately to a harsh claim that “…as is all too often the case, when attempting to defend their malfeasance or nonfeasance with respect to recordkeeping fees, fiduciary-defendants often disingenuously assert that the cost of Bundled RK&A services depend upon service level (even though such an assertion is plainly untrue based upon the actual marketplace for such services), as part of attempt to perpetuate misunderstanding by the less informed in order to stave off breach of fiduciary duty claims.” The suit goes on to allege that for plans with more than 5,000 participants “…any minor variations in the way that these essential RK&A services are delivered have no material impact on the fees charged by recordkeepers to deliver the services.” By way of backing up this assertion they claim this is “…confirmed by the practice of all recordkeepers of quoting fees for the Bundled RK&A services on a per-participant basis without regard for any individual differences in services requested—which are treated by recordkeepers as immaterial because they are, in fact, inconsequential to recordkeepers from a cost perspective.” They continue their trail of assertions by claiming that “…it is axiomatic in the retirement plan services industry that (1) a plan with more participants can and will receive a lower effective per-participant fee when evaluated on a per-participant basis; and (2) that as participant counts increase, the effective per-participant RK&A fee should decrease,” and that “…because recordkeeping fees are actually paid in dollars, prudent fiduciaries evaluate the fees for RK&A services on a dollar-per-participant basis. This is the current standard of care for ERISA fiduciaries and has been throughout the Class Period.”
Quotes Notes
The plaintiffs do allow for some modification here—explaining that “…once a prudent fiduciary has received quotes, if necessary, the fiduciary can then negotiate with the plan’s current provider for a lower fee or move to a new provider to provide the same (or better) services for a competitive (or lower) reasonable fee,” and that they can subsequently further choose to “allocate the negotiated fees among participant accounts at the negotiated per-participant rate or pro rata based on participant account balances, among other less common ways.”
Having said all that, they continued their line of assertions by stating that, “there are no services provided to the Plan and its participants by Aon Hewitt or Voya that are unusual or out of the ordinary,” and that “for large plans like the Plan any differences in services are immaterial to pricing considerations, the primary drivers of which are the number of participants and whether the plan fiduciaries employed a competitive process of soliciting bids to determine the reasonable market rate for the services required by the plan.”
By way of establishing that the fiduciaries here failed to do so, they first claim that during the period in question, the Fluor plan paid anywhere from $77/participant to as high as $141/participant in 2020, citing the 5500 report for the plan. The suit then presents for comparison the rates allegedly paid by other, (allegedly) comparable plans (at least based on participant count)—these ranged from $29/participant to $42/participant, which they compared (unfavorably) to what the suit claims was the $96/participant average that the plan paid Voya/Aon Hewitt.
Custom ‘Eyed’
Now, in addition to the recordkeeping fees, the suit also alleges that “Several of the Plan’s custom investment options are objectively imprudent, separate and apart from the apparent excesses with respect to the Plan’s recordkeeping and administrative fees, as well as its relationship with Voya, which the Plan entered into at Defendants’ behest.” Specifically, the suit criticizes the suite of nine custom target-date funds, managed by BlackRock, and said to mirror the BlackRock LifePath Index Funds.
However, the plaintiffs here claim that “the Fluor TDFs are significantly worse performing than many of the mutual fund alternatives offered by TDF providers,” and that “…any objective evaluation of the Fluor TDFs would have resulted in an examination of and selection of a more consistent and better performing and more appropriate TDF suite than the Fluor TDFs.” Indeed, the suit claims that “… the performance of the Fluor TDFs persistently and dramatically trailed the performance of the Off-the-Shelf TDFs at every quarter end in the Class Period.” This issue was, they claim, exacerbated by the positioning of these funds as the plan’s qualified default investment alternative (QDIA).
Oh—and they also find fault with the Custom Large Cap Equity Fund, the Custom Small/Mid Cap Equity Fund, and the Custom Non-US Equity Fund—each a “custom investment alternative” established “for exclusive use by the Plans in the Master Trust, including the Plan. Of course, they’re actively managed funds, and the suit has the usual complaints to register about the “uphill battle” that such funds face in trying to consistently beat benchmarks “with the additional obstacle of high fees”—which, as you might imagine, they claim these funds all failed to do.
Will these allegations survive a motion to dismiss? Stay tuned.
NOTE: In 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.
