$10 billion 401(k) Smacked with Excessive Fee Suit

Yet another multi-billion-dollar plan has been sued for recordkeeping and managed account services that the plaintiffs claim were twice what could have been paid for those services.

The target this time is the U.S. Bank 401(k) Savings Plan—and bringing suit on behalf of the nearly 90,000 participants—and the plaintiffs Ana L. Dionicio and Alejandro M. Wesaw—have asserted that “during the putative Class Period (January 5, 2017, through the date of judgment), the US Bank defendants “breached the duty of prudence they owed to the Plan by requiring the Plan to ‘pay[ ] excessive recordkeeping [and administrative (RKA) and managed account] fees’”—and “by failing to remove their high-cost recordkeeper, Alight Solutions (‘Alight’)1, and their high-cost managed account service provider, Alight Financial Advisors (‘AFA’).”

The plaintiffs[i] further assert that “these objectively unreasonable recordkeeping and managed account fees cannot be contextually justified, and do not fall within ‘the range of reasonable judgments a fiduciary may make based on her experience and expertise’”—the latter drawn from the U.S. Supreme Court ruling in Hughes v. Northwestern. As is common in such suits, they claim that the defendants actions (or lack thereof, as the case may be), caused the participants to pay excessive fees, that they failed to leverage the plan’s size to negotiate better rates (for recordkeeping AND managed account services), and that they failed to undertake a competitive bidding process to ascertain whether better fees could be obtained—and that, ultimately the plan participants they seek to represent suffered “tens of millions of dollars of harm in the form of lower retirement account balances than they otherwise should have had in the absence of these unreasonable Plan fees and expenses.”

‘Boilerplate’ Statements

The allegations are pretty much boiler plate at this point—complete with tables of ostensibly comparable programs (at least with regard to participant count and asset size)—but with some interesting additional commentary. More on that in a minute. 

Standard language in such things repeated here (Dionicio v. US Bancorp, D. Minn., No. 0:23-cv-00026, complaint 1/5/23) includes acknowledgements that:

• The Plaintiffs and all participants in the Plan did not have knowledge of all material facts (including, among other things, the excessive RKA and managed account fees) necessary to understand that Defendants breached their fiduciary duties until shortly before this suit was filed (to establish a “start” date for any statute of limitations claims); and
• Having never managed a mega 401(k) Plan, meaning a plan with over $500 million dollars in assets, Plaintiffs and all participants in the Plan, lacked actual knowledge of reasonable fee levels available to the Plan.

‘Axiomatic’ Assumptions

Now, despite having just acknowledged that they didn’t know what reasonable fee levels were, the suit states as “axiomatic in the retirement plan services industry that the more participants in a plan, the lower the effective RKA fee per participant the plan can negotiate. All prudent plan fiduciaries and their consultants and advisors are aware of this industry dynamic.”

And—doubtless in response to recent federal court decisions[ii] that have dismissed similar suits that have relied on comparator plans with no reference to comparable service levels, these plaintiffs claim that “for mega plans, like the U.S. Bank Plan, any immaterial variations in the way certain services are received by one plan compared to another plan have an immaterial impact on the reasonable market rate for Bundled RKA services.” They go on to assert that, “as a result, comparisons of the fees paid by similar sized plans are meaningful and provide a reasonable basis for determining whether an inference of imprudence is warranted based on the RKA fees being paid by any specific plan.” The suit goes on to note that, “additionally, any minor variation in the level and quality of Bundled RKA services described above and provided by recordkeepers has little to no material impact on the fees charged by recordkeepers.”

Different ‘Strokes’

And then—a direct refutation to those other federal court decisions—the plaintiffs conclude that “accordingly, comparisons of the Total RKA fee rate of different, similarly sized plans can provide meaningful information to help a plan fiduciary understand how its fees compare to a range of RKA fees without regard for minor and immaterial service level variation.”

