Teamsters Plan Draws Excessive Fee Suit

A new excessive fee lawsuit treads familiar ground, but comes from a new direction, and takes on the practices of a multi-employer defined contribution retirement plan for union members.

The suit (Ybarra v. Bd. of Trs. of Supplemental Income Tr. Fund, C.D. Cal., No. 8:17-cv-02091, complaint filed 11/30/17) was filed in the U.S. District Court for the Central District of California by plaintiffs Felipe Ybarra and Cesario Serrato as representatives of the participants and beneficiaries of the Supplemental Income 401(k) Plan, a $921 million retirement plan that (as of 12/31/16) had 27,178 participants, including Teamsters and other union workers.

The suit alleges that the plan fiduciaries breached their fiduciary duties of prudence and loyalty by:

  • Offering retail class mutual fund shares when identical lower cost institutional class shares were available, resulting in participants “paying additional unnecessary expenses with no value to the Class.”
  • Overpaying for recordkeeping by paying the plan recordkeeper, John Hancock Retirement Plan Services, and its predecessor, New York Life Insurance Company, “excessive fees through revenue sharing arrangements with the mutual funds offered as investment options under the plan.”

Retail ‘Tale’

According to the suit, the plan offers 21 investment options: 20 mutual funds and a stable value fund, but since 2011 have allegedly offered only retail class mutual fund shares as investment options, “…even though at all times lower cost institutional class shares of those exact same mutual funds were readily available to the Plan.” Indeed, according to the suit, the plan continues to offer retail class shares rather than institutional class shares, a decision that the plaintiffs claim cause “…and continue to cause the Class to pay additional investment costs ranging from 0.05% to 0.64% on every mutual fund offered through the Plan.” Moving to specific claims, the suit alleges that “Plan participants lost $319,329 in 2015 alone because they paid an additional 0.42% in operating expenses to invest in class A shares of Invesco Equity and Income Fund instead of the less expensive class Y shares available to the Plan.”

Picking up on themes from similar lawsuits, the suit takes issue with the notion of asset-based recordkeeping fees since it claims that recordkeeping for 401(k) plans like the Teamsters plan and its participants is “fundamentally the same as keeping records for a brokerage account with a few additional points of data,” going on to state that “…costs are driven purely by the number of inputs and the number of transactions,” and that “because the cost of recordkeeping services depends on the number of participants, not on the amount of assets in the participant’s account, the cost of providing recordkeeping services to a participant with a $100,000 account balance is the same for a participant with $1,000 in her retirement account.”

And while the suit mistakenly refers to recordkeepers for defined benefit plans, it moves on the criticize the use of revenue sharing, since, being asset-based, “they bear no relation to the actual cost to provide services or the number of plan participants and can result in payment of unreasonable recordkeeping fees.” The plaintiffs move on to conclude that, “based on the number of Plan participants and the assets in the Plan, a reasonable recordkeeping fee for the Plan is, at most, approximately $40 per participant.”

Revenue ‘Shearing’

The plaintiffs go on to state that “the unreasonable fees paid to John Hancock through its revenue sharing arrangements directly resulted from Defendants’ choice of improper mutual fund share classes,” and then that, as other suits have, the defendants “failed to use the Plan’s bargaining power to leverage John Hancock to charge lower recordkeeping fees for the Plan participants,” and that they “failed to take any or adequate action to monitor, evaluate or reduce John Hancock’s fees.” Specifically, they note that the plan’s failure to offer any institutional class mutual fund shares and the replacement of the Fidelity target date funds with retail class JP Morgan target date funds in 2016 “show Defendants failed to implement or follow any rational process for reviewing and evaluating the investment options offered to Plan participants, including reviewing whether appropriate mutual fund share classes were being offered or whether less expensive alternatives with lower revenue sharing were available.”

While for the very most part the suit treads familiar ground, the naming of a union retirement plan seems to be a “first” in this particular type of litigation. It’s also perhaps noteworthy that one of the plaintiffs’ lawyers was Franklin D. Azar & Associates, a Colorado-based firm which heretofore primarily touted its services as a personal injury law firm that specializes in motor vehicle accidents, defective products, and slip-and-fall accidents. Though it has now, after “trolling” for 401(k) class action plaintiffs, filed several of these excessive fee cases, including one filed the same day as the Ybarra complaint.

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