Mercy Health Charged With Excessive Fees, Prohibited Transactions

The lawsuit challenges fees for recordkeeping, target-date funds and stable value funds, as well as fees paid to service providers to the health care system's 403(b) plan.

An Employee Retirement Income Security Act (ERISA) lawsuit has been filed against fiduciaries of Mercy Health Corp.’s 403(b) plan.

The complaint alleges that the fiduciaries breached the duties they owed to the plan and its participants by authorizing the plan to pay unreasonably high fees for recordkeeping and administration (RK&A); failing to objectively, reasonably and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; and unreasonably maintaining investment advisers and consultants for the plan despite the known availability of similar service providers with lower costs and/or better performance histories.

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The plaintiff contends that the defendants “did not engage in a prudent decision-making process and/or engaged in self-dealing, as there is no other explanation for why the plan paid these unreasonable fees for RK&A, investment management, and investment advisory and consultant services.” The plaintiff also brings prohibited transaction claims based on dealings between the defendants and the recordkeeper, investment manager, investment advisers and consultants to the plan.

The proposed class action lawsuit alleges that during the class period, the defendants failed to regularly monitor the plan’s RK&A fees paid to covered service providers, including but not limited to Voya, and failed to regularly solicit quotes and/or competitive bids from covered service providers in order to avoid paying unreasonable fees for RK&A services. According to the plaintiff, the defendants did not have a plan or process in place to ensure that the plan paid no more than a competitive reasonable fee for RK&A services.

Because the defendants failed to regularly monitor the plan’s RK&A fees paid to covered service providers, the fees were significantly higher than they would have been had the defendants engaged in this process, the complaint states. Using a graph and table, the lawsuit contends that during the year 2018, other plans of similar sizes with similar amounts of money under management as compared to the Mercy Health plan paid recordkeepers an average of approximately $536,914, or approximately $48.83 per participant. Mercy Health’s plan paid RK&A fees to Voya totaling approximately $1,294,361, or approximately $118.00 per participants.

The lawsuit also alleges that the defendants failed to ensure that the plan paid no more than a reasonable fee for expenses related to its target-date funds (TDFs) and that they did not have a plan or process in place to ensure that the plan paid no more than a reasonable fee for expenses related to its TDFs.

As with many other excessive fee lawsuits, the plaintiff in this case says the plan paid unreasonably high fees based on the share classes selected for funds in the plan. “Defendants: did not conduct an impartial and objectively reasonable review of the plan’s investments on at least a quarterly basis; did not identify cheaper, lower-cost, more prudent share classes available to the plan; and did not transfer the plan’s investments into these cheaper, lower-cost, and/or institutional shares, all to the substantial detriment of plaintiff and the plan’s participants,” the complaint states. It contends that because the defendants failed to act in the best interests of participants by engaging in an objectively reasonable investigation process when selecting its investments, the defendants caused unreasonable and unnecessary losses to participants in the amount of approximately $19,460,841.

The lawsuit also specifically calls out what it says are excessive fees associated with the plan’s stable value funds.

According to the complaint, during the class period, the defendants paid service providers in excess of $4,500,000 for fees and commissions. It says the services “provided by Regulus Advisors do not warrant the fees charged because there are other equally or superior services available to plan participants, including plaintiff, for free or at significantly lower rates than those charged by Regulus Advisors.”

Noting that Voya and Regent are parties in interest as they provide services to the plan, the complaint states that the defendants “knew or should have known that Regal and Voya, as dual-registered RIAs, had an inherent conflict of interest and/or interests materially adverse to the best interests of plan participants.” It says the defendants caused the plan to engage in transactions in which goods and/or services were furnished, either directly or indirectly, between the plan and parties in interest, including, but not limited to Regal and Voya. According to the complaint, the defendants engaged in prohibited transactions that do not qualify for a statutory exemption as reasonable compensation for plan service providers.

Mercy Health has not yet responded to a request for comment.

Judge Finds 401(k) Participants Proved No Harm From Lack of Stable Value Fund

A federal judge granted summary judgment to American Airlines in a suit challenging the use of the AA Credit Union Fund in its 401(k).