As for benchmarking, the plaintiffs here assert that “a benchmarking survey alone is inadequate. Such surveys skew to higher ‘average prices,’ that favor inflated recordkeeping fees. To receive a truly ‘reasonable’ recordkeeping fee in the prevailing market, prudent plan fiduciaries engage in solicitations of competitive bids on a regular basis.”

Now, the plaintiffs don’t claim to know that the fiduciary defendants didn’t conduct that RFP—but they nonetheless claim that “unlike a hypothetical prudent fiduciary, Defendants followed a fiduciary process that was ineffective given the objectively unreasonable RKA fees it paid to Alight and in light of the level and quality of RKA services it received.”

Fee ‘Sense’

What were those unreasonable recordkeeping fees? Well, according to the plaintiffs—and as laid out in an accompanying table, from the years 2016 through 2021 (“based upon publicly available information in the Plan’s DOL 5500 Forms”), “the Plan paid an effective average annual Total RKA fee of $41 per participant.” That, they claim, stands in sharp contrast to their calculations for similar sized plans, that the plaintiffs claim paid a total RKA fee of around $23 per participant (the comparator plans paid anywhere from $18 to $28 per participant, according to the plaintiffs’ calculations).

Interestingly enough, the plaintiffs assert as fact that “the comparator Plans serviced by other recordkeepers and who charged less received materially the same level and quality of RKA services,” apparently hanging their hat on the notion that “each of these Plans note in their fee disclosures that they received general administrative services just like the U.S. Bank Plan in the form of “recordkeeping, legal, accounting, trustee, and other administrative fees.” 

All in all, the plaintiffs here claim that, “during the Class Period, the Plan additionally cost its participants on average approximately $1,588,130 per year in unreasonable and excessive Total RKA fees, which equates to, on average, approximately $18 per participant per year.” Moreover, during the years 2016 to 2021, and “because Defendants did not act with prudence, and as compared to other plans of similar sizes and with a materially identical level and quality of services, the Plan actually cost its participants a total minimum amount of approximately $9,528,778 in unreasonable and excessive Total RK&A fees.”  During that same period “based upon information derived from 404(a)(5) participant fee disclosures, and publicly available information reported on 5500 forms and the accompanying financial statements, because Defendants did not act prudently, and as compared to other Plans of similar sizes and with a materially identical level and quality of services, the Plan caused Plan participants to suffer losses (when accounting for compounding percentages/lost market investment opportunity) a total cumulative amount in excess of $16,637,115 in Total RKA fees.” 

Participant ‘Perspective?’

Oh, but if that reference seems a bit cursory to you, the suit notes that “plaintiff has participated in several 401(k) plans from other employers and there have been no material differences in the services that she has received.” And if their point wasn’t clear enough, the suit states that “plaintiff does not need to provide examples of similar plans receiving the same services in the same year where the primary drivers of price in large plans are the number of accounts and whether the plan's fiduciaries solicited competitive bids, rather than the marginal cost of recordkeeping for each participant.”

While most of the suit focuses on the recordkeeping fees, there was also the issue—with comparable assertions put forth—with regard to the managed account fees. As part of that assertion, the plaintiffs make astonishing claims like “managed account services are offered by covered service providers to increase the revenue they generate through their relationship with a retirement plan, as Alight does,” followed by “Alight promotes its managed account services over other potential solutions because the covered service provider will earn more revenue when participants use the managed account services.”

Not surprisingly, the suit states that “managed account services have historically been expensive compared to other alternatives, such as target date funds that provide the materially same service at a much lower cost.”

And then, as was done with the recordkeeping fees, the plaintiffs present a separate table of allegedly comparable plans and the fees they ostensibly paid for managed account services—more specifically, the plaintiffs assert that those plans were “…receiving the same material managed account services,” and “are paying fee rates at every tier significantly lesser than Plan participants.” Indeed, the plaintiffs state that “all the comparator Plans provide the exact same managed account services in the form of asset allocation based on the risk tolerance of the investor, with little to no individual customization.”

Will the court be persuaded by these assumptions and assertions? We shall see.

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.