Another large 401(k) plan has been sued for a breach of fiduciary duty involving excessive fees for recordkeeping—and managed account services it says were worth nothing.
This one has been filed in the US District Court for the Northern District of Illinois by one Ryan K. Gosse, individually and as representative of a Class of Participants and Beneficiaries of the $1.5 billion Dover Corporation Retirement Savings Plan which, according to the suit has some 18,331 participants. More specifically, the suit alleges that the plan fiduciaries “breached the duty of prudence they owed to the Plan by requiring the Plan to ‘pay[ ] excessive recordkeeping fees [and managed account fees],’ and by failing to timely remove their high-cost recordkeepers, Wells Fargo Bank N.A. (“Wells Fargo”) (at least from 2009—through September 2020)1 and Bank of America, N.A. d/b/a Merrill (“Merrill”) (September 2020-present), and managed account provider, Financial Engines (2017- 2020).”
Preemptive Claims
Borrowing a reference point from the recent U.S. Supreme Court decision in Hughes v. Northwestern University, the plaintiff here (Gosse v. Dover Corp., N.D. Ill., No. 1:22-cv-04254, complaint 8/11/22) preemptively noted 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.’” Also in a preemptive note, the suit claims “there is no requirement to allege the actual inappropriate fiduciary actions taken because ‘an ERISA plaintiff alleging breach of fiduciary duty does not need to plead details to which he has no access, as long as the facts alleged tell a plausible story.’” That said, the suit alleges that “the unreasonable recordkeeping and managed account fees paid inferentially tells the plausible story that Defendants breached their fiduciary duty of prudence under ERISA.”
As for the injury suffered, the suit claims that “these breaches of fiduciary duty caused Plaintiff and Class Members 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.”
Now, just in case the court finds their arguments a bit shallow, the plaintiff here (as is customary for plaintiffs in these suits, particularly since the Supreme Court’s ruling on “actual knowledge,” and its impact on setting the starting date for the statute of limitations), noted that “the Plaintiff and all participants in the Plan did not have knowledge of all material facts (including, among other things, the excessive recordkeeping and managed account fees) necessary to understand that Defendants breached their fiduciary duty of prudence until shortly before this suit was filed.” Moreover, “having never managed a mega 401(k) Plan, meaning a plan with over $500 million dollars in assets, …Plaintiff, and all participants in the Plan, lacked actual knowledge of reasonable fee levels available to the Plan.”
‘Plausible’ Denials?
Another preemptive statement—certainly in the context of a number of suits that have been dismissed of late for “only” alleging fee disparities without the contextual basis of potential service differentials, the suit claims “there is nothing in the Dover Plan Form 5500 filings during the Class Period, nor anything disclosed in the Dove Plan Participant section 404(a)(5) fee and service disclosure documents, that suggests that the annual administrative fee charged to Dover Plan participants included any services that were unusual or above and beyond the standard recordkeeping and administrative services provided by all national recordkeepers to mega plans.”
Having laid that groundwork, the suit proceeds to move to the particulars here, explaining that the Dover Plan paid revenue sharing to Wells Fargo and Merrill, as disclosed on the Plan’s Form 5500 forms during the Class Period. While acknowledging that the amount of compensation paid to recordkeepers must be reasonable—but “not the cheapest or the average in the market”—the suit goes on to state that “the costs of providing managed account services have declined and competition has increased. As a result, the fees providers are willing to accept for managed account services have been declining for many years.”
The plaintiff here goes on to comment that, both for recordkeeping and managed account services, “prudent fiduciaries will regularly monitor the amount of managed account service fees the plan is paying and will ensure the fees are reasonable compared to what is available in the market for materially similar services,” and that “the most effective way to ensure a plan’s managed account service fees are reasonable is to periodically solicit bids from other managed account service providers, stay abreast of the market rates for managed account solutions, and/or negotiate most-favored nation clauses with the managed account service providers and/or the recordkeepers.” And, as you might expect, the plaintiff here alleges[1] that the excess managed account fees were a result of the fiduciaries’ failure to do so.
Monitoring Processes
The plaintiff here—represented by Walcheske & Luzi LLC—argues here, as have other suits in which that firm served as class counsel—that “prudent fiduciaries implement three related processes to prudently manage and control a plan’s recordkeeping costs.” Specifically, “a hypothetical prudent fiduciary tracks the recordkeeper’s expenses by demanding documents that summarize and contextualize the recordkeeper’s compensation, such as fee transparencies, fee analyses, fee summaries, relationship pricing analyses, cost-competitiveness analyses, and multi-practice and standalone pricing reports,” “…prudent hypothetical fiduciaries must identify all fees, including direct compensation and revenue sharing being paid to the plan’s recordkeeper,” and “…must remain informed about overall trends in the marketplace regarding the fees being paid by other plans, as well as the recordkeeping rates that are available. By soliciting bids from other recordkeepers, a prudent plan fiduciary can quickly and easily gain an understanding of the current market for the same level and quality of recordkeeping services.”
Getting down to brass tacks, the plaintiff claims that during the period in question “the Plan had on average 18,926 participants with account balances and paid an average effective annual recordkeeping/RKA fee of at least approximately $1,623,121, which equates to an average of at least approximately $86 per participant”—and the suit then proceeded to present a table of allegedly comparable plans (at least based on size, more specifically, “similar sizes with similar amounts of money under management”), with fees ranging from $23 to $39/participants.
Oh—and as if that weren’t enough, when it comes to the managed account services, the plaintiff claims that “the Plan’s managed account services added no material value to Plaintiff or to other Plan participants to warrant any additional fees,” that “the asset allocations created by the managed account services were not materially different than the asset allocations provided by the age-appropriate target date options ubiquitously available to Defendants in the market,” and that “offering asset allocation solutions to plan participants in the form of target date funds is a best practice, and much less expensive than managed accounts.”
The plaintiff argues that Wells Fargo promoted the Financial Engines managed account service over other potential managed account solutions “because Wells Fargo earned more revenue when Plan participants used the Financial Engine services,” and that “defendants separately violated their duty of prudence to Plan participants by charging excessive managed account fees, costing participants millions of dollars of lost retirement earnings.”
Will this court be persuaded this time? Stay tuned.
Footnote
[1] In yet another potential preemptive argument, the plaintiff here states 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, every three to five years.”
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