Breaking Down an Excessive Fee Settlement

By Nevin Adams • November 18, 2015 • 0 Comments
Another “excessive fee” lawsuit was settled recently — but what’s more interesting than the settlement amount is the speed with which it was reached and how it’s going to be spread among the parties.

The settlement of the class action came in the case of Karolyn Kruger, M.D., et al v. Novant Health, Inc., and the settlement proposed by the parties was $32 million. The case, which was brought in March 2014, alleged that Winston-Salem, N.C.-based Novant DC plan executives breached their fiduciary duties by providing “excessive compensation” to service providers (Great-West Retirement Services and D.L. Davis & Co., a brokerage company that provided the plans with what was described as limited marketing and enrollment services), and that the investment options offered participants were “unreasonably expensive.”

The settlement agreement acknowledges that the defendants “dispute these allegations and denied and continue to deny liability for any alleged breaches or ERISA violations.” At the time the complaint was filed by the law firm of Schlichter, Bogard & Denton, Novant’s retirement program consists of approximately 25,000 participants with total assets around $1.2 billion.

Settlement Terms

The settlement will be deposited in an interest-bearing account, with notice provided to affected Novant plan participants (past and current). That said, the settlement also acknowledges the following distributions:

  • $25,000 for each of the seven named plaintiffs in the case.
  • Not more than $10,666,666 (one third of the settlement amount), as well as reimbursement for costs incurred of no more than $95,000 for plaintiffs’ counsel.
The payment to the named plaintiffs is an amount the settlement notes is “well in line with precedent recognizing the value of individuals stepping forward to represent classes — particularly in a case like this one, where the potential benefit to any individual does not outweigh the cost of prosecuting the claim and there are significant risks, including the risk of no recovery, the risk of alienation from their employers and peers, and the risk of uncompensated time and energy devoted to a lawsuit with uncertain prospects for success.”

Aside from the role the law firm played in identifying and bringing the cause of action, according to the settlement agreement, the defendants “produced almost twenty thousand pages of materials,” and that in preparing for mediation, plaintiffs’ counsel spend “hundreds of hours thoroughly reviewing and extensively analyzing” those materials, as well as “hundreds of hours thoroughly researching publicly available documents (which they say wound up totaling more than 2,500 documents and “tens of thousands” of pages) related not only to the plans, but all aspects of Novant’s business operations with key service providers.”

Alleged Fiduciary Issues

So, what were the Novant defendants alleged to have done wrong?

  • Continuing to include “retail” share class versions of the investment funds offered through Novant’s Retirement Plus Plan, even though significantly cheaper, but otherwise identical, institutional share class versions of the same funds (or other lower-cost alternatives) were available.
  • Not putting the Retirement Plus Plan’s record keeping services out for competitive bidding since 1998 and, as a result, overpaying for administrative services.
  • Breaching their fiduciary duties by allowing the plan to pay D.L. Davis unreasonable fees for providing participant communication and education services, and further alleged that those unreasonable fees were made due to Novant’s extensive business relations with Derrick Davis, the owner of D.L. Davis & Co., and his companies unrelated to Novant’s plan.
While most of the ills alleged of the Novant fiduciaries have shown up in other excessive fee lawsuits, one thing that might make this case somewhat different has to do with Novant’s other business relationships with D.L. Davis. According to the complaint, Davis, through other corporate entities he owns or controls, has entered into a variety of land development projects and office building leasing arrangements in the greater Winston-Salem area with Novant, raising the possibility of conflicts of interest.

Defendant’s Response

Interestingly enough, Novant, while supporting the settlement terms as “a fair and reasonable compromise,” took time in a “statement of non-opposition” to rebuff several of the assertions made by the plaintiffs, noting that the revenue-sharing payments were used to cover the costs of plan administration, and that the “retail” investment funds “cost nearly the same as — and in some cases less than — the institutional shares the complaint claims Novant should have offered instead.”

Additionally, they claim that the plan fiduciaries had issued an RFP for record keeping services in 2012, and “had placed the plan’s administrative services and fees under further review, engaging the help of an outside consultant, in the months before the complaint was filed in 2014.” Despite those assertions, Novant acknowledged that ERISA fee cases such as this one “often involve many years of costly, hard-fought litigation and are rife with uncertainty for plaintiffs and defendants alike,” noting that a “fair and reasonable compromise that eschews the long road of litigation in favor of providing immediate and lasting benefits to Novant employees, former employees, and retirees is in the best interests of both Novant and the putative class members.”

Other Agreements

Of course, it isn’t just about the money. As part of the settlement, the defendants agreed, in advance of or during the four-year settlement period, to:

  • conclude a comprehensive RFP-driven competitive bidding process, conducted and led by an outside consultant, for record keeping, investment consulting and participant education services;
  • engage a mutually agreed upon independent consultant to assess the adequacy of the RFP process and assess defendants’ anticipated selection of service providers for the plans;
  • ensure that the plans’ administrative service providers are not reimbursed for their services based on a percentage-of-plan-assets basis;

  • review all current investment options and revise the investment options as needed, “ensuring that those options are selected or retained for the exclusive best interests of the plans’ participants;”
  • have the independent consultant review the investment option selection process and provide recommendations, if necessary;
  • have the independent consultant conduct an annual review, for four years, of Novant’s management of the plans;
  • remove Davis and related entities from any involvement with the plans or Novant’s employee benefit plans;
  • not enter into any new real estate or business relationships with Davis and related entities;

  • not offer any Mass Mutual investments in the plans or any other investment that provides compensation to Davis and related entities (the settlement notes that D.L. Davis is a registered broker of MML Investors Services, a subsidiary of the Massachusetts Mutual Life Insurance Co.);
  • provide accurate communications to participants in the plans;
  • not offer any brokerage services to the plans; and
  • adopt a new investment policy statement to ensure that the plans are operated for the exclusive best interests of the plan participants.