Chemical Distributor Faces Excessive Fee Suit Against 401(k) Plan

The plaintiffs say defendants failed to utilize 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.

An Employee Retirement Income Security Act (ERISA) lawsuit has been filed against chemical distributor Brenntag North America Inc. alleging the company and other fiduciaries of the Brenntag USA Profit Sharing Plan failed to take measures to ensure reasonable investment and recordkeeping fees.

According to the complaint, the plan has nearly half a billion dollars in assets that are entrusted to the care of the plan’s fiduciaries, qualifying it as a large plan in the defined contribution (DC) plan marketplace. The lawsuit says Brenntag, as sponsor of a large plan, failed to use its bargaining power to reduce plan expenses and also failed to scrutinize each investment option to make sure it was prudent.

The plaintiffs allege that from January 8, 2014, to the present, the defendants breached their fiduciary duties to the plan and its participants by “failing to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; and maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories.”

The plaintiffs say defendants failed to utilize 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 (at least for the majority of the class period) as alternatives to the mutual funds in the plan, despite their lower fees.

The complaint suggests that the fiduciary task of evaluating investments and investigating comparable alternatives in the marketplace is made much simpler by the advent of independent research from companies like Morningstar. It also notes that ERISA-mandated monitoring of investments leads prudent and impartial plan sponsors to continually evaluate performance and fees, resulting in great competition among mutual funds in the marketplace. “This has led to falling mutual fund expense ratios for 401(k) plan participants since 2000. In fact, these expense ratios fell 31% from 2000 to 2015 for equity funds, 25% for hybrid funds, and 38% for bond funds,” the lawsuit states. It cites data from the Investment Company Institute (ICI) that illustrates 401(k) plans on average pay far lower fees than individual retail investors.

The plaintiffs argue that passively managed funds, because they are simply a mirror of an index, offer both diversity of investment and comparatively low fees. By contrast, they say, actively managed funds, which have a mix of securities selected in the belief they will beat the market, have higher fees, to account for the work of the investment managers of such funds and their associates. They cite data that supports their argument 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 lawsuit also says more expensive share classes are targeted at smaller investors with less bargaining power, while lower cost shares are targeted at institutional investors with more assets, generally $1 million or more, and therefore greater bargaining power. “Large defined contribution plans such as the [Brentagg] plan have sufficient assets to qualify for the lowest cost share class available,” the complaint states. The plaintiffs argue that “a fiduciary to a large defined contribution plan such as the plan can use its asset size and negotiating power to invest in the cheapest share class available. For this reason, prudent retirement plan fiduciaries will search for and select the lowest-priced share class available.”

The lawsuit points out that throughout the class period, the investment options available to participants were almost exclusively mutual funds. The plaintiffs argue that plan fiduciaries such as the defendants must be continually mindful of investment options to ensure they do not unduly risk plan participants’ savings and do not charge unreasonable fees. They say some of the best investment vehicles for these goals are collective trusts, which pool plan participants’ investments further and provide lower fee alternatives to even institutional and 401(k) plan specific shares of mutual funds.

In addition, they say separate accounts are another type of investment vehicle similar to collective trusts, which retain their ability to assemble a mix of stocks, bonds, real property and cash, and their lower administrative costs. “Separate accounts are widely available to large plans such as the plan, and offer a number of advantages over mutual funds, including the ability to negotiate fees. Costs within separate accounts are typically much lower than even the lowest-cost share class of a particular mutual fund,” the complaint states. “By using separate accounts, total investment management expenses can commonly be reduced to one-fourth of the expenses incurred through retail mutual funds,” it adds, citing the U.S. Department of Labor’s Study of 401(k) Plan Fees and Expenses.

Using 2018 as an example year, the lawsuit says 20 out of 23 funds in the Brenntag plan—87% of funds—were much more expensive than comparable funds found in similarly sized plans. It alleges that the expense ratios for funds in the plan in some cases were up to 91% above the median expense ratios in the same category. Additionally, the lawsuit alleges that expense ratios for the American Funds target-date funds were in the bottom quartile—meaning they were the most expensive for all American target-date funds.

The plaintiffs also accuse the defendants of failing to monitor or control the plan’s recordkeeping expenses. They say the market for recordkeeping is highly competitive, with many providers equally capable of providing a high-level service, so they vigorously compete for business by offering the best price. The defendants are accused of failing to prudently manage and control the plan’s recordkeeping costs by failing to track 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; 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, and immediately if the plan’s recordkeeping expenses have grown significantly or appear high in relation to the general marketplace.

The plaintiffs argue that to the extent that a plan’s investments pay asset-based revenue sharing to the recordkeeper, prudent fiduciaries monitor the amount of the payments to ensure that the recordkeeper’s total compensation from all sources does not exceed reasonable levels, and require that any revenue sharing payments that exceed a reasonable level be returned to the plan and its participants.

They also argue that an RFP should happen at least every three to five years as a matter of course, and more frequently if the plans experience an increase in recordkeeping costs or fee benchmarking reveals the recordkeeper’s compensation to exceed levels found in other, similar plans.

According to the lawsuit, the increase in recordkeeping costs (as measured on a per participant basis) for the Brenntag plan far outpaced the modest growth in the number of participants from the start of the class period until the present, indicating the plan’s fiduciaries failed to leverage the growing size of the plan (by both participants and assets) to achieve lower per-participant costs.