The parties in another long-standing excessive fee suit have come to terms – with some interesting twists in the terms of settlement.
The original lawsuit, filed in late 2015 in the Southern District of Indiana by the St. Louis-based law firm of Schlichter, Bogard & Denton, alleged that fiduciaries of the $5.1 billion Anthem, Inc. 401(k) plan failed to leverage the plan’s size and economic clout to take advantage of lower-fee investment options. This included lower-cost shares of the Vanguard funds that already dominated the plan’s menu – funds that the suit says were “readily available” to plans of this size. Also at issue was Anthem’s decision to offer the Vanguard Prime Money Market Fund, described as “microscopically” low-yielding in the suit, rather than a stable value fund providing higher returns. The suit alleges that if the amounts invested in the Prime Money Market Fund had instead earned the returns recorded by the Hueler Index from Dec. 29, 2009 to Sept. 30, 2015, “plan participants would not have lost over $65 million in their retirement savings.”
The suit also challenged the record keeping fees paid to Vanguard, which the plaintiffs contend varied between $42 and $94 per participant annually. According to the suit, the “outside limit” of a reasonable record keeping fee would have been $30 per participant.
If the allegations were largely in keeping with the focus of similar excessive fee suits, there were some differences in the settlement terms.
First, the suit acknowledges two subclasses: all participants and beneficiaries of the Anthem 401(k) Plan (formerly the WellPoint 401(k) Retirement Savings Plan) who had an account balance greater than $1,000.00 at any time from July 22, 2013 through the date of judgment (“excluding the Defendants,” of course), and what is called a Revenue Sharing Subclass that includes all participants and beneficiaries of the Anthem 401(k) Plan (formerly the WellPoint 401(k) Retirement Savings Plan) who had a reduction in the value of their account balance at a rate of more than $35.00 per year due to revenue sharing payments to The Vanguard Group at any time from Dec. 29, 2009 through July 21, 2013, excluding the Defendants. It’s not indicated how many of the plan’s 59,000 participants are in each (and presumably some overlap).
And while it’s not unusual – at least for suits brought by the Schichter law firm – to call for changes in plan administration and process, this settlement includes some fairly specific directives and timeframes for the Anthem fiduciaries. For example:
- Within the first year of the settlement period, the plan’s Pension Committee will publish to participants invested in the money market fund the fund fact sheet or similar disclosure that explains the risks of the Plan’s money market fund investment option, the historical returns of the money market fund over the last 10 years, and the “benefits of diversification.”
- Additionally, the plaintiffs’ counsel says it will “both monitor compliance with the settlement for three years and take any necessary enforcement action without cost to the Class.”
The settlement – which calls for $23,650,000 to be set aside in an interest-bearing settlement account that will be used to pay the participants’ recoveries as well as Class Counsel’s Attorneys’ Fees and Costs, Administrative Expenses of the Settlement, Class Representatives’ Compensation, and Individual Plaintiffs’ Compensation – also calls for the following:
- During the first eighteen (18) months of the Settlement Period, the Plan’s fiduciaries will conduct a request for proposal for recordkeeping services for the Plan, one that will request a fee proposal based on a total fixed fee and on a per participant basis, after which they may decide to stay with their current provider, or change, but in any event within 30 days of that decision provide the plaintiffs’ counsel “a summary of the finalist proposals received, the decision made, and the reasons therefor,” including the final agreed-upon fee for basic recordkeeping services.
By the end of that first year, the Pension Committee also agreed to:
- engage an independent Investment Consultant “familiar with investment options in defined contribution retirement plans who shall, within a reasonable time after being engaged, review the Plan’s fund lineup and make recommendations regarding the investment options offered in the Plan (including, but not limited to the money market fund). The Investment Consultant will make recommendations regarding whether to add a stable value fund to the Plan’s investments;
- meet within one hundred fifty (150) days after receipt of the Investment Consultant’s report and recommendations to review the Investment Consultant’s report and evaluate whether and to what extent to implement the Investment Consultant’s recommendations, if any; and
- consider, “with the assistance of the Investment Consultant, among other factors: (1) the lowest-cost share class available to the Plan for any mutual fund considered for inclusion in the Plan as well as other criteria applicable to different share classes; (2) the availability of revenue sharing rebates on any share class available to the Plan for any mutual fund considered for inclusion in the Plan; and (3) the availability of collective trusts and or separately managed accounts, to the extent such investments are permissible and are otherwise have similar risks and features to a mutual fund considered for inclusion in the Plan.”
And, within thirty (30) business days of the Pension Committee’s consideration of the Investment Consultant’s evaluation and recommendations, the defendant’s counsel will provide a written summary of the Investment Consultant’s recommendations and the decisions made to the plaintiff’s counsel.
Other monetary elements included:
- $20,000 for each of the Class Representatives
- Separate incentive payments to the “Individual Plaintiffs not named as Class Representatives” in an amount of $5,000
- As for those plaintiffs’ attorneys, they’re requesting “$7,882,545, as well as reimbursement for costs incurred of no more than $650,000.”
The case is Bell v. ATH Holding Co., LLC, S.D. Ind., No. 1:15-cv-02062-TWP-MPB, motion for preliminary settlement approval 4/5/19.
Why This Matters
The Anthem suit stood out for several reasons – at $5.1 billion, it was one of the largest plans to be sued, for starters. And, as noted above, the actions that the plan committee has committed to in the settlement are not only fairly specific, but with what seem to be an unusually high number of “check in” points with the plaintiffs’ counsel. The commitment by that same counsel to basically keep an eye on things for the next three years (at no additional cost) also seems unusual.
But as for the suit itself, it was also unique in that, unlike most of these suits, it wasn’t alleged that the fiduciaries didn’t review or monitor the plan’s investment options, nor were they alleged to have chosen funds with inappropriate revenue-sharing structures. This wasn’t a situation where the fiduciaries ignored the counsel of an advisor who told them they were paying too much for record keeping fees, or where the plan fiduciaries had taken no action following their review of that fund menu (they had actually moved toward less expensive options in 2013), or a challenge about the use of more expensive active management options when passive, index choices would allegedly have done the trick.
No, here what seems to have made the fund charges unreasonable was simply that that they were not the cheapest option available. In an earlier refusal to dismiss plaintiffs’ charges Judge Tanya Walton Pratt brushed aside arguments (Hecker v. Deere & Co.) where the appellate court affirmed that “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund,” noting that “neither court addressed whether a defendant violates their fiduciary duty in selecting high-cost investment options where identical investment options are available at a lower cost.” And, as it turns out, they still haven’t. But that’s something to keep an eye on.