A big plan has struck a big cash settlement in an excessive fee suit involving the use of proprietary investment products in its 401(k) plan.
The suit was brought by a number of plaintiff-participants relating to the management of the New York Life Insurance Company Employee Progress-Sharing Investment Plan and the New York Life Insurance Company Agents Progress-Sharing Investment Plan, on behalf of some 10,000 participants during the class period of the $5 billion plans.
Under the proposed settlement (Krohnengold et al. v. New York Life Insurance Co. et al., case number 1:21-cv-01778, in the U.S. District Court for the Southern District of New York), New York Life (or its insurers) will pay a gross settlement amount of $19 million into a common fund for the benefit of the settlement class, which the plaintiffs (Amy Laurence, Wayne Antoine, Lee Webber, Anthony Medici, Joseph Bendrihem, Larry Gilbert, Rafael Musni, Thomas Lantz, Sandra Scanni, and Claudia Gonzalez) described as a “significant recovery in connection with the claims that were alleged,” and one that falls “well within the range of negotiated settlements in similar ERISA cases.”
Case History
The suit was initially filed as a putative class action on March 2, 2021, with additional plaintiffs added on June 15, 2021. In essence, as has been the case in numerous other suits involving the inclusion of proprietary funds in the 401(k) menu of investment providers, the suit alleged that the fiduciary committee for each of the Plans (and its predecessor Board of Trustees) breached its fiduciary duties by retaining certain MainStay mutual funds affiliated with New York Life as investment options in the Plans.
The suit also claimed that the committee also breached its fiduciary duties by retaining a Fixed Dollar Account (“FDA”), affiliated with New York Life, as the Plans’ default investment; that the defendants committed prohibited transactions with respect to the Plans’ investment in the proprietary funds affiliated with New York Life, and that New York Life was further liable as a monitoring co-fiduciary for the alleged fiduciary breaches of the committee. The suit also alleged that the defendants violated ERISA’s anti-inurement rule with respect to the at-issue proprietary investments.
Since that filing, the New York Life defendants moved to dismiss the suit on July 16, 2021, then in August 2021 the court granted in part and denied in part defendants’ motion to dismiss—specifically dismissing the claims of four plaintiffs regarding the FDA on the grounds that they lacked standing on that issue, dismissed the breach of fiduciary duty claims (but not prohibited transaction claims) of the other plaintiffs regarding the FDA on statute of limitations grounds; dismissed all plaintiffs’ breach of fiduciary duty claims based on the MainStay MacKay International Equity Fund; and dismissed plaintiffs’ anti-inurement claim—and then gave the plaintiffs an opportunity to re-plead the claims that were dismissed. This they did, and they added three new plaintiffs from the Agent Plan who were defaulted into the Fixed Dollar Account—at which point the New York Life defendants brought another (partial) motion to dismiss—though that was denied in its entirety on March 28, 2023.
Settlement Specifics
As for the adequacy of the settlement, the proposal notes that “Plaintiffs’ expert estimated that the total losses associated with Plaintiffs’ breach of fiduciary duty claims was between $76.8 – $93.4 million”—and that, based on that, a $19 million recovery represents approximately 20–25% of the total estimated losses. Moreover, it explains that the plaintiffs’ expert also estimated the profits to New York Life on “all monies invested in the FDA (not just defaulted assets) because Plaintiffs’ prohibited transaction claims involving the FDA were not limited to monies invested in the FDA by default,” and that he estimated that those profits totaled between $8,265,491 and $9,512,443. Adding those to the other number, the settlement notes that the $19 million gross settlement amount represents a recovery rate of approximately 18–22%—which they say is “on par with numerous other ERISA class action settlements across the country, including in this District.”
Settlement ‘Support’
In support of the settlement, the plaintiffs told the court that the settlement (among other things):
- is modeled after one previously approved by this court in Beach v. JPMorgan Chase Bank (No. 1:17-cv-00563), another case involving alleged fiduciary breaches in connection with proprietary investments in a 401(k) plan;
- was negotiated at arm’s length by experienced and capable counsel, with the assistance of a respected neutral mediator;
- followed contested motion practice and significant discovery, including 21 fact witness depositions, multiple rounds of expert reports, four expert depositions, and the production of over a quarter million pages of documents;[i]
- provides for significant monetary relief and an equitable method of distribution to Class Members; and
- is consistent with the requirements of Rule 23.
The complex nature of the alleged injuries makes for a fairly complex plan of allocation to participants—those who are interested can check out the footnote below.[ii]
Of course, the settlement does NOT provide for an award of a specific amount of attorneys’ fees (and is not conditioned on the award of any such fees). Rather, it requires that a motion for their fees and expenses be filed at least 14 days before the deadline for objections to the proposed settlement. That said, the agreement says that fee request will be limited to 33% of the gross settlement amount (you can do the math), as well as recovery of litigation expenses and administrative expenses related to the settlement—and “service awards” of up to $10,000 for each of the named plaintiffs in the case.
Will the court approve? Stay tuned.
[i] Defendants produced over 179,000 pages of documents in response to plaintiffs’ discovery requests, and the Plans’ investment consultants produced over 100,000 additional pages in response to subpoenas.
[ii] One that is “calculated based on the Class Member’s level of investment in such Disputed Investment relative other Class Members, and the amount of estimated losses (or profits, in the case of the FDA) that Plaintiffs’ expert calculated for each such Disputed Investment during the Class Period.” Further, to account for the estimated losses specific to Class Members who were defaulted into the FDA, any Class Members who were identified as defaulted by Plaintiffs’ expert for purposes of his loss analysis (based on the data provided to him) will have their Fund Allocation Score specific to the FDA multiplied by 1.5”—an “enhancement that the agreement says ‘reflects the fact that approximately $4.1 million in losses were calculated for FDA defaultees in addition to the approximately $8.2 million in profits from all FDA investors (a ratio of 50%), based on the most conservative estimates of Plaintiffs’ expert.’” And THEN it gets complicated…
