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.

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.