Another massive 401(k) plan has been targeted with an excessive fee suit, alleging a lack of RFPs, overpriced recordkeeping and managed accounts and self-dealing.
The suit (Guyes et al. v. Nestle USA Inc. et al., case number 1:20-cv-01560), brought in the U.S. District Court for the Eastern District of Wisconsin, was filed by Walcheske & Luzi, LLC[i] on behalf of Lorie M. Guyes—a participant in the plan until April 2020—“individually and as representative of a Class of Participants and Beneficiaries on behalf of the Nestle 401(k) Savings Plan.”
The plan in question had more than 39,000 participants and approximately $4.2 billion in assets. As other excessive fee suits have alleged, this one alleges that “after an inquiry reasonable under the circumstances,” the defendants breached their fiduciary duties by “…among other things: (1) authorizing the Plan to pay unreasonably high fees for recordkeeping and administration (RK&A); (2) authorizing the Plan to pay unreasonably high fees for managed account services; and (3) engaging in self-dealing with regard to administration of the Plan.”
‘Actual’ Knowledge
Now, as you might imagine in the wake of the “actual knowledge” standard articulated by the U.S. Supreme Court in the Intel case, the suit takes pains to note that “plaintiff did not have knowledge of all material facts (including, among other things, the cost of the Plan’s recordkeeping services compared to similarly-sized plans, the Plan’s leverage to negotiate lower recordkeeping expenses, the cost of the Plan’s managed account service compared to similarly situated plans, and the Plan’s leverage to negotiate managed account expenses) necessary to understand that Defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA, until shortly before this suit was filed.”
Oh, and if that weren’t enough, the suit goes on to note that “plaintiff 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 recordkeeper and Defendants’ processes for selecting and monitoring the Plan’s managed account service provider) because this information is solely within the possession of Defendants prior to discovery.” So, what did they know? Well, “for purposes of this Complaint, Plaintiff has drawn reasonable inferences regarding these processes based upon (among other things) the facts set forth above.”
And, in an unusual admission, “the named Plaintiff and all 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.”
Those admissions notwithstanding the suit alleges that “at all relevant times, the Plan’s fees were excessive when compared with other comparable 401(k) Plans offered by other sponsors that had similar numbers of plan participants, and similar amounts of money under management.” Moreover, the suit alleges that “the fees were also excessive relative to the RK&A services received.”
Bidding Business
Noting that “Prudent Plan Fiduciaries ensure they are paying only reasonable fees for RK&A services by soliciting competitive bids from other service providers to perform the same services currently being provided to the Plan,” the suit goes on to claim that “this is not a difficult or complex process and is performed regularly by prudent Plan Fiduciaries. Plan Fiduciaries need only request a bid from salespeople at other service providers.” Indeed, this plaintiff says that, “for Plans with as many participants as Defendants’ Plan, most recordkeepers would require only the number of participants and the amount of the assets to provide a quote while others might only require the number of participants.”
Once the “prudent Plan Fiduciary” receives those bids, they “can negotiate with its current provider for a lower fee and/or move to a new provider to provide the same (or better) services for a competitive reasonable fee.”
The suit spends some time outlining the flexibility the fiduciaries have in apportioning a reasonable fee, but ultimately sets the bar as being reduced to a reasonable per participant number.
Monitor ‘Ring’
However, the suit claims that during the period in question, “Defendants failed to regularly monitor the Plan’s RK&A fees paid to covered service providers, including but not limited to Voya,” despite the fact that they “knew or should have known that they must regularly solicit quotes and/or competitive bids from covered service providers, including but not limited to Voya, in order to avoid paying objectively unreasonable fees for RK&A services.”
Moreover that they “failed to regularly solicit quotes and/or competitive bids from covered service providers, including but not limited to Voya, in order to avoid paying unreasonable fees for RK&A services,” and that “unlike a hypothetical prudent Fiduciary, Defendants failed to ensure that the Plan paid no more than a competitive reasonable fee for RK&A services.” Or, they argue in the alternative, “to the extent there was a process in place that was followed by Defendants, it was done so ineffectively given the objectively unreasonable fees paid for RK&A services.”
