A federal court judge has mostly denied motions to dismiss a lawsuit against Insperity, a professional employer organization (PEO) that offers a 401(k) plan to employees of small- and medium-sized businesses that contract with Insperity to provide human resources services. The lawsuit accused Insperity and some of its subsidiaries and providers with violating their fiduciary duties by offering plan funds with excessive fees and engaging in self-dealing, among other claims.

For one thing, the plaintiffs contend in their complaint that the defendants breached their fiduciary duties and committed prohibited transactions under the Employee Retirement Income Security Act (ERISA) by selecting untested proprietary funds as investment options for the plan and retaining those funds despite their poor performance, which benefited defendants at the expense of participants.

Plaintiffs allege that in 2012, Reliance removed the plan’s J.P. Morgan-managed target-date funds (TDFs) and replaced them with the Insperity TDFs, for which Reliance Trust Company is the investment manager and which had been created two days before Reliance included them in the plan. Reliance then purportedly transferred $466 million of the plan’s assets into these funds, using the plan’s assets as seed money. Like other target-date funds, Reliance’s assets invested in other funds that had their own fees and expenses that were deducted from fund assets. Unlike other target-date funds, including those offered by established competitors such as J.P. Morgan, Vanguard, and T. Rowe Price, Reliance allegedly charged additional management and administrative fees in addition to the fees assessed by the underlying funds. According to the Amended Complaint, Reliance’s funds drastically underperformed alternatives from J.P. Morgan, Vanguard, and T. Rowe Price, causing the plan losses of more $56 million compared to prudent alternatives. Plaintiffs allege Reliance’s choice was made to benefit itself and because its funds paid revenue sharing to Insperity. U.S. District Judge Mark H. Cohen of the U.S. District Court for the Northern District of Georgia said that distinguishes this case from those that merely allege underperformance of selected funds without a concomitant allegation of self-dealing.

Cohen found plaintiffs’ allegations sufficient to state a claim for breach of fiduciary duty against Reliance, and in denying the motion to dismiss, said Reliance’s arguments are more appropriately addressed on summary judgment, after the benefit of discovery.

The plaintiffs also claimed that defendants breached their fiduciary duties by selecting Retirement Services, a subsidiary of Insperity, as the plan's recordkeeper, paying it excessive administrative expenses, and failing to monitor and control the amount of those administrative expenses.

Plaintiffs allege that Insperity and Insperity Holdings, named in the plan as the fiduciary responsible for the plan's control, management, and administration, selected Retirement Services as the plan's recordkeeper without conducting any competitive bidding process. They also contend that all defendants breached their fiduciary duties as follows: Reliance, which is responsible for monitoring the compensation received by Retirement Services, failed to control the amount of asset-based revenue sharing and recordkeeping costs as the plan's assets grew; Retirement Services received compensation that was unreasonable because it drastically exceeded the direct expenses incurred in the administration of the plan; Holdings failed to adequately monitor Reliance's monitoring of Retirement Services; and Insperity billed participating employers for additional amounts for service and recordkeeping charges, which were paid to Retirement Services on top of the already allegedly excessive fees assessed.

As an initial matter, the Insperity defendants contend that plaintiffs' claim based on the initial selection of the recordkeeper is time-barred. Under ERISA, a plaintiff must file suit within the shorter of either six years after the "date of the last action which constituted a part of the breach or violation," or three years from the date that the plaintiff had "actual knowledge" of the breach. Retirement Services was selected as recordkeeper in October 2003, so Cohen said he will not consider plaintiffs' contention that Insperity and Holdings should have selected the recordkeeper through a competitive bidding process. He granted the Insperity Defendants' motion to dismiss that portion of the Amended Complaint.

However, because the majority of plaintiffs' assertions against Retirement Services concern its actions while operating as the recordkeeper, those allegations are not time-barred, Cohen said. He found the plaintiffs have sufficiently alleged that the Insperity defendants acted as fiduciaries concerning administrative and recordkeeping fees to withstand a motion to dismiss.

The plaintiffs claimed the defendants breached their fiduciary duties by providing as a plan investment an imprudent money market fund that was not in the sole interest of participants and did not provide meaningful retirement benefits without considering a stable value fund option, and then providing an imprudent proprietary stable value fund.

According to the court opinion, plaintiffs allege that stable value funds are unique investments available only to retirement plans, especially large plans, which provide safety of principal and liquidity but far higher returns than money market mutual funds, which are used by retail investors with shorter investment horizons and more rapid trading activity. Cohen found their allegations in the compliant fail to state a claim upon which relief can be granted. “Plaintiffs challenge the mere selection of one fund over another, with no allegations (other than hindsight financial comparison) of why the selection was improper,” he wrote. Therefore, he granted the Insperity defendants' and Reliance's motions to dismiss Count IV of the complaint.

Plaintiffs alleged that defendants' selection of funds with excessive management fees resulted in greater income for defendants and that Reliance Trust and Insperity entities engaged in blatant self-dealing when offering higher-cost investments to plan participants. In order to drive revenue to Reliance Trust, Reliance Trust selected these investments, and Insperity entities allowed Reliance Trust proprietary investments to be offered as plan investment options. In return. Reliance Trust selected higher-cost share classes of the plan's funds, which paid a larger amount of asset-based revenue sharing to Insperity entities than the available lower-cost share classes would have paid. Cohen found plaintiffs have stated a claim.

Finally, Cohen found plaintiffs have included sufficient specific allegations of deficient monitoring on behalf of Holdings to state a claim for relief.