Terms Announced in Proprietary Fund Settlement

By Nevin Adams • August 17, 2018 • 0 Comments
We now know the terms of an excessive fee lawsuit settlement reported a month ago.

In early July, Deutsche Bank Americas Holding Corp. settled claims of a class action brought by Ramon Moreno and Donald O’Halloran, former participants in the Deutsche Bank Matched Savings Plan. The parties informed the court that they reached a “settlement in principle on July 8” – the day before the suit was to go to trial.

The suit, filed on behalf of a proposed class of about 20,000 employees, claimed that Deutsche Bank directed more than $300 million of its workers’ retirement savings toward an in-house index fund with fees 11 times higher than a comparable Vanguard fund – fees that went “directly into Deutsche Bank’s pocket.” Plaintiffs had also alleged that the plan included actively managed proprietary funds that charged investment management fees two to five times higher than other “actively managed funds in the same style” – and that those proprietary funds consistently underperformed benchmarks. As other excessive fee suits have alleged, these plaintiffs also challenged the “jumbo” plan’s failure to consider/include mutual fund alternatives, such as collective funds, that carry lower fees. Moreover, the plaintiffs had alleged that for two of those proprietary funds, this plan was the only DC plan among roughly 1,400 such plans with more than $500 million in assets to hold these funds.

Terms Limits

According to the settlement agreement in Moreno v. Deutsche Bank Am. Holding Corp., E.D.N.Y., No. 1:15-cv-09936, plaintiffs’ motion for preliminary approval of class action settlement 8/14/18), Deutsche Bank (or its insurers) will:

  • pay a gross settlement amount of $21,900,000;

  • delegate all decisions regarding proprietary investments (i.e., investments affiliated with Deutsche Bank) to an independent fiduciary; and

  • seek guidance from the independent fiduciary regarding whether any of the mutual funds in the plan should be replaced with alternative investment vehicles such as separate accounts or collective trusts.

The parties state that this settlement was “negotiated at arm’s length by experienced and capable counsel, with the assistance of a well-respected mediator, Retired Judge Layn Phillips,” that it is “consistent with the class that was previously certified by the Court for litigation purposes (subject to minor housekeeping adjustments),” that it “provides for significant monetary relief that compares favorably to settlements in other cases,” and that it “provides for meaningful prospective relief in the form of independent fiduciary review of the Plan’s proprietary investment options and investment vehicles” and is “appropriately tailored to the claims that were asserted in the action.” Oh, it is not opposed by the defendants in the suit.

The settlement also acknowledged the “extensive” discovery process, including:

1. production of over 90,000 pages of documents by Defendants;
2. production of over 44,000 pages of documents by third parties;
3. production of additional documents by the Class Representatives;
4. eight depositions of defense fact witnesses;
5. depositions of each of the Class Representatives;
6. two third-party fact witness depositions; and
7. five expert depositions (following an exchange of their expert reports).

Based on that evidence, and in anticipation of the trial, the parties submitted “over two dozen witness declarations, hundreds of exhibits, and extensive proposed findings of fact and conclusions of law.”

‘Main’ Events

By way of supporting the appropriate size and structure of the settlement, the agreement cited the example of Main v. American Airlines, Inc., 248 F. Supp.3d 786, 793-94 (N.D. Tex. 2017), which also alleged breaches as a result of the use of proprietary index funds, proprietary actively managed funds, and failure to use separate account alternatives to mutual funds, and which had recovery that was, on an absolute basis ($21.9 million vs. $22.0 million) almost identical, but “significantly greater than American Airlines on a per-participant basis and percentage-of-assets basis.”

The settlement agreement goes on to explain that the $21.9 million recovery “represents over 50% of the estimated damages associated with the proprietary funds in the Plan (using the average of Dr. Pomerantz’s two models for the seven actively managed proprietary funds, plus the damages he calculated for the three proprietary index funds), and approximately 38.5% of the total investment damages including non-proprietary funds.” Moreover it notes that if recordkeeping damages are included, the $21.9 million recovery represents over 34% of total estimated damages.

Outcomes Oriented

Part of the argument supporting the agreement also entails recounting the potential uncertainty as to the outcome. Here the plaintiffs noted that the defendants presented “a plethora of arguments aimed at avoiding liability,” including assertions that proprietary funds never made up than 50% of the funds in the Plan’s core lineup, that the Plan’s Qualified Default Investment Alternative (default fund) was never a proprietary fund, that no proprietary funds were added during the statutory period, and that the percentage of plan assets invested in proprietary funds in the plan as of March 31, 2017 was only 6.7%.

Moreover, the defendants also emphasized the fact that they relied on an outside investment consultant (Aon Hewitt), which reviewed the plan’s investment lineup during and prior to the class period, and that while “Plaintiffs pointed out that outside advice from consultants does not operate as a complete whitewash,” they noted, “it was uncertain whether and to what extent this outside advice would color the Court’s findings on liability.”

The plaintiffs also cited the case of Brotherston v. Putnam Investments, LLC (on appeal to the 1st Circuit, but decided in favor of the plan fiduciary defendants “despite making a persuasive showing that the fiduciaries were ‘no paragon of diligence’ and that the defendants had failed to monitor the plan’s investments”).

Party ‘Flavors’

Under the settlement, attorneys’ fees are subject to court approval and are capped at no more than 30% of the Gross Settlement Fund ($6,570,000), plus litigation costs and settlement administration expenses. The settlement also provides for service awards up to $10,000 per Class Representative, subject to court approval. Nichols Kaster PLLP represents the plaintiffs, while Goodwin Procter LLP represents Deutsche.

So how much will the approximately 34,700 class members get? Well, “after accounting for any attorneys’ fees, expenses, and class representative service awards approved by the Court,” the Net Settlement Amount will be allocated among eligible Class Members in proportion to their weighted quarterly account balances in the Disputed Investments (“Class Members’ balances in the Deutsche Funds will be weighted three times more heavily than balances in the Non-Deutsche Funds”) – to the tune of about $631.12 per Class Member, according to the settlement agreement.