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Small Plan Sued Based on ‘Astronomical’ Active Management Fees

A participant in a $25 million plan has sued his employer for what the suit calls “excessive and imprudent” investment fees and options.

The lawsuit, filed in the U.S. District Court for the Southern District of Ohio against payday lender CheckSmart Financial LLC's 401(k) plan by one Enrique Bernaola, claims that the plan fees were “four times or more the cost of passively managed mutual funds, with absolutely no justification for this concentration in the Plan on actively managed and extremely expensive mutual funds, which rarely add value or can be justified as investment options, especially in the absence of a broad array of passively managed index funds being also made available.”

Oh, and the suit goes on to categorize as “astronomical” the 104 basis points it said was the average expense ratio weighted by the plan’s assets.

The suit also took issue with the fact that “there are virtually no Vanguard index funds offered in the Plan, and the S&P 500 index mutual fund charges a grossly excessive (for an index fund) expense ratio of 60 basis points.”

The suit also claims that three out of the five plan top assets are “actively managed” investment options for participants – and that those lifestyle funds, which it acknowledges are expected to charge more than passive index funds, nonetheless “materially underperformed the S&P 500 total return under every benchmark” (setting aside the reality that the S&P 500 wouldn’t normally be considered an appropriate benchmark for those offerings).

The plan, which has over 1,700 participants, has a menu of investment offerings from more than 50 mutual fund providers, according to the suit.

The filing comes shortly after another small-plan 401(k) fee litigation case was filed (Damberg v. LaMettry’s Collision, Inc.) – and held out by some as a harbinger of this type litigation moving down market, only to be dismissed shortly thereafter. That case – and ostensibly this one – stand out in an environment where for a decade the vast majority of the so-called “excessive fee” revenue-sharing lawsuits have been filed against multi-billion dollar 401(k) plans. Little wonder since, as bank robber Willy Sutton once opined, “That’s where the money is” — in this case, the assets and fees make for multi-million dollar contingency fees for plaintiff’s lawyers.

We’ll see if this one “sticks.”

The case is Bernaola v. CheckSmart Financial LLC, S.D. Ohio, No. 2:16-cv-00684, 7/14/16.