Quick Settlement Struck in 401(k) Excessive Fee Suit

The fiduciaries of the 99 Cents Only Stores have come to terms in an excessive fee suit involving their 401(k) plan – and for considerably more than…99 cents.

That said, the relatively quick (the suit was filed only about a year ago on March 25, 2022) settlement was, by the standards of such things, relatively modest – as was the size of the plan in question (just $76 million, representing the balances of some 5,700 participants). 

The participant-plaintiffs in this case are Salvador Aquino, Susan Ford, Monicalayle Garcia, Barbara Kraus, Martha Lopez, Francisco Martinez, Megan Sargent[i] – bringing suit on behalf of the 99 Cents Only Stores 401(K) Plan against 99 Cents Only Stores LLC and the Retirement Committee of the 99 Cents Only 401(K) Plan.  They had sued the defendants 1) for breach of fiduciary duties of prudence and loyalty, and 2) for breach of fiduciary duties in violation of the duty to investigate  and monitor investments and covered service providers – pretty standard, near cookie-cutter type allegations[ii] for this type proceeding.

Case History

Despite the short litigation timeframe, there had been a lot of activity:

• a June 2022 motion to dismiss the suit by the 99 Cents Only defendants,
• an amended version of the suit filed by the plaintiffs later that month that removed the duty of loyalty claim, and modified allegations relating to the duty of prudence claim (based on the selection and retention of four actively managed funds and the failure to include more than one index fund option on the Plan’s menu),
• a motion opposing the fiduciary defendants’ motion to dismiss the plaintiffs’ amended complaint,
• an August propounded discovery motion by the plaintiffs to which the fiduciary defendants responded with documents and data (after a stipulated protective order was signed by the Court), which then led to
• the commencement of settlement discussions, which in turn led to
• a November 2022 mediation conference with Jed D. Melnick of JAMS – which produced the now announced settlement agreement.

The Settlement

That proposed settlement – filed in the U.S. District Court for the Central District of California (Aquino v. 99 Cents Only Stores LLC, C.D. Cal., No. 2:22-cv-01966, settlement motion 4/19/23) – calls for a cash settlement of $750,000. From that will also be drawn:

• attorneys’ fees of 33.1/3 % of the gross settlement (but set at a maximum of $250,000),
• attorney expenses of $82,000, and
• plaintiffs’ Case Contribution Awards of $10,000 for each of the plaintiffs named in the suit,
• all of which, of course, are subject to Court approval.

Chances Are…

In submitting the proposal for court approval, the parties note that that settlement amount represents 25% of the Class’s total potential damages for all claims of approximately $3,000,000. They continue to explain that for plaintiffs’ first claim of excessive recordkeeping fees and share class violations, plaintiffs’ expert calculated $1,007,264.30 in potential damages – to which they figured they had a 100% success rate as to those claims at trial. 

With regard to the second claim (regarding four of the Plan’s investments’ alleged poor performance when compared to their passive benchmarks), the plaintiffs estimated approximately $2,000,000 in potential losses to the Plan (estimated potential damages of $4,000,000 for this claim if successful at trial, but with only a 50% chance of success at trial “because those claims are riskier and have been subject to dismissal in the Ninth Circuit.” 

Here specifically, they cited the dismissal of a suit involving Salesforce and its $2 billion plan, and its 2022 affirmation of that dismissal by the Ninth Circuit. That decision had commented, among other things, that “passively managed funds, however, ordinarily cannot serve as meaningful benchmarks for actively managed funds, because the two types of funds ‘have different aims, different risks, and different potential rewards that cater to different investors.’”

“Given that Plaintiffs’ have recovered 25% of the estimated potential damages of $3,000,000, this settlement falls within the range of reasonableness that Courts in other jurisdictions have approved,” the settlement proposal concludes.

“In sum, the Settlement is the product of vigorous litigation and arm’s-length negotiation by experienced and well-informed counsel, adequately reflects the strength of the parties’ claims and defenses, is based on sufficient discovery and information, and provides significant relief to the Settlement Class. Accordingly, the Court should find the Settlement is fair, reasonable, and adequate, and merits preliminary approval. Further, the Parties will submit the Settlement and related applications for fees and expenses to an independent fiduciary retained on behalf of the Plan, which will provide an opinion on the Settlement’s fairness before the final fairness hearing.”

Now we’ll see what the court makes of the proposal.