Newest 401(k) Fee Suit Challenges Admin, RK, Investment Fees

By Nevin Adams • September 13, 2016 • 0 Comments
Another major employer has been charged in an excessive fee lawsuit that not only contests the fees paid by the plan, but administrative fees paid by the plan to the plan sponsor as well.

The suit claims that Northrop Grumman employees were “motivated to, and did, charge time and expenses to the Plan which were impermissible in nature, unreasonable, and unnecessary.”

‘Unfettered Control’

The lawsuit (Marshall v. Northrop Grumman Corp., C.D. Cal., No. 2:16-cv-06794, complaint filed 9/9/16), filed last week by the law firm of Schlicther, Bogard & Denton on behalf of seven former employees of Northrop Grumman Corp., alleges that the $19 billion plan paid nearly $10 million (between $1.7 million and $2.1 million/year) in administrative fees associated with the company’s retirement plan — even though the plan was already paying millions of dollars in fees to a third-party record keeper, Hewitt Associates (effective April 1, 2016, Fidelity Investments replaced Hewitt as the plan’s recordkeeper). The suit claims that Northrop executives had “unfettered control” over the amounts taken from the retirement plan, allowing the company to receive plan assets “in the guise of compensation” that wasn’t reasonable or necessary for the plan’s administration.

The suit notes that from 2010 to 2016, Hewitt was compensated for recordkeeping services at a fixed rate of $500,000 per month plus transaction-specific payments, or a rate of $39.47 per participant per year on the basis of 152,000 participants in all Northrop defined contribution plans, with that rate reduced to $37 per participant per year when the plans had more than 152,000 participants.

Financial Engines Rebates

However, the suit notes that, beginning in 2012, Hewitt also received indirect compensation from another plan service provider — Financial Engines — and that Financial Engines received a fee based on the percentage of assets in a participant’s 401(k) account. Moreover, the suit alleges that Financial Engines shares or kicks back to Hewitt 25% of the asset-based advice fee and 35% of the asset-based professional management fees that plan participants pay to Financial Engines for advice. The suit claims that Hewitt provides no service to Financial Engines or the plan participant to justify this payment to Hewitt from participants’ plan assets, and that since Financial Engines provided its advice services for less than the fee that was being charged to participants who paid it, “participants paid Financial Engines excessive fees for the services Financial Engines provided to them.”

Moreover, the suit notes that while Hewitt’s recordkeeping fee was largely flat from 2009 through 2015, the number of participants, and in turn 401(k) accounts, Hewitt was required to recordkeep declined by more than 31,000 (23%), from 134,000 to 103,000.

At the same time, the suit claims that the amount of asset-based compensation Hewitt received from Financial Engines “skyrocketed nearly ten-fold, increasing from approximately $258,120 in 2013 to over $2.3 million in 2015, even though the recordkeeping services provided by Hewitt to the Plan remained the same or declined.” The plaintiffs claim that, based on the plan features, the nature of the administrative services provided by Hewitt, the plan’s number of participants (100,000-130,000), and the recordkeeping market, “the outside limit of a reasonable recordkeeping fee for the Plan in the time frame of 2010 through 2015 would have been $2.5-$3.3 million per year (or at most $25 per participant with an account balance).” Since the plan paid $5.9-$7.5 million (or approximately $48 to $73 per participant) per year from 2010 to 2015 for recordkeeping services, the plaintiffs claim was nearly triple a reasonable fee for these services, resulting in millions of dollars in unreasonable recordkeeping fees each year, all of which was paid from plan assets. “Had Defendants ensured that participants were charged only reasonable fees for recordkeeping services, Plan participants would not have lost in excess of $30 million in their retirement savings through unreasonable recordkeeping fees and lost returns,” according to the suit.

The suit also challenges the decision by the plan to retain as an active equity investment option the Emerging Markets Equity Fund, while during 2010 the plan fiduciaries “determined that an active investment strategy for the Plan’s equity and fixed income investment options was no longer prudent or in the Plan participants’ best interest.” That fund is alleged to have “consistently and dramatically underperformed its benchmark index,” while also being the most expensive fund on the plan menu.