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Managed Accounts the Focus of 401(k) Excessive Fee Suit


The fiduciaries of another billion-dollar 401(k) plan have found themselves in the cross-hairs of an excessive fee suit—and the fees for the managed accounts have been called out for special scrutiny. 

Claiming that he (and other participants of the plan “suffered ongoing financial harm as a result of Defendants’ continued imprudent and unreasonable investment and fee decisions made with regard to the Plan,” participant-plaintiff Brian Reichert has filed suit (Reichert v. Juniper Networks, Inc., N.D. Cal., No. 3:21-cv-06213, complaint 8/11/21) against the fiduciary defendants of the $1.4 billion Juniper Networks Inc. 401(k) plan. 

More specifically, Reichert—who had only worked for Juniper since January 2021, but previously worked for a company acquired by Juniper—claims that they “breached the duties they owed to the Plan, to Plaintiff, and to the other Participants of the Plan (there are 6,860 in 2019, according to the suit) by, among other things: (1) authorizing the Plan to pay unreasonably high fees for retirement plan services (“RPS”); (2) failing to objectively, reasonably, and adequately review the Plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; (3) maintaining certain funds in the Plan despite the availability of identical or similar investment options with lower costs and/or better performance histories; (4) authorizing the Plan to pay unreasonably high fees for managed account services; and (5) failing to disclose to Participants necessary Plan information for them to make informed Plan investment decisions.”

While acknowledging that he (and the other participants in the plan) “having never managed a large 401(k) Plan such as the Plan, lacked actual knowledge of reasonable fee levels and prudent alternatives available to such Plans,” and that he “did not have actual knowledge of the specifics of Defendants’ decision-making processes with respect to the Plan (including Defendants’ processes for selecting and monitoring the Plan’s RPSP because this information is solely within the possession of Defendants prior to discovery”—the suit nonetheless states that “for purposes of this Complaint, Plaintiff has drawn reasonable inferences regarding these processes based upon (among other things) the facts set forth below.”

As have other suits, this one (Walcheske & Luzi LLC and Creitz & Serebin LLP represent the proposed class) claims that by virtue of being a defined contribution plan, “the employer has no incentive to keep costs low or to closely monitor the Plan to ensure every investment remains prudent, because all risks related to high fees and poorly performing investments are borne by the participants.” 

Managed ‘Account’

Noting that a managed account “…purportedly customizes the participant’s portfolio based upon factors such as their risk tolerance and the number of years before they retire,” the suit comments that in practice “…there is often little to no material customization provided to the vast majority of plan participants which results in no material value to most, if not all, participants relative to the fees paid.” The suit goes on to claim that “In fact, many managed account services merely mimic the asset allocations available through a target date fund while charging additional unnecessary fees for their services.”

Extending the argument often made (including here) that recordkeeping charges have little to do with the amount of assets in the account, this suit notes that the rates for managed account management are “often tiered,” with a sliding fee scale it says is “appropriate because the marginal cost to manage the additional assets for the participant is essentially $0.” Indeed, the suit goes on to asset that “the economies of scale for managed account services are even greater than for RPS.” 

The suit proceeds to make a series of statements about the “norms” of managed account structures, operation and pricing, relying on terms such as “often” and “many” as qualifiers, and then states that “Managed account services have historically been expensive compared to other alternatives, such as target date funds that provide the materially same service (e.g., an automated time-based dynamic asset allocation creation and rebalancing solution).” That said, the suit claims that the defendants “caused Plan Participants to pay excessive fees for the managed account services it made available to Plan Participants by not periodically soliciting bids from other managed account service providers and/or not staying abreast of the market rates for managed account solutions to negotiate market rates,” and that “the excessive fees paid by Plan Participants using the managed account service were not warranted and did not provide any material value or benefit to Plan Participants.”

Having simplified the managed account process/structure, the suit provides similarly short shrift to the process of conducting an RFP, noting that it is “not a difficult or complex process and is performed regularly by prudent plan fiduciaries.” More specifically, they claim that “for Plans with as many participants as the Juniper Plan, many RPSP would require only the number of participants while others might require only the number of participants and the amount of the assets to provide a quote.”

SAI ‘So’

The suit notes that the defendants retained Fidelity’s own subsidiary Strategic Advisors, Inc. (SAI) to provide managed accounts and that plan participants were charged 65 basis points on an annual basis for using those services. The suit states that “companies are not required to publicly disclose the fee rates for managed account services making it difficult to obtain marketplace data,” but that “there are a number of other managed account providers whose services are virtually identical” to those provided by SAI and “whose publicly known fees range from 0.25% to 0.30% on all assets, e.g., Betterment, Vanguard, and Charles Schwab, for plans much smaller than the Plan”—what the suit claims “…represent the normal range of fees for what is typically charged for managed account services.” 

