A new class action complaint seeks damages on behalf of nearly 20,000 participants, who argue their nearly $1 billion in combined plan assets should have earned them a better deal on investments and administration.
The latest example of retirement industry fee litigation was filed just before the New Year in the U.S. District Court for the District of Minnesota: Morin et al vs. Essentia Health.
The case contains many of the elements that have become wearingly familiar to PLANADVISER readers; participants claim their employer failed to negotiate fair fees from a variety of service providers during the class period, and that excessive fees paid by participants were effectively used to subsidize the employer’s own costs in offering/running the plans. But it also is distinct because of the history of the two retirement plans described in detail in the text of the complaint, including a 403(b) plan that has some important distinctions from a typical 401(k).
At a high level, participants argue their employer failed to use the combined bargaining power of its two retirement plans—one a traditional defined contribution plan known simply as the Retirement Plan and the other a distinct 403(b) plan. The Retirement Plan was established and effective on December 22, 1965. It has been restated and amended numerous times since. It was recently restated and amended, effective January 1, 2012, to identify Essentia Health as the sponsor and replace Essentia’s subsidiary in that role. The 403(b) plan was first established and effective on January 1, 2009, and Essentia has been identified as the 403(b) plan sponsor since its inception.
According to the text of the complaint, the Retirement Plan had 16,848 participants with balances and held approximately $982 million in assets at the end of 2014. The 403(b) Plan had 2,836 participants with balances and held approximately $103 million in assets. The plans combined administratively in 2012, participants claim, “contemporaneously with the restatement and amendment of the Retirement Plan.”
Plaintiffs argue the size of a defined contribution plan, both by number of participants with balances and total assets, should directly determine the pricing it can obtain for administrative services and investment management. “By combining administratively, the plans have had the ability to operate in the market as a 20,000-participant plan with $1 billion in assets,” plaintiffs suggest.
The claims for damages look to the period prior to the administrative merger of the plans. According to plaintiffs, prior to January 1, 2012, defendants imprudently kept the plans’ records and operations separately. Defendants used BMO Harris as the recordkeeper for the Retirement Plan and Lincoln National Corporation as the recordkeeper for the 403(b) plan. The size of the plans stayed roughly the same through the end of 2011.
“Though the Plans were operated as two separate entities, this should not have diminished their combined bargaining power, as defendants had control of both plans,” plaintiffs suggest. “A prudent fiduciary would have offered service providers the ability to service both plans as a way to attract their business and ultimately demand lower rates.”
NEXT: Details from the complaint
The complaint argues that, had an investigation and analysis of the market for recordkeeping services been conducted in the 2009 to 2011 timeframe, the plans “should have been able to procure comprehensive recordkeeping services for between $60 and $80 per participant.”
“In 2009, defendants caused the Retirement Plan to pay BMO Harris a grossly excessive $127 per participant, more than 50% above a reasonable amount,” plaintiffs suggest. “Moreover, the Retirement Plan’s excess was exclusive of revenue sharing. The Retirement Plan’s Form 5500s during these years stated that BMO Harris was receiving additional indirect compensation (a/k/a revenue sharing), but did not disclose the amount or formula.”
For the 403(b) plan, defendants’ compensation arrangement with Lincoln from 2009 to 2011 was based entirely on Lincoln’s receipt of revenue sharing payments from the 403(b) plan’s investments, according to the complaint. Plaintiffs “do not know the amount received by Lincoln, because Essentia did not disclose the amount or formula, nor can the amount be discerned from the plan’s investments, given that the 403(b) Plan’s 5500s during this period did not disclose the share class of its mutual fund investments.”
The complaint continues: “Based on Defendants’ disregard for BMO Harris’ excessive compensation (and defendants’ other failures described herein), it is reasonable to infer the revenue sharing payments collected and retained by Lincoln exceeded the reasonable value of Lincoln’s recordkeeping services.”
“The problem worsened in the 2010 plan year,” plaintiffs suggest. “Defendants permitted BMO Harris to collect $142 per participant in direct compensation, in addition to the revenue sharing BMO Harris was receiving. The amount of revenue sharing received by BMO Harris in 2010 is unknown, because Essentia again reported extra indirect compensation to BMO Harris on its Form 5500 but not the amount or formula. The 403(b) plan’s payments to Lincoln also remained a black box … Essentia disclosed only that Lincoln’s compensation was paid almost entirely through revenue sharing, which Essentia refused to quantify. Reasonable recordkeeping services remained available, for plans the same size as the Plans, for between $60 and $80 per participant—and trending downward.”
Similar patterns are alleged for the years leading up the 2012 plan reforms, and participants further call into question the quality of the fiduciary process used to select current service providers. While fees have ostensibly come down in the plans, participants suggest they are still not being fully informed of the all-in costs once revenue-sharing is considered.
The full text of the complaint is available here.