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Split Decision in Excessive Fee Suit

Litigation

A federal judge has rendered a split decision in an excessive fee suit—though it seems fair to say that, at least in the judgment of this court, the Schlichter-represented plaintiffs’ experts didn’t live up to their “billing.” 

The suit was filed by the law firm of Schlichter Bogard & Denton, LLP representing a class of participants against the fiduciaries of the Banner Health Employees 401(k) plan. The organization grew substantially from 2009 to 2016, both in terms of constituent units or facilities—and a commensurate number of participants and asset values in the plan—expanding from 23,166 participants and approximately $1.18 billion in assets to 41,416 participants and approximately $2.25 billion in assets during that period.

Background

Until August 2014, the $2 billion, 33,000 participant Banner 401(k) Plan offered three “levels” of funds to participants: (1) “Level 1: Ready-mixed Investment Options,” target-date funds that allowed a participant to invest in a single fund based on a desired retirement date; (2) “Level 2: Core Investment Options,” described as “8 core investment options to help you create and manage a diversified portfolio”; and (3) “Level 3: Expanded Investment Options”—basically a mutual fund window intended as “[a]dditional investment opportunities for more sophisticated investors.” 

The plaintiffs in this case claimed that both the plan committee and the advisor (Slocum) breached their fiduciary duty by continuing to offer the Fidelity Freedom Funds, and a particular Level 2 fund, the Fidelity Balanced Fund. Specifically, the plaintiff’s expert contended that “the performance gap [between the Freedom Funds and other alternatives] was so glaring by the end of second quarter 2011 that a prudent fiduciary could no longer ignore the need to replace the Fidelity Freedom Funds,” and that the failure to timely remove the Freedom Funds resulted in $40.7 million in losses to the plan.

Count ‘Down’

As the new year began, the case proceeded to an 8-day bench trial[i] before Judge William J. Martinez of the U.S. District Court for the District of Colorado to consider the following claims:

  • Count I: Breach of the duties of prudence and loyalty by allowing the Plan's recordkeeper to collect allegedly excessive recordkeeping and administrative fees
  • Count II: Breach of the duties of prudence and loyalty by offering and failing to monitor allegedly imprudent investment options accessible to those who participated in the plan via a Mutual Fund Window and breach of the duties of prudence and loyalty by retaining the Fidelity Freedom Funds after they allegedly became an imprudent investment option
  • Count III: Breach of the duty to monitor performance of other fiduciaries
  • Count IV: Prohibited transactions with a party in interest due to the allegedly excessive fees of the recordkeeping fee arrangement
  • Count V: Prohibited transactions for payment of Banner expenses from plan assets

And—as relief, the plaintiffs were looking for a recovery of approximately $85 million in plan losses and “appropriate injunctive relief.”

The Decision(s)

The decision (Ramos v. Banner Health, 2020 BL 188868, D. Colo., No. 1:15-cv-02556, 5/20/20) itself is rather lengthy, almost tedious in its level of detail regarding both the allegations made, the defenses offered, and the ultimate determination by Judge Martinez. Those keeping score in such things will find it interesting that the plaintiffs were successful in their allegations in Count I, III and V, basically the allegations regarding excessive fees. 

On the other hand, Judge Martinez found plenty of evidence that these defendants had a process that involved both an advisor and legal representation, that there was a review of fund options and performance, and that decisions made regarding (or retaining) those funds were discussed and documented. And that, in no small part, doubtless contributed to the defendants’ success in prevailing on Counts II and IV.

Window (Ad)dressing

Not that there weren’t issues with regard to Count II, specifically the mutual fund window. Judge Martinez noted that the Banner investment committee (RPAC) “did not monitor, did not intend to monitor, and did not perceive any obligation to monitor each of the funds available in the Mutual Fund Window, but rather “consistent with the advice of counsel at Drinker Biddle, the RPAC monitored the Mutual Fund Window "at a ‘high level.’" 

That said, Judge Martinez found a number of reasons to doubt the estimates of damages submitted by the plaintiffs’ expert (Dr. Gerald Buetow), noting that he “made several unsupported assumptions,[ii] which undermine the credibility of his opinion that failure to remove the Mutual Fund Window caused losses to the Plan, and his calculation of those losses.” As a consequence, Judge Martinez noted that “these assumptions significantly undermine the reliability of Dr. Buetow's estimate of losses for the violations alleged…,” and that “Buetow’s method used to calculate losses, and the calculations themselves, also undermine the reliability of Dr. Buetow's loss estimate.”[iii] Indeed, Judge Martinez ultimately concluded that “Buetow’s assumptions, methods, and calculations are so unreliable that they cannot support a finding, by the preponderance of the evidence, that offering unmonitored funds through the Mutual Fund Window caused any loss to the Plan”—and rejected the notion that a prudent fiduciary wouldn’t have offered the Fidelity funds, as well as the assertion that the mutual fund window was imprudent. 

RFP ‘Riff’

That was not, however, the case with the issue of recordkeeping fees. Judge Martinez found it “highly significant that Banner has not undertaken a single RFP in nearly 20 years, despite the recognized utility of an RFP for assessing reasonableness of fees,” that while, for no charge the plan’s investment consultant (Slocum) “provided limited reviews of the Plan's recordkeeping and administrative fees paid to Fidelity,” the Banner defendants failed to learn that “other Slocum plan clients with more than $1 billion in assets and a large number of total participants were paying far less than the Plan for recordkeeping and administrative fees on a per-participant basis, whether through fixed, per-participant fees, or by way of bundled fee structures.” 

