Midsize Health System Latest to Face ERISA Challenge

The complaint suggests that, as of the end of 2020, the 401(k) plan at issue had over $465 million in net assets under management.


A proposed class of plaintiffs has filed a new Employee Retirement Income Security Act lawsuit in the U.S. District Court for the District of Minnesota, naming as defendants the North Memorial Health Care system and its board of directors.

The lawsuit includes similar allegations to the many ERISA lawsuits that have been filed in recent years against large health care systems across the U.S., but it stands out for the comparatively small size of the defendant.

According to the complaint, the 401(k) plan at the heart of the lawsuit had at least $286 million in assets under management at all times during the proposed class period. At the end of the plan’s fiscal year in 2020, the plaintiffs claim, it had over $465 million in net assets under management—considerably less than the billions of dollars in assets in the retirement programs of many other health care systems that have come under legal attack.

In an attempt to support allegations that the fiduciaries of the NMHC 401(k) plan acted imprudently, the complaint refers to an unrelated case in which Transamerica, the plan’s recordkeeper for five of the six years of the proposed class period, had to settle charges leveled by the Securities and Exchange Commission.

“Transamerica made material misstatements of fact to investors and potential investors, engaged in business practices which operated as a fraud or deceit upon clients or prospective clients, failed to reasonably supervise the variable annuity recommendations its agents were making, and failed to reasonably supervise the 529 plan share-class recommendations that its agents were making, among other violations,” the complaint states. Transamerica is not named as a defendant in the lawsuit.

The plaintiffs suggest the defendants’ breaches of their fiduciary duties related to their overall decisionmaking resulted in the selection and maintenance of several funds in the plan that “wasted assets because of unnecessary costs.”

“Another indication of defendants’ failure to prudently monitor the plan’s funds is that several funds during the class period were more expensive than comparable funds found in similarly sized plans,” the complaint states. “Simply put, a fiduciary to a large defined contribution plan such as the plan can use their asset size and negotiating power to invest in the cheapest share class available. The total assets under management for all of these funds was over $460 million, thus easily qualifying them for lower share classes.”

The complaint states defendants knew or should have known of the existence of identical, less expensive share classes, and thus should have immediately identified the prudence of transferring the plan’s funds into these alternative investments. It says 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 emergence of the new complaint comes at a time that some retirement industry compliance experts see as a possible litigation inflection point thanks to recent appellate and Supreme Court rulings. Beyond the emergence of potentially influential precedents, the pace of filings in 2022 has been quite brisk, with at least 25 cases filed in the first four months of the year. One expert anticipates that anywhere from 75 to 100 cases will be filed by the end of 2022.

«