Perhaps a bit closer to home, the suit cites the example of the Kimberly-Clark 401(k) Profit Sharing and Retirement Plan, which in 2020 also provided SAI managed account services “at a much lower price on the following schedule: no fee up to the first $5,000, 0.25% up to $100,000, 0.15% on the next $150,000, and 0.10% on assets greater than $250,000.” The plaintiff concludes that “the fee rates paid by the Plan participants to SAI therefore were excessive and not reasonable given the Plan’s massive size and negotiating power,” and that “the Plan’s managed account services added no material value to participants to warrant any additional fees.” Moreover the suit alleges that “the asset allocations created by the managed account services were not materially different than the asset allocations provided by the age-appropriate target date options ubiquitously available to Defendants in the market and already available to participants in the Juniper Plan.”

Citing a 2014 report by the Government Accountability Office on the viability of alternatives to managed accounts, the suit concludes that “…based on the value provided, the reasonable fee for Plan’s managed account service was zero or very close to zero.”

Recordkeeping ‘Riff’?

The suit proceeds to note that “based upon the best publicly available information,” from the years 2015 through 2019 the plan paid an average effective annual RPS fee of at least approximately $543,687—“which equates to an average of at least approximately $80 per participant.” Then—and has have other excessive fee suits—the plaintiff cites data from other plans and the fees paid per Form 5500 data to make their case that the fees paid by the Juniper plan were excessive, in that by the plaintiff’s reckoning (and the selected comparisons) “had Defendants been acting in the best interests of the Plan’s Participants, the Plan actually would have paid on average a reasonable effective annual market rate for RPS of approximately $277,562 per year in RPS fees, which equates to approximately $41 per participant per year.” The difference, the plaintiff claims means that the fiduciaries “actually cost its Participants a total minimum amount of approximately $1,330,624 in unreasonable and excessive RPS fees” for the period 2015-2019—or, allowing for compounding, “in excess of $1,836,069 in RPS fees.”

‘Class’ Acts

Of course, that wasn’t the only issue. Here, as in other excessive fee litigation, the plaintiff first alleges that “Defendants knew or should have known that they were required[i] to select the share classes that provide the greatest benefit to plan participants, i.e., the lowest Net Investment Expense to Retirement Plans,” and that they “knew or should have known that it must engage in an objectively reasonable search for and selection of the share classes that provide the greatest benefit to plan participants,” but that “in many cases Defendants did not use share classes that provide the greatest benefit to plan participants,” nor did they “engage in an objectively reasonable search for and selection of the share classes that provide the greatest benefit to plan participants.” The net difference, according to the suit, was that “Defendants caused unreasonable and unnecessary losses to the Plan’s Participants through 2019 in the amount of approximately $988,190….”

Beyond share class, the plaintiff also argues that there were better fund choices to be made, and that by not “engaging in an objectively reasonable investigation process when selecting its investments, Defendants caused objectively unreasonable and unnecessary losses to Plaintiff and the Plan’s Participants in the amount of approximately $21,607,734 through 2019….”

Disclose Sures

Oh—and if that (all) weren’t enough, the plaintiff claims that the defendants (also) claim that “defendants failed to properly disclose the fees charged to Participants in the Plan in their quarterly statements and 404a-5 participant fee disclosure documents,” that the Plan’s recordkeeper collected revenue sharing on several of the investment options made available to Participants, and that since “defendants failed to disclose the revenue sharing rates of each investment option to the Participants in its 404a-5 participant fee disclosure documents”… participants “are not able to determine how much they actually paid for the RPS provided by the Defendants’ RPSP nor can Plan Participants therefore calculate the net fee they paid for designated investment alternatives.” Ultimately, the suit alleges: “Without knowing the portion of the expense ratio allocable to the RPS services received by the Participants, each Participant could not make informed decisions with regard to the management of their individual accounts.”

Perhaps more to the point of the suit, the plaintiff here alleges that “the Defendants’ incomplete disclosures are a clear violation of the ERISA disclosure requirements imposed on all Plan administrators and are also evidence that the Defendants were imprudent in the administration of the plan.”

Will the allegations be sufficient? Time will tell…

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 those qualifiers should serve as a reminder of that reality.

[i] This would appear to be an extrapolation of the actual requirement that the fees and services rendered be reasonable and in the best interests of plan participants and beneficiaries.