Evonik Chemical Corp. Faces ERISA Excessive Fee Challenge

Retirement plan fiduciaries at the specialty chemical company are accused of failing to take advantage of the lowest cost share class for many of the mutual funds offered within the plan, among other issues. 

A new Employee Retirement Income Security Act (ERISA) lawsuit has been filed in the U.S. District Court for the District of New Jersey, alleging that the Evonik Corp. permitted excessive fees to be charged to its defined contribution (DC) retirement plan.

Also named as defendants in the lawsuit, which seeks class action status, are the company’s president, the board of directors, the retirement plan investment committee and 30 “John Does.”

Similar to the plethora of ERISA excessive fee fiduciary breach lawsuits that have been filed in recent years, this one suggests the plan failed to use its bargaining power to negotiate lower fees. According to the text of the suit, the DC plan held more than $1 billion as of 2017.

“Defendants, however, did not try to reduce the plan’s expenses or exercise appropriate judgement to scrutinize each investment option that was offered in the plan to ensure it was prudent,” the lawsuit states. “Instead, defendants abdicated their fiduciary oversight, allowing Prudential Bank and Trust to lard the plan with funds managed by the trustee and/or its affiliates. These plan funds charged excessive fees.”

Notably, the lawsuit does not accuse Prudential of fiduciary breaches. Instead, it focuses on the conduct of the plan’s fiduciaries, who are also accused of failing to take advantage of the lowest cost share class for many of the mutual funds offered within the plan. The plaintiffs also accuse the fiduciary defendants of failing to consider collective trusts, comingled accounts or separate accounts as alternatives to the mutual funds in the plan.

Based on this alleged conduct, the plaintiffs assert claims against the defendants for breach of the fiduciary duties of loyalty and prudence (organized under count one) and failure to monitor fiduciaries (count two).

Turning to the ever-important topic of timeliness, the complaint states that plaintiffs “did not have knowledge of all material facts (including, among other things, the investment alternatives that are comparable to the investments offered within the plan, comparisons of the costs and investment performance of plan investments versus available alternatives within similarly-sized plans, total cost comparisons to similarly-sized plans, information regarding other available share classes, and information regarding the availability and pricing of separate accounts and collective trusts) necessary to understand that defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA until shortly before this suit was filed.”

The text of the complaint goes into significant detail while describing the duties of prudence and loyalty under ERISA before turning to the specific allegations at hand. It also discusses the broad debate about the use of active management funds within retirement plans.

“The funds in the plan have stayed relatively unchanged since 2013,” the complaint states. “Taking 2018 as an example year, the majority of funds in the plan (at least 10 out of 16) were much more expensive than comparable funds found in similarly-sized plans (plans having between $500 million and $1 billion in assets). The expense ratios for funds in the plan in some cases were up to 54% above the median expense ratios in the same category.”

The complaint then suggests that, in several instances, “defendants failed to prudently monitor the plan to determine whether the plan was invested in the lowest-cost share class available for the plan’s mutual funds, which are identical to the mutual funds in the plan in every way except for their lower cost.”

“A prudent fiduciary conducting an impartial review of the plan’s investments would have identified the cheaper share classes available and transferred the plan’s investments in the above-referenced funds into the lower share classes at the earliest opportunity,” the complaint alleges. “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 goes through similar arguments with respect to the defendants’ alleged permission of excessive recordkeeping fees and their offering of poorly performing and expensive actively managed funds.

The Evonik Corp. has not yet responded to a request for comment about the litigation.