Excessive Fee Suit Targets Advisor Comp

Another excessive fee suit has been filed against 401(k) plan fiduciaries, including allegations that part of a breach of fiduciary duty was allowing the plan’s advisor to be paid excessive compensation.

The suit (Sandoval v. Novitex Enterprise Solutions LLC, D. Conn., No. 3:17-cv-01573, complaint filed 9/20/17), was filed in the U.S. District Court for the District of Connecticut by a participant in the 401(k) Novitex Enterprise Solutions Inc (formerly known as Pitney Bowes Management Services). The suit describes the plan as “a significant and large 401(k) plan in terms of assets,” though its $157 million in assets (as of Dec. 31, 2015) and more than 10,000 participants are much smaller than the plans that have dominated the headlines in these lawsuits.

The suit makes the same kind of allegations that others have, though the 21-page suit is comparatively light on providing details behind those charges. The suit takes issue with the reliance on actively managed funds (with the exception of the Vanguard Institutional Index fund, all of the variable investment options are actively managed), and claims that “with the exception of the Vanguard Institutional Index fund (0.04% expense ratio) and the actively managed Vanguard Inflation-Protected Securities fund (0.10% expense ratio), all are costly, with expense ratios ranging from 0.69% to 1.08%, with a mean of 0.78% and a median of 0.89%.” This includes a fund that gets its own special call out, the “Excessively Expensive Stable Value Investment Option,” which the suit compares unfavorably to the Vanguard Stable Value Fund as having “not only a lower expense ratio of 0.35%, but a substantially higher crediting rate of 1.86%.”

‘Unreasonable on its Face’

Additionally, the suit claims that “any revenue sharing paid from the investment options offered by the Plan to compensate for administrative, recordkeeping and other services was unreasonable on its face because a retirement plan with the assets of the Plan could have easily achieved lower total plan cost (‘TPC’) by adopting a zero revenue sharing menu of investment options and/or by properly achieving all available savings from revenue sharing by establishing a properly structured and designed plan expense account (‘PEA’) that credited all revenue sharing to the benefit of the Plan and equalized the amount of participant fees (both direct and indirect) paid by participants of the Plan.”

The suit also takes issue with the amount of compensation received by plan advisor, UBS. “In addition to a $125,000 per annum base fee” (which the suit specifically claims is “excessive given the size of the Plan,” it notes that UBS also receives “additional compensation from third parties in connection with assets in which clients’ advisory accounts are invested [and this compensation is in addition to the fee that a client pays for investment advisory services].” The suit claims that “UBS has a vested interest in obtaining more compensation from third parties and related entities, which may run counter to the interests of the Plan of choosing the most prudent investment options.”

The suit alleges that “Novitex and the Benefits Committee breached their fiduciary duties by failing to monitor and ensure that UBS was paid reasonable compensation,” that “likewise, Transamerica was paid excessive recordkeeping and related fees in light of the assets and other characteristics of the Plan,” and that “Novitex and the Benefits Committee breached their fiduciary duties by failing to monitor and ensure that Transamerica was paid reasonable compensation.”

The claims in this suit may mirror those made in other cases, but it remains to be see if the brevity on specifics will survive the inevitable motion to dismiss.

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