Small Plan Participant Seeks Big Class Action Against Nationwide

By Nevin Adams • July 03, 2017 • 0 Comments
A participant in a plan with 27 participants is seeking the return of the “excessive and unreasonable asset-based fees charged by Nationwide for recordkeeping and administrative services, and to prevent Nationwide from charging those excessive fees in the future.”

The suit (Schmitt v. Nationwide Life Ins. Co., S.D. Ohio, No. 2:17-cv-00558, complaint filed 6/27/17), filed by one Alana Schmitt, “Individually and as representatives of a class of participants and beneficiaries on behalf of the Andrus Wagstaff, PC 401(k) Profit Sharing Plan and all other similarly situated individual account retirement plans,” says that while small plans such as the AW plan have the same legal and regulatory obligations as Fortune 500 companies, they “lack the expertise to navigate the labyrinth of federal regulations governing employee benefit plans or the time and resources to seek out and employ expert financial and legal consultants to understand the complexities of the marketplace.”

The AW plan — which at the end of 2015 had 27 participants and $1.1 million in plan assets — contracted with Nationwide under Nationwide’s Retirement Flexible Advantage Retirement Plans Program to provide recordkeeper and other services for a fee of 1% per year of the AW plan assets.

However, citing a survey by NEPC, the suit claims claim that the median recordkeeping cost of 113 plans was $64 per plan participant in 2015. However, the suit claims that, “as a result of Nationwide’s asset-based fees, in 2014 the AW Plan paid approximately $9,400 for recordkeeping services for a plan that had only 15 participants at the end of the year, amounting to $625 per participant.” Those recordkeeping fees increased to $11,000 for 22 participants the next year, amounting to $500 per participant, according to the suit. Consequently, the plaintiff alleges that Nationwide’s fees are “almost 10 times more than the reasonable amount of compensation that should have been charged to the AW Plan.”

Not mentioned in the suit is that the average plan size of the respondents to the NEPC survey was $1.1 billion and each plan had more than 12,000 participants.

The suit claims that, based on information on the Nationwide website (37,000 retirement plans, 2.4 million participants and $114 billion in retirement plan assets in the Nationwide Retirement Flexible Advantage Retirement Plans Program) and the 1% fee charged to the AW plan, “Nationwide potentially earns over $1 billion a year in excessive compensation at the expense of the individual plan participants.”

The suit notes that while the AW plan fiduciaries may have breached their fiduciary duties to the AW plan by entering into the Nationwide contract, “the U.S. Supreme Court made it clear in Harris Trust and Savings Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 245 (2000), that 29 U.S.C. § 1132(a)(3) authorizes a civil action against a non-fiduciary who participates in a transaction prohibited by 29 U.S.C. § 1106(a).”

Disclosure Dismissal

The suit invokes a 2014 settlement of a class action against Nationwide for “failing to disclose indirect compensation received from mutual funds to retirement plans,” but notes that “after settling that action in 2014, Nationwide continued to charge Plans unreasonable fees for recordkeeping and administration but now discloses its unreasonable fees” in 408(b)2 disclosures. “However, merely disclosing that a Plan is paying an unreasonable fee does not make the fee reasonable…”

‘Responsible’ Recordkeepers

The plaintiff describes recordkeeping services for a qualified retirement plan as “essentially fixed and largely automated,” and – as other excessive fee litigation has alleged previously – claims that the cost of recordkeeping and administrative services “depends on the number of participants, not the amount of assets in the participant’s account.” They note that “responsible recordkeepers charge recordkeeping fees for each plan participant rather than as a percentage of plan assets,” because otherwise, “as plan assets increase through participant contributions or investment gains, the recordkeeping revenue increases without any change in the services provided.”

The suit claims that the Nationwide program “takes advantage of the lack of sophistication and bargaining power of the AW Plan and other similarly situated plans by unscrupulously adding 75 to 100 basis points (0.75% to 1.00%) to the cost of every investment option available to retirement plan investors in the AW Plan and the Plans.” Moreover, the plaintiff alleges that where the Nationwide fee is less than 1%, Nationwide receives the balance of the 1% fee via revenue-sharing from the mutual fund provider. They note that Vanguard charges 9 basis points (0.09%) to manage and administer the Vanguard Short Term Bond Index Fund (Admiral Class) investments, but Nationwide charges 100 basis points (1%) to track a participant’s investment in the Vanguard Short Term Bond Index Fund on the Nationwide platform.

The suit claims that if Nationwide charged the median fee, the AW plan (and similarly situated plans) would pay $1,728 per year for recordkeeping services, rather than $11,000 per year, saving the plan participants 84 basis points (0.86%) per year – and that the plaintiff would have paid $53 in fees in 2015 rather than $373, a savings of $320.

Other Examples

The suit claims that Nationwide has charged other Plans unreasonable fees to serve as the recordkeeper, citing the examples of the EXAL Corporation 401(k) plan, with 431 active participants and average assets of $20.4 million, which the suit says paid Nationwide $134,673 in direct and indirect compensation for recordkeeping in 2015, or $323 per participant. They note that:

  • the Claas of America, Inc. Employees’ Savings Plan, with 310 active employees and $21 million in total assets, paid Nationwide $127,900 in direct compensation and undisclosed indirect compensation, or $414 per participant;

  • the JMAC, Inc. 401(k) Plan, with $21 million in assets and 634 active participants, paid $142,448 in direct compensation for recordkeeping in 2015, or $224 per participant; and

  • the Rocky Brands, Inc. 401(k) Plan, with 527 active participants and average assets of $25.8 million, paid Nationwide $60,056 in direct compensation and undisclosed indirect compensation, or $114 per participant.

In what it describes as “an apparent attempt to hide the actual dollar amount of fees being paid by the AW Plan and the individual benefit plan investors,” the suit claims that the 2014 and 2015 Form 5500s show that no administrative or other fees were paid by the AW plan… to anyone. It goes on to claim that those reporting “failures” “…appear deliberately intended to conceal the amount of Defendants’ actual compensation for services provided to the Plan,” and that those errors “suggest that Defendants have also failed to comply with the disclosure requirements” of 408(b)2.

The lawsuit, filed in the U.S. District Court for the Southern District of Ohio by Dyer Garofalo Mann & Schultz, seeks to represent a class of as many as 37,000 retirement plans and 2.4 million individual investors — those invested in the Nationwide Retirement Flexible Advantage Retirement Plans Program.

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