He then concluded that “at a minimum, such information should have led a prudent fiduciary to engage in a more robust process to determine the appropriateness of the recordkeeping and administrative fees charged to the Plan by Fidelity.” Instead—“while the RPAC members were notified of their obligation to assess fee reasonableness on an ongoing basis, and warned by legal counsel that the economic recovery following the 2008 recession could lead to excessive fees under uncapped, asset-based revenue sharing arrangements, the RPAC did not thoroughly investigate the fees being paid to Fidelity (measured on a per-participant basis) or analyze the reasonableness of those fees, until at the earliest late-2015. Instead, the RPAC relied solely on non-fiduciaries to provide a high-level summary of the fee reasonableness.”

Expert ‘Tease?’

Ah—but as the matter of damages—well, the plaintiffs’ expert, or at least his testimony, was found…wanting. While his (Martin A. Schmidt) estimate was that the loss from excessive fees between 2009 and 2016 was approximately $19 million, the court found that he used as comparisons plans so much smaller as to be “inapt comparators,” offered no real assessment as to whether the services provided were comparable and that the fact that his opinions were “derived solely from his "experience" and the data of dissimilar Plans A and B, drastically reduces the Court’s confidence in the accuracy of this opinion.” Judge Martinez commented that he “relied almost exclusively on his unquantifiable and non-replicable experience for his damages estimates, a process which the Court is constrained to find as unreliable.”

That didn’t mean that the court didn’t find merit in the allegations—but undertook their own independent calculation, ultimately determining that (only) $1,661,879.83 was its “best estimate of the amount of loss to the Plan from November 20, 2009 to December 31, 2011, caused by Banner Defendants’ failure to monitor and ensure that Plan recordkeeping and administrative fees were reasonable during that period of time.”

Plan Expenses

The other issue was the matter of expenses charged to the plan (and thus drawn from participant accounts). From 2009 until 2016, Banner sought reimbursement for, among other things, fees charged by Slocum, Drinker Biddle, and Ernst & Young, costs associated with plan audits, and staff time and expenses for their work on the plan—but they also sought reimbursement for the salaries of human resources personnel who worked on the plan. That said, they apparently didn’t maintain “precise time records,” and in 2012 the Labor Department (during an audit of another of Banner’s retirement plans), found that the procedure used by Banner staff to allocate their time among all the retirement plans was “problematic.” 

However, even after that finding (and the development of a policy requiring the tracing of the time spent on each plan, those hours still weren’t tracked properly. Those issues were subsequently noted and documented in an internal audit, and when in May 2017 the DOL initiated another investigation of Banner (this time into possible ERISA violations resulting from the improper reimbursement of Banner by the plan), Banner self-disclosed to the DOL the issue it had discovered with respect to the inadequate documentation of expense reimbursements. All in all, the internal investigation determined that the Plan had improperly reimbursed Banner $1,476,072.42 from plan assets from Jan. 1, 2012 to Dec. 31, 2017—an amount that was subsequently restored to the plan, along with earnings. However, that didn’t account for the period from 2010 to 2011 where Banner paid itself approximately $687,589 from the plan. Judge Martinez awarded the participants $687,589—plus interest—to account for expenses that Banner impermissibly paid out of plan assets, including salaries for human resources employees that helped administer the plan—and this he also found to be indicative of the failure to monitor plan fiduciaries by Banner’s CEO (among others) in Count III.

As noted above, Judge Martinez ruled in favor of the plaintiffs on Counts I, III, and V, and granted (excluding prejudgment interest at a rate of 3.25%) recovery of losses in the amount of $1,661,879.83 on Count I and $687,589 on Count V. However, he also rejected the claims made in Counts II and IV. 

What This Means

Once again, a sound, documented (and apparently prudent) process was sufficient to fend off allegations about imprudent (and allegedly expensive) fund choices. It seems odd amidst all that apparent order and structure that an RFP hadn’t been conducted in more than two decades, and likely that, had they afforded even a modicum of attention to that aspect of the plan’s administration, they might also have prevailed there as well.

As for the calculation of damages, this is not the first time that experts have, in various courts’ assessment, fallen short of that standard. You have to give Judge Martinez credit for not only calling those into question, but for taking the time to produce an alternate set of calculations and results. 

And while this decision technically constitutes wins for both sides, you have to figure that the plaintiffs (and certainly their contingency fee counsel) are disappointed with a judgment of only about $1.3 million, when they had initially claimed losses nearly 40 times that.

Of course, nothing says it won’t be appealed…


[i]Just ahead of that, the advisor in the case, Slocum & Associates, settled for $500,000.

[ii]Notably the presumption that most participants lack the financial acumen to invest via a brokerage window, that all funds offered through the Mutual Fund Window were not appropriate investment options, not to mention that target date funds were a better investment alternative than the funds available in the Mutual Fund Window, without accounting for the risk profile and investment management preferences of Participants.

[iii]Judge Martinez noted that plaintiffs’ expert Dr. Buetow “…corrected his expert report multiple times to correct serious errors in his damage calculations for the Mutual Fund Window,” including one version where a (subsequently terminated) associate calculated quarterly returns by dividing annual returns by three rather than four. Suffice it to say that his estimates varied—from $204 million in damages to $23 million. And while the defendants’ expert (Dr. Russell Wermers) seemed to think that the latter estimate was “…ultimately free of the calculation errors that plagued Dr. Buetow’s earlier opinions, in the Court's view the multiple miscalculations and wild fluctuations in loss estimates significantly undermines its confidence in Dr. Buetow’s choice of damages model and the assumptions upon which he based his loss opinions.” 

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