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Recordkeeping Fees Trigger Latest Excessive Fee Suit

By Nevin Adams • January 04, 2017 • 0 Comments
A new excessive fee lawsuit claims that plan fiduciaries caused plans to “pay excessive fees” and failed to “monitor and control the Plans’ escalating costs,” resulting in millions of dollars of losses to the plans — and this time share classes are not the issue.

The lawsuit filed in the U.S. District Court in Minnesota charges that Essentia Health “permitted the Plans’ service providers to double down on fees to ensure the Plans paid all fees and none were borne by Essentia, acting with an eye to Defendants’ own interests and putting the best interest of Plans second.”

The two plans in question — the Essentia Health 403(b) plan and the Essentia Health Retirement Plan — were initially administered separately (the retirement plan had 16,848 participants with balances and held approximately $982 million in assets at the end of 2014, while the 403(b) plan had 2,836 participants with balances and held approximately $103 million in assets, according to the suit).

Before Jan. 1, 2012, BMO Harris was the recordkeeper for the retirement plan and Lincoln National Corporation served as the recordkeeper for the 403(b) plan (at that time the retirement plan had 5,009 participants with account balances at the end of its 2009 plan year, and the 403(b) plan had 2,731 participants). The suit claims, based on plaintiffs’ “investigation and analysis of the market for recordkeeping services in the 2009 to 2011 timeframe,” that the plans should have been able to procure comprehensive recordkeeping services for between $60 and $80 per participant.

Undisclosed Revenue Sharing?

However, in 2009, plaintiffs allege that BMO Harris was paid “a grossly excessive $127 per participant,” and that didn’t take into account revenue sharing, which the plan’s 5500 acknowledged, but did not detail. As for the 403(b) plan, plaintiffs claim that the compensation arrangement with Lincoln from 2009 to 2011 was based entirely on Lincoln’s receipt of revenue sharing payments from the 403(b) plan’s investments, but again, they do not know how much “because Essentia did not disclose the amount or formula, nor can the amount be discerned from the Plan’s investments, given that the 403(b) plan’s 5500s during this period did not disclose the share class of its mutual fund investments.”

Not that that stopped the plaintiffs, who “based on Defendants’ disregard for BMO Harris’ excessive compensation (and Defendants’ other failures described herein)” found it “reasonable to infer the revenue sharing payments collected and retained by Lincoln exceeded the reasonable value of Lincoln’s recordkeeping services.”

The suit outlines similar issues in 2010 (though the fees paid to BMO Harris rose to $142 per participant in direct compensation), while now describing the 403(b) plan’s payments to Lincoln as a “black box,” with Essentia disclosing only that Lincoln’s compensation was paid almost entirely through revenue sharing in amounts unquantified by Essentia.

Plan Consolidation

Recordkeeping for the plans was consolidated in 2012 with Diversified, though through what plaintiffs alleged was a “truncated, inadequate fiduciary process.” The result? Plaintiffs allege that in 2012, from the combined plans, Diversified collected $65 per participant in direct compensation, still above what they feel were reasonable (an all-in fee of between $45 and $55 per participant). “Though the change in vendors and pricing terms had the potential to bring the Plans’ recordkeeping expenses down to earth, Diversified’s extraction of extra compensation beyond the $53 per account fee took the Plans’ recordkeeping expenses from the high end of the reasonable range to well above the reasonable range,” according to the suit.

Then came 2013, and the merger of Diversified with affiliate Transamerica Retirement Solutions. “This change in recordkeeper, together with the abuses in 2012, should have put Defendants on notice by the beginning of 2013 that the Plans’ recordkeeping expenses needed to be monitored closely. Instead, Defendants stood by idly as Transamerica took advantage of the Plans to collect $89 per participant in direct compensation. By permitting Transamerica unchecked access to participants’ accounts, the Plans’ recordkeeping expenses ballooned to twice the amount the Plans would have paid had they prudently investigated and monitored the Plans’ recordkeeping expenses,” according to the suit.

After that, the plans continued to grow (both participants and assets), and while plaintiffs argue that the plan fiduciaries should have negotiated a better deal, the plan costs continued to increase. Indeed, according to the suit, the plans paid “approximately $1 million in excess recordkeeping fees in 2014, and again in 2015.”

Among other things, the suit seeks certification as a class action, the award of actual monetary losses to the plans, equitable restitution and other appropriate equitable monetary relief against defendants, the permanent removal of defendants from any positions of trust with respect to the plans, the appointment of an independent fiduciary to administer the plans for a certain number of years, and ordering that the plans engage in a competitive bidding process, overseen by the independent fiduciary, for recordkeeping services to the plans.

The suit was filed on behalf of the seven plaintiffs by the law firms of Madia Law LLC and Nichols Kaster PLLP. The latter has been active in this kind of litigation of late, filing suits which has been very active in bringing lawsuits against large financial companies that include in-house investment funds in their employees’ 401(k) plans, including New York Life, Putnam Investments LLC, Deutsche Bank, American Airlines Inc., M&T Bank Corp. and American Century Services LLC, as well as against the Fujitsu Group Defined Contribution and 401(k) Plan.

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