A new name in excessive fee litigation emerges—filing suit against a (relatively) smaller plan, treading some new ground(s) and covering some familiar territory.
The participant-plaintiffs here (Goodman v. Columbus Reg’l Healthcare Sys., Inc., M.D. Ga., No. 4:21-cv-00015, complaint 2/2/21)—a whopping seven—claim that Columbus Regional (which terminated the plan in question effective May 31, 2019, but at the time had approximately $183 million in assets and some 4,700 participants) “failed its duties from start to finish” by:
- Failing to prudently select and monitor the plan’s investment options and “failing to timely remove imprudent investments”
- Selecting and retaining investments with “unjustifiably high management fees”
- Failing to monitor and “prudently manage” the plan’s administrative expenses
- Causing the plan to “enter into one or more prohibited transactions with a party-in-interest to the plan”[i]
- “Failing to adequately disclose to participants the information they needed to make informed investment decisions, including information about the excessive fees being charged to participants’ individual retirement accounts.”
The suit, filed in the U.S. District Court for the Middle District of Georgia by Williamson & York LLC and James White Firm LLC, takes pains to note that the “plaintiffs are not second-guessing Columbus Regional’s investment decisions with the benefit of hindsight,” but claims that the information they now have was “readily available” to the plan fiduciaries at the time, and that they “either failed to do even minimal due diligence or, worse, simply ignored readily available information,” and that, they claim, means that Columbus Regional “stocked the Plan with overpriced and underperforming funds, needlessly wasting participants’ money.”
The suit does put a figure on this alleged waste: $4.6 million for the period Jan. 1, 2015 through the date of the plan’s termination, at least compared with Vanguard funds selected as a comparison. Oh, and those losses “continue to accrue investment opportunity losses,” according to the suit.
Duty ‘Bound’?
The suit heads into some new territory by outlining “specific fiduciary duties,” which include certain common touchstones like “the continuing duty to monitor investments and to remove or replace imprudent investments,” a “duty of prudent delegation,” and a duty to “defray reasonable administrative expenses,” alongside some that might have been considered at least implied (the duty of competence)—and at least one of which you might not have been previously aware “the duty to justify high-cost active management strategies.”
In support of the latter premise, the plaintiffs refer to active management as “high-risk strategy.” They also set aside a section devoted to the notion that “expense ratios are the best way to understand investment management fees and costs.”
The American Century family of target-date funds and the plan’s default investment option selected by the fiduciaries was also called out—alleging that the family “did not have a consistent track record of outperforming the market”—oh, and the suit claims that the “A” class of shares was chosen “when the very same funds were available in a much lower priced, institutional share class.” All of which added up to $403,654 in “excess fees” … “as a result of this failure alone.”
‘Interest’ Bearing
The plan’s choice of stable value fund also came into question—and this is the sticking point regarding the allegations of a conflict-in-interest cited above. The plaintiffs called into question Transamerica’s retention of the spread between the crediting rate and the actual returns generated on the pooled investment. Besides that, the plaintiffs claim that “a substantially identical MassMutual stable value fund would have paid returns that were on average almost three times higher…” And that decision, they claim, cost the plan/participants $2.7 million during the class period.
Oh, and more directly than some—they also allege that “revenue sharing hid the Plan’s true costs,” though they acknowledge such practices are “not necessarily improper, it was abused here.” As for investment advisory expenses—an item that has escaped scrutiny in the vast majority of these excessive fee suits—the plaintiffs here claim that Merrill Lynch’s charges (based on Form 5500 filings) was $175,000 to $260,00, whereas they allege that “publicly available” data would suggest that that a “reasonable fee” for those services was “in the range of $50,000 to $75,000 annually.”
And, hitting all the “usual” litigation touchpoints, these plaintiffs also challenged the fees paid to the plan’s recordkeeper (Transamerica)—$430,000/year (citing the Form 5500 filing) versus the $250,000 ($55/participant) the plaintiffs claim would be reasonable. The plaintiffs allege that the actual expenses paid for recordkeeping and advisory services was approximately $3.3 million—whereas they claim that reasonable administrative expenses would have been approximately $1.4 million.
Oh—and as for the last point alleged, the plaintiffs say that the disclosures to participants “consisted of incomplete and vague boilerplate furnished by the very same service providers that benefited from the excessive fees and kickbacks.” As a result, “Columbus Regional’s wasting of plan assets went unchecked, costing the participants millions of dollars in retirement savings.”
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.
[i] More specifically, Transamerica (and its affiliate corporation, non-party Transamerica Retirement Solution, which provided “recordkeeping and other services.”
