Compliance March 16, 2022

$5.1M Settlement Struck in Costco ERISA Lawsuit

The lawsuit suggested the fiduciaries of the plan breached their ERISA duties by authorizing the plan to pay unreasonably high fees for recordkeeping, among other allegations.

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The parties in an Employee Retirement Income Security Act lawsuit filed against Costco have reached a settlement that will see the company pay $5.1 million to resolve allegations that it committed fiduciary breaches in the provision of retirement benefits to employees.

The lawsuit arose in June 2020, when a participant in the Costco 401(k) Retirement Plan filed a suit against his employer, its board of directors and the members of a benefits committee. The lawsuit suggested the fiduciaries of the plan breached their ERISA duties by authorizing the plan to pay unreasonably high fees for recordkeeping; failing to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent in terms of cost; and maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories.

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The complaint alleged the defendants did not have a viable methodology for monitoring the expenses of the funds in the plan, failed to have an independent system of review  to ensure that the plan participants were charged appropriate and reasonable fees for the plan’s investment options, and failed to leverage the plan’s size to negotiate lower expense ratios for certain investment options maintained and/or added to the plan during the class period.

In agreeing to the settlement, Costco admits no wrongdoing and insulates itself and its executives from future related allegations. The firm will pay  $5.1 million into a settlement fund, of which a maximum of $1.5 million will be paid out as attorney’s fees, with the remainder going to participants and beneficiaries of the Costco retirement plan.

In addition to the settlement payment, the settlement agreement also covers various non-monetary items. For example, commencing no later than the end of the first calendar quarter beginning after the settlement’s effective date, Costco “will ensure that the plan administrative service per capita recordkeeping fee deducted from plan accounts does not exceed $3.25 per plan account per quarter.”

The settlement agreement further stipulates that Costco’s obligation to ensure that the plan administrative service per capita recordkeeping fee does not exceed $3.25 per plan account per quarter “shall continue for the number of calendar quarters necessary for the value of the reduction of the plan administrative service per capita recordkeeping fee amount to total $3.2 million.” To this end, the agreement presents a formula that Costco must use to calculate the level of recordkeeping and administration fees paid. In basic terms, the plan’s fiduciaries must subtract from the actual per-plan account recordkeeping fee charged in the first quarter of 2022, the fee charged in the subsequent quarter in question, and then multiply the result by the number of fee-paying plan accounts during the quarter in question. Then, the fiduciaries must add the results for all such quarters.

“If this calculation results in a reduction in the plan administrative service per capita recordkeeping fee for any fraction of a calendar quarter, the fee for such quarter may be reduced on a pro rata basis such that the total fee reduction does not exceed $3.2 million,” the agreement stipulates. “Costco may, but is not required to, meet its obligation to ensure the value of the fee reduction in the amount described … by obtaining a plan administrative service per capita recordkeeping fee lower than $3.25 per plan account in one or more quarters.”

The settlement says Costco may arrange for a lower fee “by any reasonable means including, but not limited to, direct negotiation with the recordkeeper, a request for proposal, and/or a company subsidy.”

The full text of the settlement agreement is available here.

Administration March 16, 2022

Plan Sponsors Are Mulling Retirement Income Options

Plan sponsors are taking a deliberate approach to adopting retirement income solutions for participants since the passage of the SECURE Act.

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Plan sponsors have not pursued massive adoption of retirement income options for participants following passage of the Setting Every Community Up for Retirement Enhancement Act, according to industry experts.

The SECURE Act created a new fiduciary safe harbor for selecting an annuity provider. Many players in the retirement industry anticipated that this would pave the way for greater adoption of in-plan retirement income options, but that has not been the case.

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Plan sponsors are taking a deliberate approach as “a fair amount of healthy discussions about retirement income,” are underway, says Jeff Cimini, senior vice president, retirement product management, at Voya Financial. “We’re seeing some clients moving towards the adoption of solutions,” he explains.

When plan sponsors consider retirement income options for participants, they’re more likely considering “different investment choices that allow either a participant or a managed account provider to combine different investment strategies that produce an asset allocation specifically for those drawing income,” Cimini says.

With these solutions, retirement plan participants enrolled in a defined contribution plan can choose to annuitize part or all their accumulated retirement savings to account for longevity risk. Participants can also choose from among managed payout solutions—while staying in-plan after retirement—or systematic withdrawals, to create a lifetime income stream.

Many participants who have accumulated significant savings remain anxious about outliving their savings and many see in-plan retirement income options favorably, yet adoption has not spiked, says Jennifer Doss, defined contribution practice leader at CAPTRUST. “Not a lot of action, a lot of discussion, a lot of education—that’s the state that we’re in right now,” she says.

Plan sponsors’ questions have increased since the beginning of 2021, Doss adds. “We got a big uptick in questions around what products are out there, what products are available at different recordkeepers, what types of solutions and services are both offered at the recordkeepers and not just from an investment perspective—what kind of services are offered or more geared towards retirement income for retirees,” she explains.

Data from the 2021 PLANSPONSOR Defined Contribution Plan Benchmarking Report shows that 35.4% of plans overall offered no retirement income option in 2021, compared to 44% of plans that did not offer any such solution to participants in 2019. The 2021 figures show that large and jumbo plans—with assets of $1 billion or more—are more likely to provide a lifetime income option, compared with plans with assets of $1 million or less.

According to the 2021 report, systematic withdrawals is the most prevalent retirement income solution offered (39.3%), and out-of-plan annuity purchase is the least prevalent (4.2%). In-plan insurance-based products that provide guaranteed income—annuities, Guaranteed Minimum Income Benefit, Guaranteed Minimum Withdrawal Benefit, and other guaranteed products—were used by 7% of plans overall in 2021, compared to 11.1% in 2019.

The figures might indicate a trend that plan sponsors are looking at broad ways to include retirement income solutions in their plans, which Cimini says is reflected in conversations with plan sponsors. “We’re having discussions about supporting pre-retirees and retirees who’d like to stay in the plan, [who want] the ability to generate income from the plan, but considerations include more than just the guaranteed [products],” he says.

“We have a lot of clients that are thinking about what we’ll call ‘intelligent’ or ‘smart withdrawal’ programs, tools that help participants with systematic withdrawals,” Cimini says. “We’ve seen an increase in the consideration of what we’ll call ‘the retirement sleeve,’ which is multiple choices of investment programs that offer different ways to generate income.”

He adds that plan sponsor clients are targeting retirement income products to participants that are at or near retirement.

One trend is plan sponsors offering tools to help participants understand their lifetime income needs and whether savings are sufficient to meet those needs.

Doss says a trend that would lead to greater adoption of retirement income solutions is for plan sponsors to default plan participants into a retirement income product or include an income component in qualified default investment alternative. “If we see adoption in the future, it’s going to be integrated into the QDIA,” she says. “What we’ve learned historically is that if you offer it as a standalone option that just doesn’t get the uptake and the desired results that that you would want as a plan sponsor.”

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