Most of the claims were familiar (as was the plaintiffs’ attorney), but there were some interesting nuances in the arguments in the latest excessive fee case—which happens to involve a multiple employer plan, or MEP.
This one (McLachlan v. Int’l Union of Elevator Constructors, E.D. Pa., No. 2:22-cv-04115, complaint 10/13/22) was brought in the U.S. District Court for the Eastern District of Pennsylvania by participant-plaintiffs, Bradley J. McLachlan and Alex D. Graham, by and through their attorneys (Capozzi Adler PC), on behalf of the nearly $5 billion multiple employer plan (MEP) Elevator Constructors Annuity and 401(k) Retirement Plan, “themselves and all others similarly situated” (during the period in question, there were nearly 30,000 participants).
At a high level, the suit claims that the plan fiduciaries failed to live up to those obligations by “(1) failing to objectively and adequately review the Plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost and performance; and (2) failing to control the Plan’s recordkeeping and administration (‘RKA’) costs”—all of which they claim were “contrary to actions of a reasonable fiduciary and cost the Plan and its participants millions of dollars.”
Now, it’s not unheard of—but it is a tad unusual—to have each plaintiff’s alleged injury spelled out in such detail, but here it’s noted that Plaintiff McLachlan “suffered injury to his Plan account by overpaying for his share of RKA costs. Plaintiff McLachlan specifically invested in the T. Rowe Price Retirement 2030 Fund complained of, below. He suffered further injury to his Plan account from the underperformance and excessive expense of this fund. In addition, Plaintiff McLachlan suffered injury to his Plan account by having to pay for his share of consulting fees to maintain any of the lower performing or expensive funds in the Plan whether specifically identified herein or not, as described below. These funds were maintained and monitored with the assistance of Segal Advisors who received at least $183,100 during 2020, the cost of which was borne by each participant in the Plan.” The suit goes on to note that he “suffered injury to his Plan account by the fact that his claim against his share of investments in the Plan is diminished by the high RKA costs and underperforming and expensive funds which were left languishing in the Plan whether they are specifically identified herein or not.” That by way of staking out his standing to bring suit for the plan overall.
As for his co-plaintiff (Alex D. Graham), the suit states that he also “suffered injury to his Plan account by overpaying for his share of RKA costs.” And then it goes on to note that he “specifically invested in the Janus Henderson Venture Fund complained of, below. He suffered further injury to his Plan account from the underperformance and excessive expense of this fund. In addition, Plaintiff Graham suffered injury to his Plan account by having to pay for his share of consulting fees to maintain any of the lower performing or expensive funds in the Plan whether specifically identified herein or not, as described below.” At which point the fees paid to Segal Advisors was referenced again, as was the alleged diminishment of his plan investments by “high RKA costs and underperforming funds which were left languishing in the Plan whether they are specifically identified herein or not.”
Despite that detail, the plaintiffs here (as those bringing suit these days routinely do) admit that they “… did not have knowledge of all material facts (including, among other things, total plan RKA cost comparisons to similarly-sized plans or information regarding other available funds) necessary to understand that Defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA….” Well, “until shortly before this suit was filed,” anyway. That said, they didn’t get that insight from committee meeting minutes—apparently “in an attempt to discover the details of the Plan’s mismanagement, Plaintiffs wrote to the Defendants to request, among other things, the Committee’s meeting minutes”—the request was rejected. The plaintiffs admit that “reviewing meeting minutes, when they exist, is the bare minimum needed to peek into a fiduciary’s monitoring process. But in most cases, even that is not sufficient. For, “[w]hile the absence of a deliberative process may be enough to demonstrate imprudence, the presence of a deliberative process does not…suffice in every case to demonstrate prudence.” Regardless, “for purposes of this Complaint, Plaintiffs have drawn reasonable inferences regarding these processes based upon several factors.”
Those “reasonable inferences” apparently involve speculation that they “did not adhere to fiduciary best practices to control Plan costs when looking at certain aspects of the Plan’s administration such as monitoring investment management fees for the Plan’s investments, resulting in several funds during the Class Period being more expensive than comparable funds found in similarly sized plans (conservatively, plans having over 1 billion dollars in assets).” Indeed, they comment that “defendants could not have engaged in a prudent process as it relates to evaluating investment management fees,” and that “had a prudent process been used, the Plan would not have been saddled with a total plan cost that was more than 160% higher than the median for similar plans.”
The plaintiffs cite several sources as the basis for that statement—all of which have been cited with some frequency, specifically (a) ICI conducted a study in 2018 which calculated the average total plan costs from hundreds of 401(k) plans (they claim it found that the average asset weighted total plan cost or TPC for 401(k) Plans with over $1 billion in assets under management is .22% of total plan assets, while they claim the Plan’s total costs ranged from a high of .62% in 2018, or more than 180% above the median, to a low of .59% in 2020, or more than 160% above the median of .22%), and they claim that “the Plan was saddled by outrageous per participant fees as high as $125 per participant in 2020 with the lowest yearly per participant fee being $95 in 2016.”
They also cite (b) a data point that came up in recent litigation regarding Fidelity’s charges for recordkeeping its own plan ($14-$21 per person), as well as (c ) the 22nd Edition of the 401(k) Averages study (“the average plan with over 2,000 participants and 200 million in assets, paid no more than $13 per participant”), and (d) the NEPC 2020 Defined Contribution Progress Report (“found that the average plan with over 15,000 participants paid around $45 per participant for trust and recordkeeping fees”—the suit notes that “the $45 number is slightly higher than the other studies found herein because it includes trustee fees whereas the other studies do not”).
Now, as a MEP[i], you might find those comparisons to be inapplicable—but just in case the court does, the suit states that “a jumbo MEP plan, such as the Plan, should be able to obtain the same competitive rates as jumbo 401(k) or 403(b) plans that have over 1 billion dollars in assets and over 15,000 participants. It should cost no more simply because a plan is an MEP plan. At best, the additional cost, if any, would be minimal in the neighborhood of an additional $1 or $2 per participant”—though their basis for that statement is…well, unarticulated.
The suit also takes issue with the use of actively managed funds for some $280 million in participant assets (“these funds had nearly identical lower cost alternatives during the Class Period”), that “the Plan’s target date funds were not in the best available format” (specifically that they were mutual funds, rather than collective investment trusts), and that, “in 2016, $1.8 billion out of the total $2.6 billion, or approximately 69% of the assets in the Plan were invested in insurance based annuity products.”
Will the court be persuaded? Stay tuned.
[i] Though it’s not the first MEP to be targeted in an excessive fee suit. In fact, it’s not even the first to be targeted by Capozzi Adler (see MEP Settles Excessive Fee Suit, Another MEP Targeted by Excessive Fee Suit). Other MEPs targeted to date include MEPs sponsored by Pentegra ($1.9 billion), ADP ($4.4 billion), Wood Group Management Services ($2.4 billion), and the Coca-Cola Bottlers’ Association 401(k) Retirement Savings Plan ($800 million).