Another financial services firm finds itself in the cross-hairs of allegations of breaching their fiduciary duties by participants in their very own 401(k) plan.
This time the target is Oklahoma’s BOKF NA. The plaintiffs here—Suzanne West, Jeremy McMillan, and Ivan Herrera—all Oklahoma residents and participants in the BOK Financial 401(k) Plan—have filed suit in the U.S. District Court for the Northern District of Oklahoma against BOKF, NA (“BOK”); The Retirement Plan Committee of BOKF, NA (the “Committee”); and Cavanal Hill Investment Management, Inc. (“Cavanal Hill”). According to the suit, the plan has approximately $630 million in assets and 6,444 participants with account balances at the end of 2018, the most-recently reported year.
“For financial services employers like BOK, the potential for imprudent and disloyal conduct is especially high. Not only do the Plan’s fiduciaries lack a direct incentive to prudently vet investment options and minimize costs, Defendants can benefit the company by retaining high- cost proprietary investment products that a disinterested fiduciary would avoid or remove under the same circumstances,” the plaintiffs argue.
The suit (West v. BOKF, NA, N.D. Okla., No. 4:20-cv-00101, complaint 3/12/20) explains that the BOK plan fiduciary defendants employ BOK and its subsidiary, Cavanal Hill, to manage key investment options for Plan participants: the target-date funds and the capital preservation option (among others)—“investment options are designed for the least sophisticated, and thus most vulnerable, participants in the Plan,” according to the suit. However, the suit claims that “BOK’s proprietary funds are excessively-priced for the large plan market, and the performance of those funds does not make up for the higher price that participants must pay.” Those “defects” also apply to BOK’s proprietary international equity fund retained as an option in the Plan, according to the suit, which claims that “defendants appear to have retained it for the sole purpose of collecting fees for BOK and Cavanal Hill from the Plan.”
“No other ERISA-governed defined contribution plan similar in size to the Plan offers BOK’s proprietary funds,” the plaintiffs allege, “Indeed,” they note, “the Plan is more than 6 times larger than BOK’s next largest customer which, not coincidently, is another employer under common control with BOK.”
The suit notes that BOK launched its proprietary target-date funds, managed through its MAP CIT product, in 2005, and added the BOK target-date funds to the Plan at inception, “before the funds had an established performance record,” and that “despite rapid expansion of the target-date market since that time, the Committee appears to have never revisited its choice of target-date funds for the Plan.”
The suit goes on to claim that “BOK’s target-date funds are significantly more expensive than superior alternatives in the large plan market,” and that, in fact, “the BOK target-date funds are not even viable in the large plan market, and have been wholly rejected by fiduciaries of other similarly-sized plans.” The suit describes the funds as “an extreme outlier compared to other customers of BOK’s target-date funds,” and that the BOK plan was “2.7 to 6.7 times larger than the next largest plan invested in those funds.” It claims that “there was not a single plan with $200 million in assets (other than the Plan) that invested in BOK’s target-date funds, and the median plan was consistently more than 100 times smaller than the Plan.”
The suit notes that in 2016 (which it characterizes as the most recent year with comprehensive analysis), the average target-date mutual fund expense ratio for plans between $250 million and $1 billion in assets was between 0.45% and 0.49%, and for plans with $10 million or less, the average was between 0.64% and 0.81%. “By comparison, BOK’s target-date funds cost 0.88%,” meaning that, according to the plaintiffs, “BOK’s target-date funds charge a small market price, not a large market price, and thus disinterested large market fiduciaries have avoided them.” This, the plaintiffs claim, “actually understate the excessiveness of the fees for BOK’s target-date funds because BOK’s target-date funds are not mutual funds,” but rather they are collective trusts. “While the same comprehensive analysis of fees paid by 401(k) plans is not available for collective trusts as it is for mutual funds (because collective trusts do not have the same public disclosure obligations), reports have shown that CITs “can cost 10 to 30 basis points [0.10% to 0.30%] less than mutual funds with similar features.”
Ultimately, the plaintiffs claim that “the only reason that BOK’s target-date funds have been retained in the Plan is that it is beneficial to BOK,” that the “Plan’s target-date assets represent around 20% of BOK’s total target-date assets under management,” and that “BOK receives substantial fee revenue from the Plan’s target-date investment on multiple levels—the CIT management level (the largest portion of BOK’s fees) and through certain underlying Cavanal Hill mutual funds retained as underlying holdings”—that “retaining BOK’s target-date funds in the Plan avoids loss of this revenue and depletion of critical assets necessary for the target-date funds to achieve basic economies of scale.” The plaintiffs conclude, “while this is certainly beneficial to BOK, it is not prudent or in the best interest of the Plan or its participants.”
The plaintiffs argue “a prudent and objective fiduciary engaged in appropriate monitoring of the Cavanal Hill Bond Fund would have investigated potential replacements for this underperforming proprietary fund,” citing as alternatives:
- BOK and Cavanal Hill could have re-allocated monies to other active bond funds held by the BOK target-date funds
- BOK and Cavanal Hill could have investigated other active bond funds in the marketplace with similar strategies to the Cavanal Hill Bond Fund
- BOK and Cavanal Hill could have replaced their underperforming active fund with a passive fund designed to yield predictable returns close to the benchmark
The plaintiffs also argued that an additional breach in mismanaging the BOK target-date funds “by exclusively utilizing mutual funds as underlying investment holdings of the BOK target-date funds and failing to consider lower-cost collective trust versions of the same investments.” Indeed, they write, “For a fund-of-funds CIT product like BOK’s target-date funds, choosing higher-cost mutual funds as underlying investments defeats the purpose of using a CIT structure in the first instance.” As if that weren’t enough, and as other such suits have charged, the plaintiffs took issue with the fiduciaries not selecting the lowest cost share classes—and for not considering alternatives to the plan’s capital preservation option—a money market fund, rather than a stable value fund, as the plan once made available. “The Committee has had years to investigate and obtain another stable value option for Plan participants. Yet the Committee failed to so, and all capital preservation assets in the Plan have remained in the BOK’s proprietary money market fund.
“No other fiduciary of a large ERISA plan, and no other fiduciary of a fund-of-funds CIT offered in a large ERISA plan, utilizes the Cavanal Hill Bond Fund,” the suit continues. “The reason to retain it was self-serving and improper: the Cavanal Hill fund paid extra fees to Defendants.”
The plaintiffs here are represented by Hammons, Hurst & Associates and Nichols Kaster PLLP—the latter a name that has appeared with striking regularity in this type of litigation, including cases involving John Hancock, M&T Bank, MFS, SEI and Goldman Sachs, as well as suits involving Deutsche Bank Americas Holding Corp., BB&T and American Airlines.
Nichols Kaster was also one of three litigation firms specifically noted in a recent property and casualty renewal template that has reportedly showed up in a number of cases.