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Excessive Fee Litigation

To date there have been approximately forty lawsuits filed relative to excessive fees charged to plans. Given the overall success of these suits, the early settlement of Kruger v. Novant Health should not have been a complete surprise. Although it is unusual for an excessive fee case to settle so early, the fact that the specifics of the plaintiff’s allegations painted such an egregious picture no doubt led to that result.

The allegations against Novant included allowing excessive fees to be paid to both the plans’ broker and recordkeeper, and including higher expense mutual fund share classes. The broker’s fees had increased from approximately $800,000 to approximately $6 million in just a few years, as the result of the plans’ growth and the asset-based fees to the broker. In addition, facts were presented indicating other significant business dealings between Novant and the broker, including a gift of $5,000,000 to Novant from a development company owned by the broker, bringing into question whether the broker’s engagement was “conflict-free”.

In addition to monetary relief, the settlement included provision for substantial restrictions on future dealings between the broker and Novant, RFP processes for both advisory and recordkeeping services, and oversight by an independent consultant for at least a four year period. It should be noted that the settlement also provided that future administrative service fees to the plans may not be asset-based, and that the investment menu and IPS be reviewed and revised to ensure that the plans are being operated in the best interests of participants.

We expect to hear more about excessive fee litigation over the course of 2016 based on the number of lawsuits filed in 2015. Some of the fiduciary breach allegations in the most recent cases include:

Case
Fiduciary Breach Allegations
Bell et al v. Anthem Inc. et al
  • Ÿ Use of higher-priced mutual fund share classes when lower cost shares available
  • Ÿ Failure to offer collective trusts and separately managed accounts
  • Ÿ Failure to offer stable value fund instead of money market fund
  • Ÿ Reasonableness of recordkeeping fees
Pledger et al v. Reliance Trust Co. et al
  • Ÿ Retention of revenue sharing by recordkeeper, in excess of reasonable recordkeeping fees
  • Ÿ Self-dealing with respect to recordkeeper services
  • Ÿ Self-dealing with respect to fund selection
Ellis et al v. Fidelity Management Trust Co.
  • Ÿ Poor performance and monitoring on stable value fund
  • Ÿ Misleading information on stable value fund performance
  • Ÿ Excess fees on stable value fund
Urakhchin v. Allianz Asset Management of America, LP 401(k) Savings and Retirement Plan
  • Ÿ Poor performance and monitoring on stable value fund
  • Ÿ Misleading information on stable value fund performance
  • Ÿ Excess fees on stable value fund