401(k) Plan Participants Say Fiduciaries Ignored Excessive Fees

The complaint says plan fiduciaries didn't look into lower-priced share classes, investment vehicles or passively managed funds.

In a lawsuit targeting the Pharmaceutical Product Development LLC Retirement Savings Plan, the plaintiffs allege that since April 15, 2014, fiduciaries of the plan violated their duties under the Employee Retirement Income Security Act (ERISA).

They say the plan fiduciaries failed to objectively and adequately review the plan’s investment portfolio to ensure each investment option was prudent in terms of cost and maintained certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories. In addition, the lawsuit alleges the defendants failed to use the lowest cost share class for many of the mutual funds within the plan and failed to consider collective trusts, commingled accounts or separate accounts as alternatives to the mutual funds in the plan, despite their lower fees.

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In the complaint, the plaintiffs note that data from the Investment Company Institute (ICI) illustrates that 401(k) plans on average pay far lower fees than regular industry investors, even as expense ratios for all investors continued to drop for the past several years. In addition, as the plan has more than $700 million in assets under management as of December 31, 2018, they say it has the ability to negotiate for low fees and the ability to invest in certain vehicles with investment minimums.

According to the allegations, the funds in the plan have stayed relatively unchanged since 2014. The complaint includes a chart of comparisons as of 2018 that plaintiffs say shows more than 60% of funds in the plan were much more expensive than comparable funds found in similarly sized plans. “The expense ratios for funds in the plan in some cases were up to 127% … above the median expense ratios in the same category,” the complaint says.

The plaintiffs also say prudent retirement plan fiduciaries will search for and select the lowest-priced share class available, but allege that in several instances during the class period, the defendants failed to prudently monitor the plan to determine whether it was invested in the lowest-cost share class available for the plan’s mutual funds. The complaint again includes a chart using 2018 expense ratios to attempt to demonstrate how much more expensive the funds were than their identical counterparts. “There is no good-faith explanation for utilizing high-cost share classes when lower-cost share classes are available for the exact same investment. The plan did not receive any additional services or benefits based on its use of more expensive share classes; the only consequence was higher costs for plan participants,” the complaint says.

“It is not prudent to select higher cost versions of the same fund even if a fiduciary believes fees charged to plan participants by the ‘retail’ class investment were the same as the fees charged by the ‘institutional’ class investment, net of the revenue sharing paid by the funds to defray the plan’s recordkeeping costs,” the complaint adds. Citing the case of Tibble v. Edison, the plaintiffs say the plan’s fiduciaries should not “choose otherwise imprudent investments specifically to take advantage of revenue sharing.”

The plaintiffs note that because of their potential to reduce overall plan costs, collective trusts are becoming increasingly popular. A footnote in the complaint says, “The criticisms that have been launched against collective trust vehicles in the past no longer apply. Collective trusts use a unitized structure and the units are valued daily; as a result, participants invested in collective trusts are able to track the daily performance of their investments online.”

In addition, the plaintiffs argue that separate accounts are widely available to large plans such as Pharmaceutical Product Development’s 401(k), and “offer a number of advantages over mutual funds, including the ability to negotiate fees.” Citing the Department of Labor (DOL)’s Study of 401(k) Plan Fees and Expenses, the complaint says that by using separate accounts, “[t]otal investment management expenses can commonly be reduced to one-fourth of the expenses incurred through retail mutual funds.”

The plaintiffs note that the plan document specifically permitted investments in collective trusts and separate accounts. The plan document states, “Plan assets may also be invested in a common/collective trust fund, or in a group trust fund that satisfies the requirements of IRS Revenue Ruling 81-100.”

Citing an article in The Washington Post, the complaint says that while higher-cost mutual funds may outperform a less expensive option, such as a passively-managed index fund, over the short term, they rarely do so over a longer term. The plaintiffs allege that during the class period, the defendants failed to consider materially similar but cheaper alternatives to the plan’s investment options. Again, a chart is used to attempt to demonstrate that the expense ratios of the plan’s investment options were more expensive by multiples of comparable passively managed and actively managed alternative funds in the same investment style.

In addition, the complaint says there is objective evidence that selection of actively managed funds over passively managed ones with materially similar characteristics was unjustified. Comparing the five-year returns of some of the plan’s actively managed funds with those of comparable index funds with lower fees, the plaintiffs say it demonstrates that accounting for fees paid, the actively managed funds lagged in performance. A chart is used to show the return needed by each actively managed fund to match the returns of the passively managed fund.

Finally, the lawsuit alleges the defendants failed to prudently manage and control the plan’s recordkeeping and administrative costs by failing to: pay close attention to the recordkeeping fees being paid by the plan; identify all fees, including direct compensation and revenue sharing being paid to the plan’s recordkeeper; and conduct a request for proposal (RFP) process at reasonable intervals. The plaintiffs say there is no evidence that the defendants negotiated to lower recordkeeping costs, and that the total amount of recordkeeping fees paid throughout the class period on a per participant basis was “astronomical.”

