A suit involving target date fund choice has been settled with the plan sponsor—along with a provision you rarely see in such things.
The suit was filed in the U.S. District Court for the Middle District of Tennessee in August 2019 by Becky Kirk, Perry Ayoob and Dawn Karzenoski on behalf of the CHS/Community Health Systems, Inc. Retirement Savings Plan. As of Dec. 31, 2017, the plan had $3.2 billion in assets and about 112,700 active participants. The plaintiffs alleged that “had Defendants prudently and loyally managed the Plan’s investments and the Principal separate accounts,” each “would have had more assets” in their plan account at the time it was distributed. Moreover, that “Principal has been unjustly enriched as a result” of the investment in the Principal separate accounts.
The Parties
The suit—which named as defendants not only the CHS plan fiduciaries, but also Principal Life Insurance Company, Principal Management Corporation, and Principal Global Investors, LLC—specifically alleges that the CHS fiduciaries “did not give any serious consideration to these competitive index fund offerings in the marketplace, and instead used Principal’s proprietary index funds, despite fees that were several times higher than marketplace alternatives that tracked the exact same index.” While claims of available, identical funds with lower fees are the “norm” in this litigation, this suit raised the issue of tracking error, claiming that “compared to marketplace alternatives,” Principal’s index funds deviated further from the benchmark index and consistently had the worst performance even on a pre-fee basis.
The Discovery Process
During what was described as “extensive discovery,” the settlement agreement notes that the CHS Defendants produced more than 240,000 pages of documents, the Principal Defendants produced more than 84,000 pages of documents, and the Class Representatives produced more than 2,800 pages. Moreover, it notes that the plaintiffs also subpoenaed two third parties and received over 200 pages of documents in response.
The Settlement
Under the terms of the proposed Settlement (Kirk v. Ret. Comm. of CHS/Cmty. Health Sys., Inc., M.D. Tenn., No. 3:19-cv-00689, motion to approve partial class settlement 12/4/20), the CHS/ Defendants will pay a gross settlement amount of $580,000 into a common fund for the benefit of Settlement Class Members who invested in the “standalone Principal index funds in the Plan,” specifically the Principal Large Cap S&P 500 Index fund, Principal MidCap S&P 400 Index fund, and Principal SmallCap S&P 600 Index. The settlement agreement characterizes this sum as “a fair and reasonable recovery that represents approximately 50% of the damages (and 94% of the excess fees) that Plaintiffs calculate to be associated with those standalone funds that were the focus of Plaintiffs’ claim against the CHS/Defendants.”
As for the parties impacted, based on information provided by the plan’s recordkeeper, the settlement agreement says there are approximately 20,128 Settlement Class members who invested in the standalone index funds, and approximately 195,303 class members who invested exclusively in the TDSAs.
The parties explain that, “as an additional benefit under the Settlement, the CHS/Defendants have agreed to pay $127,642.47 toward settlement administration expenses, representing the portion of the administrative expenses associated with Settlement Class members who invested only in the TDSAs.”
What You Almost Never See—But Do Here
“Class Counsel do not intend to seek recovery of any attorneys’ fees or litigation costs in connection with the Settlement.”
On the other hand, this is, of course, only a partial settlement—an agreement between the plaintiffs and CHS and its retirement plan committee, which, according to the agreement has agreed to cooperate with additional discovery requests related to the plan participants’ claims against Principal, which the agreement says related to the management of the target date separate accounts in the plan.
The case is pending before Judge William L. Campbell Jr., who has yet to rule on the defendants’ pending motions to dismiss.
