A new excessive fee suit claims plan fiduciaries “larded the plan with excessively expensive sub-advised accounts to the exclusion of superior alternatives” – and “negligently prepared and/or intentionally misstated their Form 5500s.”
In this case it was Ramon Diaz, a former participant in the West Conshohocken, Pennsylvania-based BTG International Inc. Profit Sharing 401(k) Plan, against the fiduciaries of that plan (specifically naming two that signed the plan’s Form 5500) for allowing the plan’s recordkeeper (John Hancock) to receive “excessive and unreasonable compensation” through hard dollar fees paid directly to Hancock, indirect soft-dollar fees paid to Hancock by non-John Hancock managed sub-advised accounts “added and maintained in the Plan to generate fees to John Hancock, and fees collected directly by John Hancock from John Hancock-managed sub-advised accounts” (also allegedly “added and maintained in the Plan to generate fees to John Hancock”), and “float interest, access to a captive market for 401(k) rollover materials to Plan participants, and other forms of indirect compensation.”
The sub-advised accounts in question were group annuity funds offered by John Hancock. According to the suit, the 810-participant plan offered more than 100 fund options, 53 that “appear to be managed by John Hancock with the remainder paying revenue-sharing to John Hancock.”
The suit charges that the fees paid were “unreasonable and excessive, especially in light of the Plan’s enormous size and asset value.” How enormous? Approximately $63 million as of December 2017.
Question ‘Err’?
The suit claims that the defendants here “negligently prepared and/or intentionally misstated their Form 5500s… each year from 2012 to the present” because, from 2012 to 2016, “the Plan’s Form 5500 state the John Hancock received no direct or indirect compensation whatsoever for its services,” while in 2017 the Form 5500 reported that John Hancock “received a total of $318 in direct compensation for its services and no indirect compensation whatsoever.” The plaintiff says, in effect, that the defendants should have known better, and that to not question that reporting was a “clear breach of their fiduciary duties.”
Moreover, that in order to “provide for this compensation to John Hancock, Defendants have included inferior and imprudently selected investment options as core Plan investments.”
The plaintiff admits that he “lacks knowledge of Defendants’ fiduciary selection process,” but nonetheless alleges that “a long series of decisions involving proprietary and non-proprietary investments indicate a failure by Defendants to prudently select and monitor the investment options in the Plan,” before going on to identify lower cost share classes of the same funds that it claims were available – including, in at least one case, an R6 class of shares that it says would have saved the plan an estimated $30,000/year.
The suit also challenges the use of funds with active management, rather than index funds, claiming that those choices cost the plan $3,145,180 from 2013 through 2017. It also challenges the use of a money market fund, rather than a stable value option, claiming that the plan’s investment of $676,000 in the John Hancock Money Market fund paid interest to the plan of only 0.38%, “while paying more to John Hancock than what was paid to the Plan participants.”
The plaintiff is represented by Donald R. Reavey of Harrisburg, Pennsylvania-based Capozzi Adler PC.
John Hancock is not named as a defendant in the suit.
The case is Ramon Diaz et al. v. BTG International Inc. et al., case number 2:19-cv-01664, in the U.S. District Court for the Eastern District of Pennsylvania.
