401(k) lawsuits spreading from jumbo plans to large plans

Smaller-than-jumbo size retirement plans are being targeted in excessive fee lawsuits by a team of boutique plaintiffs’ attorneys new to the 401(k) litigation arena.

In the latest filing, participants in the defined contribution plan sponsored by TriHealth, Inc., a Cincinnati-based hospital system, allege plan fiduciaries breached their obligations under the Employee Retirement Income Security Act by offering an investment menu laden with excessively costly options, resulting in $7.2 million in lost gains to the plan between 2013 and 2017.

In court papers filed in the U.S. District Court for the Southern District of Ohio, attorneys for a prospective class of more than 12,000 plan participants allege that “administrative fees” charged to the plan between 2013 and 2017 were 90 percent more than fees on similar-sized plans when calculated on a per participant or percentage of plan asset basis.

In 2017, the plan paid 86 basis points, or 0.86 percent, in fees as a percentage of total plan assets. The average fee charge for plans in the $250 million to $500 million segment was 41 basis points, according to court documents.

As is practice in claims against jumbo plans, attorneys list menu offerings, their expense ratios, and compare them to allegedly similar passive investment or lower share class offerings in the marketplace.

In 2017, the menu held advisor class shares of T. Rowe Price’s target-date funds, and a blend of 15 other passively and actively managed mutual funds.

In at least one instance, plaintiffs’ attorneys use a potentially imbalanced comparison.

An institution share class of Neuberger Berman’s Socially Responsible fund, which falls under an actively managed Environmental, Social, and Governance investment, was offered for 67 basis points. The suit then compares that cost to Fidelity’s large cap index fund, available for 2 basis points, and alleges a price discrepancy of 3,250 percent.

Plaintiffs’ attorneys say they relied on a “commercially available program” used by retirement plan advisors to run a cost comparison against other plans with a similar number of participants and assets.

But BrightScope, which rates plans against a more specific set of industry criteria, rates TriHealth’s plan in the top 15 percent within its peer group. Its fees are ranked as “average”; the company generosity is ranked as “great.”

“These excessive fees cannot be justified,” the lawsuit says. “The high fees, occurring over years, represent more than a sloppy business practice; they are a breach of the fiduciary duties owed by TriHealth to plan participants and beneficiaries.”

Adidas

That language—indeed, much of the argument in the TriHealth claim—is similar, if not exact, to arguments presented in three other cases. The lawsuits also use similar case law to back their claims.

In a claim filed in U.S. District Court for the District of Oregon against Adidas America, Inc., which ranges over a similar time period, plaintiffs allege excessive fees led to $6.2 million in plan losses across nearly 7,500 participant accounts.

Investment fees in the Adidas plan were greater than 75 percent of plans of similar size and value, the suit says.

The benchmarking software the plaintiffs’ attorneys use for their comparative analysis is not named, but court documents say the software included information on more than 55,000 “financial plans of all types.”

But in comparing the Adidas plan, which the claim says holds more than $500 million in assets, the argument runs comparisons against just 37 other plans.

In 2017, the Adidas plan paid 61 basis points as a percentage of total plan assets, or $513 per participant. The average of the compared plans was 43 basis points, and $357 per participant.

BrightScope’s current rating for the Adidas 401(k) plan puts it in the top 15 percent of its peer group, and describes total plan costs as “low fees,” and its company generosity as “great.”

None of the service providers to the plans are named as defendants in the four lawsuits.

Greystar

In a claim filed in U.S. District Court for the Western District of Texas against Greystar Management Services, a lone plaintiff alleges the plan lost upwards of $6.2 million in excessive fund fees between 2013 and 2017, across a prospective class of nearly 15,000 plan participants.

The suit says the plan falls in the $100 million to $250 million range. In 2017, Greystar’s plan paid 161 basis points, or 1.61 percent in management fees as a percentage of plan assets, or $196 per participant.

A comparison of 12 other plans of similar size paid an average of 39 basis points, or $47 per participant.

BrightScope ranks the plan as below average in its peer group. It says it has “high fees” and average company generosity, with “poor” average account balances.

Have the plaintiffs stated a claim?

A fourth claim against West Corporation’s 401(k) plan filed in U.S. District Court for the Southern District of Alabama alleges the telecommunication company’s plan suffered millions in losses to high-fee investment offerings.

The plan has over 9,600 participants and more than $360.7 million in plan assets, according to BrightScope, which ranks the plan as having average fees and above-average company generosity.

In all the cases, Greg Coleman Law, a Knoxville, TN boutique plaintiffs’ firm with 10 attorneys, is one of the firms representing the plaintiffs.

While these are the first forays into the 401(k) litigation fracas for the firm, its founder was part of a team that won a 2011 settlement worth $178.6 million for steelworkers in a defined benefit plan.

Jordan Lewis, a Fort Lauderdale-based solo practitioner, is named counsel for plaintiffs in the TriHealth, Adidas, and Greystar claims.

Among the similar language found in at least three of the cases, plaintiffs’ attorneys say:

By selecting and retaining the Plan’s excessive cost investments while failing to adequately investigate the use of superior lower-cost mutual funds from other fund companies that were readily available to the Plan or foregoing those alternatives without any prudent reason for doing so, Adidas caused Plan participants to lose millions of dollars of their retirement savings through excessive fees.

Whether the degree of plan fiduciaries’ due diligence can be known before discovery will be a question for the respective courts.

What is knowable? The four plans in question will have to defend the claims made by their participants.

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