Costco Agrees to $5.1M ERISA Case Settlement

The agreement, in which Costco admits no wrongdoing, also includes mandatory changes to the plan’s fee management process.

The parties in an Employee Retirement Income Security Act lawsuit filed against Costco have reached a settlement that will see the company pay $5.1 million to resolve allegations that it committed fiduciary breaches in the provision of retirement benefits to employees.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The lawsuit arose in June 2020, when a participant in the Costco 401(k) Retirement Plan filed a suit against his employer, its board of directors and the members of a benefits committee. The lawsuit suggested the fiduciaries of the plan breached their ERISA duties by authorizing the plan to pay unreasonably high fees for recordkeeping; 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 complaint alleged the defendants did not have a viable methodology for monitoring the expenses of the funds in the plan, failed to have an independent system of review  to ensure that the plan participants were charged appropriate and reasonable fees for the plan’s investment options, and failed to leverage the plan’s size to negotiate lower expense ratios for certain investment options maintained and/or added to the plan during the class period.

In agreeing to the settlement, Costco admits no wrongdoing and insulates itself and its executives from future related allegations. The firm will pay  $5.1 million into a settlement fund, of which a maximum of $1.5 million will be paid out as attorney’s fees, with the remainder going to participants and beneficiaries of the Costco retirement plan.

In addition to the settlement payment, the settlement agreement also covers various non-monetary items. For example, commencing no later than the end of the first calendar quarter beginning after the settlement’s effective date, Costco “will ensure that the plan administrative service per capita recordkeeping fee deducted from plan accounts does not exceed $3.25 per plan account per quarter.”

The settlement agreement further stipulates that Costco’s obligation to ensure that the plan administrative service per capita recordkeeping fee does not exceed $3.25 per plan account per quarter “shall continue for the number of calendar quarters necessary for the value of the reduction of the plan administrative service per capita recordkeeping fee amount to total $3.2 million.” To this end, the agreement presents a formula that Costco must use to calculate the level of recordkeeping and administration fees paid. In basic terms, the plan’s fiduciaries must subtract from the actual per-plan account recordkeeping fee charged in the first quarter of 2022, the fee charged in the subsequent quarter in question, and then multiply the result by the number of fee-paying plan accounts during the quarter in question. Then, the fiduciaries must add the results for all such quarters.

“If this calculation results in a reduction in the plan administrative service per capita recordkeeping fee for any fraction of a calendar quarter, the fee for such quarter may be reduced on a pro rata basis such that the total fee reduction does not exceed $3.2 million,” the agreement stipulates. “Costco may, but is not required to, meet its obligation to ensure the value of the fee reduction in the amount described … by obtaining a plan administrative service per capita recordkeeping fee lower than $3.25 per plan account in one or more quarters.”

The settlement says Costco may arrange for a lower fee “by any reasonable means including, but not limited to, direct negotiation with the recordkeeper, a request for proposal, and/or a company subsidy.”

The full text of the settlement agreement is available here.