Parties in a retirement plan excessive fee lawsuit filed last February have agreed to a $39.5 million settlement.
The original complaint named as defendants McKinsey & Co. Inc., MIO Partners and various John Does alleged to be fiduciaries under the Employee Retirement Income Security Act (ERISA). McKinsey sponsors two defined contribution (DC) retirement plans for its employees—the McKinsey & Company Profit-Sharing Retirement Plan and the McKinsey & Company Money Purchase Pension Plan. MIO is a registered investment adviser (RIA) firm wholly owned by McKinsey and is the plans’ investment manager by McKinsey’s appointment. MIO serves the plans by deciding which investment options should be selected and retained in the plans and also manages certain proprietary investment portfolios that it has retained as investment options in the plans.
The plaintiff alleged that McKinsey and MIO made the plans “two of the most expensive—if not the most expensive—defined contribution plans in the country among plans of similar size.” According to the original complaint, as of 2015, the median annual cost of a 401(k) plan with more than $1 billion in assets was 0.27% of assets, and the 90th percentile mark was 0.51%. The plans’ annual cost was at least 3.74% of assets—more than 13 times the median and seven times the 90th percentile mark.
The complaint also states that MIO only gets paid if it offers its own proprietary investment portfolios in the plans, and that “MIO’s portfolios have high costs and are rife with other problems.” The plaintiff said MIO has failed to consider replacing its portfolios with superior alternatives. “Inclusion of MIO-managed investment options has enriched MIO substantially—since 2013, MIO’s annual compensation from the plans has ranged from $20 million to $36 million, or 0.64% to 0.94% of MIO-managed assets,” the complaint says.
McKinsey and its owners/partners were also accused of benefiting from the plans’ management. The complaint explains that McKinsey’s partners—current and former—have more than $4 billion invested with MIO through private funds outside the plans. “MIO routinely invests the plans’ portfolios alongside partners’ personal funds in order to subsidize or defray partners’ expenses in these funds. Indeed, the plans’ participants pay MIO annual management fees of close to 1% of the assets MIO oversees, yet MIO offers the exact same services, and makes the same investments, for McKinsey’s partners at no cost to the partners. As a result, the plans are effectively paying for the free investment services that MIO is providing to McKinsey’s partners. Had McKinsey’s partners simply paid their fair share of MIO’s expenses, the plans would have saved over $70 million in fees since 2013,” the complaint states.
In addition, the lawsuit alleged that McKinsey failed to appropriately monitor and control the plans’ recordkeeping expenses, and has paid a portion of these charges to itself. “Each participant pays approximately $95 per year or more for recordkeeping services (out of a total $160 annual administrative charge). This is more than twice the reasonable market rate for similarly sized plans (approximately $30 to $40 per participant), and McKinsey improperly retains around 25% of the recordkeeping charge for itself. Notably, while industry-wide recordkeeping expenses were cut in half on a per-participant between 2006 and 2016, the plans’ per-participant recordkeeping fee in 2017 was 50% higher than it was in 2006, despite significant growth in the number of participants that should have translated into lower per-participant fees,” the complaint says.
The defendants faced claims for breach of the ERISA fiduciary duties of loyalty and prudence and prohibited transactions under ERISA. McKinsey also faced a claim for failure to monitor other fiduciaries.
In addition to the $39.5 million payment, McKinsey has agreed to provide prospective relief, including:
- For a period of no less than three years, McKinsey defendants will retain an independent investment consultant to provide ongoing review of the investment options in the plans, and review and approve any communications to participants regarding the plans’ investment options;
- Also for a period of no less than three years, all expense reimbursements by the plans to McKinsey, MIO or any other affiliated person or entity will be reviewed and approved by an independent fiduciary—paid for by McKinsey—who will have final discretion to approve or reject reimbursements; and
- Before the expiration of the current agreement between McKinsey and the plans’ recordkeeper, McKinsey will issue a request for proposals (RFP) for recordkeeping services.