Excessive Fee Suit Targets ‘One of the Most Expensive Plans in America’

A plan sponsor and their financial advisor have been charged with “designing and administering one of the most expensive large 401(k) plans in the country,” including the use of a set of custom target-date funds.

The suit, brought by seven current and former plan participants of the Fujitsu Group Defined Contribution and 401(k) Plan, claims that defendants’ “failure to prudently evaluate and manage the plan’s recordkeeping and administrative fees, their failure to obtain the least expensive share classes for the plan, their selection and retention of funds with excessively high fees, and their imprudent design and implementation of the plan’s custom target-date funds, constitute breaches of their fiduciary duties of prudence and loyalty.” The suit was filed June 30 in the U.S. District Court for the Northern District of California.

The plaintiffs allege that as of the end of 2013, the plan had approximately $1.3 billion in assets, a size at which the complaint alleges that the average plan has costs equal to 0.33% of the plan’s assets per year. However, plaintiffs claim that in 2013, total fees amounted to approximately 0.88% of plan assets (about $11,400,000), and that in 2014, total fees amounted to approximately 0.90% of plan assets (about $11,900,000) — fees that they claim are almost three times higher than the average for plans of similar size, making the plan one of the five most expensive defined contribution plans out of approximately 650 plans with assets of over $1 billion.

They go on to allege that if the plan simply maintained average expenses (which they say would likely exceed the costs a prudent fiduciary would incur), the plan would have paid only $4,260,000 in fees in 2013, and $4,400,000 in fees in 2014, “demonstrating that the Plan incurred at least $7 million per year in excess fees.”

Breaches Alleged

The plaintiffs claim that these high costs are attributable to three factors, “each of which constitutes a breach of Defendants’ fiduciary duties”:

  • Defendants failed to utilize the least expensive available share class for many mutual funds within the plan.
  • Defendants caused the plan to pay recordkeeping and administrative expenses far in excess of what a prudent fiduciary would pay for those same services.
  • Defendants systematically failed to manage the plan’s investments in a cost-conscious manner, selecting and retaining investments without regard for the cost of those investments and without considering the availability of far cheaper options that would have provided comparable or superior investment management services.

Custom Target-Date

The complaint claims that in 2011 the defendants hired Shepherd Kaplan, “an investment advisor with no public track record of managing or designing target-date funds,” to create a set of custom target-date funds and select the mutual funds that make up each target-date fund. The complaint states that the asset allocations within these target-date funds were “fundamentally flawed, allocating a wildly excessive percentage of assets to speculative asset classes such as natural resources, emerging market stocks, emerging market bonds, and real estate limited partnerships.” The suit goes on to claim that the strategies “reflected a fixation with unique and nontraditional asset and sub-asset classes,” and that the underlying investments used to populate the target-date funds were “inappropriate given their idiosyncratic investment methodology and documented failure to adhere to a consistent investment style.” Finally, the plaintiffs claim that many of the mutual funds held within these target-date funds had little to no track record, all of which led to the Fujitsu target date funds underperforming their benchmark indices “by several percentage points per year on an overall basis.”

Plan Iterations

Until late 2011, Fidelity acted as the Plan’s trustee and recordkeeper, and the plan offered what the plaintiffs termed a “dizzyingly large number of funds” — approximately 170 different funds as of the end of 2010, about half of which were managed by Fidelity.

In late 2011, the plan was overhauled when defendant Shepherd Kaplan became the plan’s investment fiduciary. This second iteration of the plan included approximately 33 different mutual funds, as well as a series of custom target-date funds called the Fujitsu LifeCycle Funds that were made up of some of the mutual funds held by the plan, in percentages consistent with each target-date fund’s asset-allocation model.

At the beginning of 2016, “having learned of Plaintiffs’ counsel’s investigation of the Plan, Defendants belatedly transferred a number of the Plan’s investment options into the least-expensive share class available,” according to the suit. And then, in March 2016 (and in what the suit described as “in further response to Plaintiffs’ counsel’s investigation and impending litigation”), the plan’s management and investment lineup was again overhauled, with the plan hiring a new investment adviser as the plan’s investment fiduciary, eliminating all of the “Fujitsu LifeCycle” funds, and introducing in their place a new set of custom target-date funds called the “Fujitsu Diversified” funds. These actions were characterized by the suit as reflecting that “Defendants themselves understood there were serious problems with the Plan’s investments and design.”

Recordkeeping Charges

As other similar litigations have alleged in recent weeks, the suit claims that, “given that it costs the same to provide recordkeeping to a participant with $1,000 in her retirement account as a participant with $100,000, the amount of money in participants’ accounts is generally not relevant to recordkeeping expenses. Thus, a prudent administrator would not pay recordkeeping fees based on account size, which could cause recordkeeping fees to be far higher than would be the case for per-participant pricing.” Those differences meant that (according to plaintiffs’ estimates) the plan paid between $2.8 million and $3 million more than it should have in the first plan iteration, $1.7 million (five to six times more) more than they would have paid during the second plan iteration, and $1.9 million (seven to nine times more) than they should have paid during the final iteration.

The lawsuit seeks certification of the class, a declaration that the defendants have breached their fiduciary duties in the manner described in the complaint, an order compelling defendants to personally make good to the plan all losses that the plan incurred as a result of the breaches of fiduciary duties described, and to restore the plan to the position it would have been in but for such breaches, an order enjoining defendants collectively from any further violations of their ERISA fiduciary responsibilities, obligations, and duties, and other equitable relief to redress defendants’ illegal practices and to enforce the provisions of ERISA as may be appropriate, including appointment of an independent fiduciary or fiduciaries to run the plan; removal of imprudent mutual funds as core investment options; transfer of plan assets in imprudent mutual funds to prudent alternative investments, removal of plan fiduciaries deemed to have breached their fiduciary duties, and, of course, an award of attorneys’ fees and costs.

The case is Johnson v. Fujitsu Technology & Business of Am., Inc., N.D. Cal., No. 5:16-cv-03698, complaint filed 6/30/16. Attorney for the plaintiffs is Nichols Kaster, PLLP.

Add Your Comments


  1. steff chalk
    Posted July 6, 2016 at 1:58 pm | Permalink

    Interesting opening “…have been charged with designing and administering one of the most expensive large 401(k) plans in the country.”
    By virtue of arithmetic alone, some plan is always THE most expensive in the country.
    Many alleged breaches – but no reference to the number of employees who are Retirement Ready. When will Successfully Preparing Individuals to Retire outweigh Cheap?

  2. url url'>Gregory Kasten
    Posted July 8, 2016 at 9:02 am | Permalink

    Steff is completely right. The lawsuits are NOT about whether you are at the median. Every plan fiduciary has to be able to answer this question: “Show how it was in the best interest of the participant to have costs that were above the lowest possible floor?” If you cannot answer that question by showing improved outcomes you have a problem.

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