Participant-Plaintiffs Press Proprietary Fund Suit

Yet another fund provider has found itself in the crosshairs of a participant-plaintiff suit from their own 401(k) plan.

The plaintiffs here are Amber Colston, Willis Bramwell and Roseann Blessing who are bringing suit on behalf of the nearly $800 million, 3,500 participant Ameritas 401(k) Retirement Plan against the Plan’s fiduciaries, which include Ameritas Holding Company and the Board of Directors of Ameritas Holding Company and its members during the Class Period and the Ameritas 401(k) Retirement Plan Committee and its members during the Class Period.

The charges are pretty standard; essentially that the plan fiduciaries (and those charged with appointing/monitoring their actions) failed 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.”

Standing

The suit, filed in the U.S. District Court for the District of Nebraska, argues that the plaintiffs have standing to bring this action “because they participated and invested in the Plan and were injured by Defendants’ unlawful conduct.” The suit also claims that they have standing “because their claims against their share of investments in the Plan are diminished by the underperforming funds and the excessively expensive retail level annuity structure offered by the Plan, whether they are specifically identified herein or not.”

As is typical in such cases, the suit (Colston v. Ameritas Holding Co., D. Neb., No. 4:23-cv-03137, complaint 7/28/23) states that “plaintiffs did not have knowledge of all material facts (including, among other things, what a competitive expense ratio is for funds in a retirement plan and how target date funds and other funds in a retirement plan should perform as compared to their peers and benchmarks[i]) 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.”

The suit walks through the experience of each of the named plaintiffs to explain their injury and the reason for the suit. For example, it says that plaintiff Colston who specifically invested in the T. Rowe Price Retirement target date sub-advised account returns “which were subject to the excessive charges described herein.” It goes on to allege that she “suffered injury to her Plan account from the excessive expense of these funds which are part of a costly retail level annuity product offered by her employer at the time, Ameritas, who also, not coincidently, managed the Plan and acted as recordkeeper.” The suit also claims that she suffered injury “by having to pay for her share of consulting fees to maintain any of the expensive sub-advised funds in the Plan whether specifically identified herein or not, as described below.” 

‘Know’ How

The suit also noted that “plaintiffs did not have and do not have actual knowledge[ii] of the specifics of Defendants’ decision-making process with respect to the Plan, including Defendants’ processes (and execution of such) for selecting, monitoring, and removing the Plan’s investments because this information is solely within the possession of Defendants prior to discovery.” They went on to clarify (and accuse?) by noting that, “in fact, 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.” A request they said was “made on June 16, 2022”—and rejected, by letter dated July 15, 2022.”

Not that they considered that dispositive of the issue. “Reviewing meeting minutes, when they exist, is the bare minimum needed to peek into a fiduciary’s monitoring process,” according to the suit, which then goes on to note that “in most cases, even that is not sufficient.” Why not?  Well, according to the suit (citing Sacerdote et al. v. New York Univ), “[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.”

Contract Challenged

Of special issue here was the variable annuity contract that constituted the plan’s investment structure, and the charges applied as a result—charges and a structure that the suit claims were put in place to enrich Ameritas, rather than the participants in the plan. In fact, the suit comments that “in order to provide for these revenue streams, Defendants larded the Plan with excessive fees and charges paid directly to Ameritas, its affiliates and/or third parties to maintain the annuity contract”—and cited an article from Forbes Magazine that claimed not only that “some group annuities can top $1,000 per participant every year, or three times what low-cost 401(k) plans cost…” and that “Have second thoughts after signing up and you'll discover that buying a group annuity is like joining the Sopranos. ...”

The suit goes on to claim that “even if these charges were half of the advertised amount of 2.50% or 1.25% against all assets in the Plan, the fee would be astronomical at only half”—compared to what it claims (citing Brightscope’s data that the average total plan cost for a plan with assets between $500 million and $1 billion was 0.45% of assets in 2009 and 0.37% in assets in 2019).

The suit didn’t just have a problem with investment fees, however. Noting that “the primary charges any retirement plan might incur would be for recordkeeping, advisory services, accounting and legal,” the suit commented that the Plan entered into a recordkeeping contract with UNIFI in 2008, where UNIFI is paid $2,250 per year and a $10 per participant fee”—which added up to less than $35,000 in 2017. 

Recordkeeping Record

But then the suit notes that in 2011, UNIFI became an affiliated entity of Ameritas and by 2021 Ameritas Life Insurance Company and/or its affiliates was reported on the Plan’s 5500 filing as the recordkeeper and charged a fee of $110,685 for these services. And that, the suit alleges, didn’t include “the estimated $10M dollars extracted from the Plan throughout the Contract Management Charge and the Investment Management Expense.” Oh, and the suit also notes that in 2016, the Plan hired the advisory firm of FEG for $150,000 per year.

“Given the recordkeeping fees, the advisory fees and the fact that investment management fees are already paid for, there is no reasonable rationale for Ameritas and/or its affiliates to be paid $10M dollars (estimated at only half of the 2.5% total asset charge) per year during the Class Period. This fee is clearly excessive,” the suit continues. Indeed, the plaintiffs argue that “the choice of an annuity-based product for one of the largest Plan’s in America, had disastrous consequences for Plan participants because these excessive charges diminished their savings for retirement. A more appropriate method for maintaining such a large plan would be to offer mutual funds for investment directly in the Plan rather than through a complicated and non-transparent fee structure that annuity products are known for. It was imprudent for the Defendants not to have done so.”

Ultimately, “as a consequence of the foregoing breaches of the duty to monitor, the Plan suffered millions of dollars of losses,” the suit states, and “had the Monitoring Defendants complied with their fiduciary obligations, the Plan would not have suffered these losses, and the Plan’s participants would have had more money available to them for their retirement.”

What will the court make of these allegations? Stay tuned.

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.