According to the complaint, the plan averaged around $20 per participant in direct fees paid to the recordkeeper between 2014 and 2018, which the plaintiffs say is well above the average of plans a fraction of its size. However, they say if all the indirect revenue sharing reported on the plan’s Form 5500 was paid to the recordkeeper, then prior to any rebates, the per participant recordkeeping fee would have ranged from $54 to $143 during the class period.

The plaintiffs add that even though the defendants claim to have paid a certain amount of revenue sharing back into the plan, a review of their account statements fails to show that any of those amounts were added back directly to each of their retirement accounts.

Licensing Lawsuit Filed by SEI Global against SS&C Defendants

The complaint alleging abusive licensing practices was filed under seal in the U.S. District Court for the Eastern District of Pennsylvania and has only just been made public.

SEI Global Services has filed a lawsuit against SS&C Advent and SS&C Technologies Holdings alleging the defendants are harming the firm through abusive licensing practices.

The lawsuit was filed in late February under seal in the U.S. District Court for the Eastern District of Pennsylvania and has only just been made public.

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The complaint states that SEI is “a provider of outsourced portfolio accounting (and related administrative) services to investment managers and hedge funds, a business in which it competes with SS&C.” Also noted is that SEI uses accounting software licensed from Advent in connection with its provision of portfolio accounting services to its clients.

“SEI had no issues or disputes with Advent from the inception of the contract between the parties in 2000 until the end of 2019,” the complaint states. “This dispute followed the acquisition of Advent by SS&C, a direct competitor of SEI, in 2015. Between 2015 and 2019, peace between the companies still existed. However, SS&C decided to flex its muscles in the fall of 2019 by raising a series of disingenuous positions to gain an advantage over SEI, leaving SEI no choice but to file this lawsuit to protect itself.”

According to the lawsuit, SEI and Advent executed a software license and support agreement on September 9, 2000. The agreement allegedly “renews automatically unless SEI elects not to renew it, or if one of the parties terminates pursuant to the termination provision.” According to SEI, the agreement has been subsequently amended by the parties but has not been terminated.

“The agreement and its amendments cover a series of license keys from Advent that deliver critical data and portfolio accounting processing functionality to SEI,” the complaint states. “The license keys provided by Advent to SEI dictate which components/capabilities SEI is able to use within the Advent software. The functionality provided by Advent’s software is viewed as standard in the industry and can only be delivered through contracting with defendants.”

The complaint goes on to suggest that while SS&C is SEI’s direct competitor, Advent traditionally was not. However, that allegedly changed with the SS&C acquisition.

“SS&C dominates, controls, manages and operates Advent, to such an extent that, at all times since its acquisition, there existed a unity of interest between SS&C and Advent and complete ownership of Advent by SS&C,” the complaint states. “Advent is SS&C’s alter ego. SS&C is using its alter ego as an instrumentality or conduit to effect its own anticompetitive objectives. Now that SS&C owns Advent, defendants are now attempting to unilaterally and improperly revoke the information to which SEI is entitled under the agreement, in violation of the terms of the agreement. This improper termination will cause substantial harm to SEI’s business.”

According to the complaint, other investment accounting systems exist in the marketplace, but SEI would allegedly need “substantial time to research other systems, select a replacement, contract with another vendor and convert its business from the Advent-provided software to an alternative software.”

“This process would take years,” the complaint states. “It would necessarily disrupt SEI’s business, and may not be successful. Even if SEI were to successfully switch to other portfolio accounting software, doing so would likely come at a significant competitive cost to SEI because many investment managers have a strong preference for using Advent software and will only work with providers of outsourced portfolio accounting services that have access to Advent’s products.”

SEI says it has tried to negotiate with the defendants in good faith, but that the defendants have refused to heed the terms of the agreement, “giving SEI no choice but to file this lawsuit to protect its business.”

According to the complaint, on October 31, 2019, Robert Roley, a senior vice president at Advent, sent an unexpected letter to SEI on “SS&C Advent” letterhead.  This letter stated the following: “You are hereby notified that unless Advent and SEI are able to reach mutually satisfactory terms for a renewal of the below-listed software products and services, Advent is unwilling to renew or extend the present term for such products. Therefore and for the avoidance of doubt, you are hereby notified that Advent hereby elects not to renew any of the products upon the expiration of their current terms.”  

SEI claims that it has engaged in subsequent discussions with defendants in an effort to resolve this dispute in good faith.

“However, defendants’ pricing proposal included an over 40% increase in rates to SEI, despite the agreement’s 3% cap on pricing increases per year,” the complaint states. “This proposal is in itself a breach of the agreement and is an attempt to extort SEI. As a 40% increase is clearly not made in good faith, this proposal is unacceptable to SEI.”

SS&C provided the following statement regarding the litigation: “SS&C finds this suit to be without merit.  After the suit was filed by SEI under seal, SS&C successfully petitioned the Court to unseal the action despite SEI’s objection. SS&C abides by its contracts and we or our predecessor companies have enjoyed a twenty year relationship with SEI Corporation.”

The full text of the complaint is available here.

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