Whole Foods 401(k) Targeted with Excessive Fee Suit

Another multi-billion-dollar 401(k) plan finds itself in the crosshairs of an excessive fee suit.

This time it was participant-plaintiffs Shauna Winkelman, Michael Lenon, Scott Cenna, Kalea Nixon, Robert Goldorazena, Chad Diehl and Ross Nanfeldt, by and through their attorneys (Capozzi Adler PC[i]) bringing suit on behalf of the Whole  Foods Market  Growing Your Future 401(k) Plan.

All in all the claims put forth (Winkelman v. Whole Foods Market, Inc., W.D. Tex., No. 1:23-cv-01352, complaint 11/6/23) are nearly identical to those filed in any number of these excessive fee suits: that the plan was large (between $1.6 and $1.9 billion during the period in question); that its size as a jumbo plan should have enabled it to bargain for a better deal than it got for participants; and that their failure to do so constituted a breach of the fiduciary duties owed to the plan/participants. 

‘Fungible’ Services

The suit outlines a number of administrative recordkeeping services, and then asserts that “these services are offered by all recordkeepers for one price (typically at a per capita price), regardless of the services chosen or utilized by the plan.” They also noted that “the services chosen by a large plan do not affect the amount charged by recordkeepers for such basic and fungible services,” and that the cost for those services “do not materially change if the recordkeeper gains a new plan or loses an existing plan, and don’t vary based on the amount of assets in the plan or in an individual’s account.”

Perhaps bearing in mind arguments made in other such suits, this one acknowledges that “although the 401(k)-participant servicing can vary slightly in the various service levels, the actual cost to a large record keeper with a very robust participant servicing system remains almost constant notwithstanding the level and sophistication of participant servicing the employer has elected for his/her plan. Accordingly, a plan sponsor or fiduciary has the leverage to negotiate favorable rates given that costs of implementation do not change for the service provider.”

Their allegations notwithstanding, the suit notes that they (a) don’t have access to 408(b)2 disclosures, (b) don’t have knowledge of any pending requests for proposals (RFPs) that may have been issued, and (c) received only heavily redacted copies of committee meeting minutes from Whole Foods. “In short,” they explain, “Plaintiffs did not have and do not have actual knowledge of the specifics of Defendants’ decision-making process with respect to the Plan, including Defendants’ processes (and execution of such) for monitoring recordkeeping and administration costs, because this information is solely within the possession of Defendants prior to discovery.”

‘Reasonable Inferences’

That said, “For purposes of this Complaint, Plaintiffs have drawn reasonable inferences regarding these fiduciary processes based upon information available to Plaintiffs, such as Rule 404a disclosures, Form 5500s filed with the DOL, market surveys, and other authority.” 

The suit asserts that there is no evidence that an RFP was conducted, and “the fact that the Plan had the same recordkeeper in place, namely Fidelity, since 2011 with little meaningful change in the already excessive RKA rate strongly suggests that the Plan fiduciaries failed to act in the best interests of Plan participants when they failed to genuinely attempt to seek a competitive market rate for RKA fees. Had the Defendants genuinely sought a competitive rate, the Plan participants would have benefited from a significant reduction in RKA costs given that the market for recordkeeping is highly competitive, with many vendors equally capable of providing a high-level service.”

The suit cites “information obtained through the Plaintiffs’ request for Plan documents” that indicates that Fidelity charged a per participant RKA rate of $34 in 2016—a figure that the plaintiffs assert “was nearly double the reasonable RKA costs for a plan the size of this Plan during the same time period.”  And then, though acknowledging that there was a “modest change in price in 2018 to $33 per participant and to $31 per participant as of 2020”—but not only that “a high fee may reflect imprudence even if the fee falls year-over-year,” but that “these rates continued to exceed, by far, the reasonable rate for a plan the size of the Plan.”

Stipulation Cited

By way of a benchmark for their assertions, the plaintiffs cite stipulations by Fidelity (Whole Foods’ recordkeeper) in litigation involving its own plan where it stipulated that the market rate for serving as recordkeeper for its own plan would have charged $14-$21/participant. “The significance of the Fidelity stipulation is that the Plan’s demographics matches favorably with the Fidelity plan’s demographics.    The Plan had almost double the number of participants that the Fidelity plan had (meaning the Plan should have commanded lower fees) and was also a billion-dollar plan like the Fidelity plan.”

The plaintiffs also cited what they claimed were comparable plans—which ostensibly paid between $10/participant and $27/participant for recordkeeping—though a footnote acknowledges those figures were obtained from Form 5500—and that “the amount calculated from the 5500 filing is likely high as it may include amounts placed in a revenue credit account or similar account which is then used to pay other administrative expenses.”

Will the court be persuaded? Stay tuned.

NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.