As for those fees, the suit claims that “from the years 2014 through 2018 and based upon the best publicly available information, which was equally or even more easily available to Defendants during the Class Period,” they claim that the plan paid $2,357,846, “which equates to an average of at least approximately $60 per participant,” which the suit states are the “minimum amounts that could have been paid.” A number the plaintiffs state, based on a table of plans deemed comparable in size, stands in contrast to what “a hypothetical prudent plan Fiduciary would have paid on average”—around $28 per participant, “if not lower.”
“During the entirety of the Class Period, a hypothetical prudent plan Fiduciary would not agree to pay more than double what they could otherwise pay for RK&A services,” they write.
Not done, the suit goes on to claim that “from the years 2014 through 2018 … the Plan additionally cost its Participants on average approximately $1,250,244 per year in RK&A fees, which equates to on average approximately $32 per participant per year,” and that “because Defendants did not act in the best interests of the Plan’s Participants, and as compared to other Plans of similar sizes with similar amounts of money under management, the Plan actually cost its Participants a total minimum amount of approximately $6,251,221 in unreasonable and excessive RK&A fees.” In fact, the suit claims that during that period “based upon the best publicly available information … because Defendants did not act in the best interests of the Plan’s Participants, and as compared to other Plans of similar sizes with similar amounts of money under management, the Plan actually cost its Participants (when accounting for compounding percentages) a total, cumulative amount in excess of $7,395,159 in RK&A fees.”
Managed ‘Account’
Beyond the recordkeeping and administrative fees, the plaintiff takes issue with the managed account services offered in the plan, and “for this service, up through the end of 2019, Defendants have allowed participants to pay an annual fee of at least 0.50% on the first $100,000, 0.40% on the next $150,000, and 0.25% on assets greater than $250,000.” Now, the plaintiffs claim that, because the plan uses a Master Trust, the defendants “do not have to disclose details related to the usage of the ‘Professional Management’ service nor the dollar amount of the fees collected by the service provider,” nor are companies “required to publicly disclose the fee rates for managed account services making it difficult to obtain marketplace data.” That said, they managed to construct a table of “fee rates paid by similarly situated plans for virtually and materially identical managed account services.”
However, the plaintiff goes on to allege that “the Plan’s ‘Professional Management’ service added no material value to participants to warrant the additional fees, and that in most cases, the asset allocation created by the ‘Professional Management’ service was not materially different Managed Account service fee rates of similarly situated plans.” Consequently, “based on the value provided, the reasonable fee for Plan’s ‘Professional Management’ service was zero or very close to zero.”
‘Self’ Serving?
Finally, the plaintiff notes that “Nestle paid itself purportedly for providing some sort of administrative service to the Plan,” and goes on to allege that upon information and belief, the services purportedly provided to the Plan by “Nestle USA” did not provide any value to the Plan, were not provided for the exclusive benefit of the Participants, and did not warrant the payment of the fees to Nestle USA.” Indeed, the plaintiff claims that the services purportedly provided to the Plan by “Nestle USA” are standard services that can be provided by the Plan’s recordkeeper, Voya, and that the payments to Nestle out of plan assets “represents a clear conflict of interest with the Plan and Plan participants and violates the duty of loyalty it owes to Plan Participants.”
Oh, and they note that “Nestle did not hire an independent fiduciary to determine whether it was in the interest of the participants to engage in this scheme, whether the services that Nestle employees performed were necessary for the operation of the Plan, whether the amounts charged for those services was reasonable.”
What This (Might) Mean
The allegations made here are familiar, and yet have a distinctive flavor, particularly the detailed disavowal of knowledge, the tables of allegedly comparable plans/costs, as well as the pointed commentary about the managed account and “self-dealing” allegations.
That said, the suit seems to rely heavily on assertions as fact, most notably that all you need know about a plan to bid on it is the number of participants, and perhaps assets. That, and the “simple” process of simply comparing fees.
Will that be enough? We shall see.
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.
