Excessive Fee Suit Calls Out Custom TDFs

A newly filed retirement plan excessive fee suit claims fiduciaries of the Fujitsu Group Defined Contribution and 401(k) Plan breached their fiduciary duties of loyalty and prudence under the Employee Retirement Income Security Act (ERISA) by designing and administering one of the most expensive large 401(k) plans in the country.

According to the complaint, as of the end of 2013, the plan had approximately $1.3 billion in assets. The lawsuit contends 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.

“These fees are almost three times higher than the average for plans of similar size, making the plan one of the five most expensive defined contribution plans out of approximately 650 plans with assets of over $1 billion dollars. Had the plan simply maintained average expenses (which likely exceed the costs a prudent fiduciary would incur), the plan would have paid only $4,260,000 in fees in 2013, and $4,400,000 in fees in 2014, demonstrating that the plan incurred at least $7 million per year in excess fees,” the complaint says.

The plaintiffs in the lawsuit, participants in the plan, attribute 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.

However, the complaint specifically calls out the design and implementation of the plan’s target-date funds (TDFs).

According to the complaint, in October 2011, defendants transferred the large majority 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 states. 

The plaintiffs attribute 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 says 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. 

The complaint notes that in March 2016, in response to plaintiffs’ counsel’s investigation and impending litigation, the Fujitsu defendants overhauled the plan’s management and investment lineup, hiring a new investment adviser (who is not a named defendant in the lawsuit) as the plan’s investment fiduciary, eliminating all of the “Fujitsu LifeCycle” funds, and introducing in their place a new set of custom TDFs called the “Fujitsu Diversified” funds. Fujitsu also overhauled the mutual fund lineup within the plan, replacing the majority of the investments previously held. “These recent changes to the plan, made in response to anticipated litigation, reflect that defendants themselves understood there were serious problems with the plan’s investments and design,” the lawsuit contends. 

Fujitsu remedied the share class issues for the mutual funds held by the plan in January 2016, after learning of plaintiffs’ investigation and its specific subject matter. However, the complaint notes that “defendants did not refund the millions of dollars in excessive fees that participants needlessly paid due to defendants’ failure to make this change years earlier.” 

The complaint in Johnson et.al. v. Fujitsu Technology and Business of America, Inc. et. al. is here.