Plaintiffs claim the supermarket chain has one of the most expensive jumbo 401(k) plans in the country.
Plaintiffs Francisco Meza (a current participant) and Marvin Montgomery (a former participant) of the $2.5 billion H-E-B Savings & Retirement Plan filed suit (Montgomery v. H.E. Butt Grocery Co., W.D. Tex., No. 5:19-cv-01063, complaint 9/3/19), claiming that the plan fiduciaries “failed to properly monitor and control the Plan’s expenses, and allowed the Plan to become one of the most expensive ‘jumbo’ 401(k) plans in the country.”
The suit claims that in 2016, among defined contribution plans with more than $1 billion in assets, the average plan had participant-weighted costs equal to 0.25% of the plan’s assets, and 90% of plans had annual costs under 0.48% per year (citing BrightScope/Investment Company Institute, A Close Look at 401(k) Plans, 2016), but that the H-E-B plan’s fees were “at a minimum, nearly three times the average, and at least 50% higher than the 90th percentile, making it one of the most expensive plans in the country with over $1 billion in assets.” This, they claim, was “not attributable to enhanced services for participants, but instead Defendants’ use of high-cost investment products and managers, and their continued retention of those managers even after performance results demonstrated that those high fees were not justified.
“Had the Plan limited its expenses to the average total cost for similarly-sized plans, Plan participants would have saved at least $10 million in fees in 2016 alone, and would have achieved millions of dollars in savings in other years as well.”
The suit also claims that the fiduciary defendants “failed to prudently monitor the expenses charged within the Plan’s index funds – funds that charged fees that “were up to seven times higher than comparable alternative index funds that tracked the exact same indexes with the same level of effectiveness,” according to the suit. The funds, according to the suit, were collective investment trusts managed by State Street that charged annual expenses of 0.11%, 0.13%, and 0.14% respectively as late as 2018.
Plaintiffs also take issue with what they described as an “imprudent process to manage and monitor the Plan’s target-risk funds” – and “despite a marketplace replete with competitive target-risk fund offerings,” using an “internal team to design and manage the LifeStage funds, with no previous experience managing investments for defined-contribution plans.” The suit claims that that “team’s inexperience resulted in fundamentally flawed asset allocations for the LifeStage funds,” and that “the underlying investments used to populate the LifeStage funds were inappropriate given their high costs, speculative investment methodology, and ongoing poor performance” (which, they claim, fell in the bottom 3% of peer plans overall).
The suit notes that in 2018, the three LifeStage funds in the Plan (80% of the plan assets) reported expense ratios between 0.52% and 0.88% (with an asset-weighted average of approximately 0.80%), “all materially higher than the category averages of 0.32% and 0.31%.” The suit claims that 20% to 30% of the LifeStage funds’ assets (about $600 million of plan assets as of the end of 2017) were “invested in high-cost, illiquid, and speculative asset classes such as private equity and hedge funds.”
They also took issue with the plan’s money market fund, which the suit claims “offered only negligible returns that failed to keep pace with inflation.” Instead, they argue that if the defendants had “prudently considered other fixed investment alternatives,” they might have “discovered that stable value funds offer superior investment performance while still guaranteeing preservation of principal.” They go on to state (without sourcing) that “prudent fiduciaries overwhelmingly prefer stable value funds over money market funds,” and that the failure of the plan to offer one gives “rise to an inference that Defendants failed to prudently monitor the Plan’s fixed investment option and investigate marketplace alternatives.”
And as if that weren’t enough, the suit calls out “millions of dollars in direct payments from the Plan to H-E-B” – which it not only says constitutes “self-dealing,” but was of an amount that was “entirely unreasonable and unjustified” (although in a footnote, they acknowledge that it is “likely that some of these payments were for in-house management of the Plan’s target-risk funds”). Closing with an allegation that the fiduciary defendants “failed to properly investigate and negotiate a reasonable share of returns for the Plan’s securities lending program,” the plaintiffs claim that the H-E-B plan received only 40% of the securities lending revenue from some $400 million in the program, while similar programs typically receive 70% to 80%.
Nichols Kaster PLLP and Kendal Law Group PLLC represent the proposed class in the case, the former showing up with growing frequency in these type cases, including another recent case involving target-date fund selection, as well as settlements involving Deutsche Bank Americas Holding Corp., BB&T and American Airlines.