A more than four-years-long lawsuit arguing American Airlines should have offered a stable value fund in its 401(k) plan rather than the AA Credit Union Fund has ended with a federal judge granting summary judgement to American Airlines.

The original complaint stated the following: “The AA Credit Union Fund effectively delivered, at all material times, the returns of a poorly managed checking account. The AA Credit Union Fund consistently failed to outpace inflation and was at all times thus a categorically imprudent retirement investment under ERISA [Employee Retirement Income Security Act]. Therefore, defendants violated their duties of prudence under ERISA by including it as a retirement investment option in the plan’s menu of investment options.”

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U.S. District Judge John McBryde of the U.S. District Court for the Northern District of Texas previously denied class certification of the case, denied a motion to dismiss the case and rejected a proposed settlement as being insufficient. The current opinion and order addresses motions for summary judgment filed by American Airlines, its Pension Asset Administration Committee and American Airlines Federal Credit Union (Credit Union).

American and the committee asserted a time-bar ground, contending that “this court should reject as time-barred any challenge to American’s inclusion of the Credit Union option in the plan,” because it was first introduced into the plan more than 35 years ago. McBryde rejected this, saying that he does not interpret the plaintiffs’ criticism of the existence of the AA Credit Union Fund option as being based solely on the initial decision to include it in the plan, but instead interprets their complaint to be that American and the committee, during the six years before the complaint was filed, violated their fiduciary duties by not taking appropriate steps to remove that option and/or to add to it a capital preservation investment option that would have been more financially beneficial to the participants. He concluded that the time-bar ground is without merit.

However, McBryde noted that to establish standing, “plaintiffs must show that each has suffered a concrete, particularized injury, actual or imminent, fairly traceable to defendants challenged behavior, and likely to be redressed by a favorable ruling.” He said the violation of duties under ERISA is not in and of itself an injury in fact to plaintiffs. McBryde also said the plaintiffs cannot establish that American and the committee were required to select a stable value fund instead of the AA Credit Union Fund option. “But, even if they could, their alleged injuries are at best speculative, not concrete,” he added.

He noted that the plan provides that participants are responsible for making investment decisions, and the plaintiffs do not point to any evidence showing that they would have chosen the stable value fund for their investments. McBryde pointed out that one named plaintiff never took even basic steps to evaluate the stable value fund as an investment option when it became available, and another chose not to invest in a stable value fund when he had the option to do so. “Plaintiffs have not established standing to pursue the claim regarding an alternative capital preservation option, i.e., the stable value fund,” he wrote in his opinion.

McBryde also said that “procedural lapses alone, assuming plaintiffs could establish any, are insufficient.” The plaintiffs must show that the procedural lapses led to plan losses. In addition, he said, because the plaintiffs contend that the AA Credit Union Fund should not have been offered at all by the plan, they must establish that no reasonable fiduciary would have included such fund in the plan. McBryde found that the expert testimony presented did not suffice to do this.

The plaintiffs complain that the interest rate on the AA Credit Union Fund was “abysmally low,” but McBryde held that making a bare allegation does not mean anything without a meaningful benchmark. The plaintiffs do not point to any similar demand deposit funds to show that they earned a better rate of return. And, they rely on a comparison to stable value funds, even though their expert admitted that the two investment options have different characteristics. McBryde said comparing the AA Credit Union Fund to stable value funds is like comparing apples to oranges because the AA Credit Union Fund is a liquid demand deposit that is fully guaranteed by the United States government up to $250,000, while stable value funds include a wrap contract—a limited guarantee from an insurance company or bank.

Separately, McBryde found that the plaintiffs’ claims against the Credit Union fail for a number of reasons. First, they have not shown that the Credit Union is a fiduciary under ERISA for the purpose of their claim. In addition, he found that the plaintiffs have not shown that the Credit Union’s investing of amounts deposited was improper or a violation of any duty owed to them or the plan.

McBryde noted that it seems the plaintiffs intend to abandon their claim that American and the committee engaged in a prohibited transaction under ERISA because they made no response to the ground of the summary judgment motion urging that they could not establish this claim.

McBryde ordered that the defendants’ motions for summary judgment be granted and that plaintiffs’ claims be dismissed with prejudice. “With prejudice” means the case can’t be brought back to court.

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