Settlement Ends Fujitsu Lawsuit Filed Over Plan Fees, Custom TDFs

In their lawsuit, the plaintiffs called the Fujitsu plan one of the most expensive in the country and specifically called out the design and implementation of the plan’s custom target-date funds.

Fujitsu Technology and Business of America has agreed to a $14 million settlement that ends a class action lawsuit alleging a variety of fiduciary failures in the management of the company’s defined contribution retirement plan.

Prior to this action, U.S. Magistrate Judge Nathanael M. Cousins, of the U.S. District Court for the Northern District of California, found plaintiffs in the excessive fee case had adequately pled the causes of action for breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA).

The initial lawsuit claimed, as of the end of 2013, that the plan had approximately $1.3 billion in assets. The lawsuit contended that among defined contribution plans with more than $1 billion in assets, the average plan has costs equal to 0.33% of the plan’s assets per year. However, in 2013, total fees for the Fujitsu plan amounted to approximately 0.88% of plan assets, or about $11,400,000. In 2014, total fees amounted to approximately 0.90% of Plan assets, or about $11,900,000.

The plaintiffs in the lawsuit, all participants in the plan, attributed the high costs to three factors:  “Defendants failed to utilize the least expensive available share class for many mutual funds within the plan; defendants caused the plan to pay recordkeeping and administrative expenses far in excess of what a prudent fiduciary would pay for those same services (plaintiffs estimate that after accounting for revenue sharing, the plan paid approximately eight to ten times what a prudent fiduciary would have paid for recordkeeping in 2014); and defendants systematically failed to manage the plan’s investments in a cost-conscious manner, selecting and retaining investments without regard for the cost of those investments and without considering the availability of far cheaper options that would have provided comparable or superior investment management services.”

According to the complaint, in October 2011, defendants transferred a large portion of the plan’s assets into a set of custom TDFs designed by defendant Shepherd Kaplan, LLC: “Despite a marketplace replete with competitive target-date fund offerings and experienced investment advisers, defendants hired Shepherd Kaplan—an investment adviser with no public track record of managing or designing target-date funds—to create a set of custom target-date funds and select the mutual funds that make up each target-date fund,” the lawsuit stated.

The plaintiffs attributed the investment adviser’s apparent inexperience and lack of a published track record for the asset allocations within the TDFs being “fundamentally flawed. The complaint suggested that as a result of fundamental flaws in design and implementation, since their inception the Fujitsu TDFs have underperformed their benchmark indices by several percentage points per year on an overall basis. In addition, fees for the TDFs ranged from 69 bps for the Income fund to 108 bps for the 2055 fund.

In now taking this first step to settle the lawsuit, Fujitsu has reportedly agreed to pay $14 million and to enact other, non-monetary relief for plaintiffs. Subject to fairness hearings and final approval, the deal is reportedly worth roughly $600 for each of the nearly 23,000 class members, although these details have not yet been confirmed. The public details of the settlement are laid out in this exhibit document.