Health Care Provider Accused of Excessive Fees in 403(b) and 401(k) Plans

Participants in Kaleida Health’s 403(b) and 401(k) plans have filed a lawsuit individually and on behalf the plans and all other similarly situated participants over excessive investment fees.

The lawsuit alleges that the defendants failed to take advantage of the plans’ bargaining power by only offering actively managed retail mutual funds as investment options instead of identical investor class mutual funds with lower operating expenses. The named defendants are Kaleida Health, its retirement plan committee and its director of employee benefits and pension plans.

The complaint notes that the investment options offered by each of the plans are nearly identical. It specifically calls out the 11 T. Rowe Price target-date funds (TDFs) offered by the plans, saying they are all adviser or retail class funds—as opposed to investor or institutional class funds—that charge a 12b-1 fee of .25% of the fund’s net assets. These funds also have investor or institutional class shares that do not charge a 12b-1 fee.

“In the extremely competitive 401(k) and 403 (b) marketplaces, retirement plans with very large pools of assets, such as the plans, which together have over $400 million in assets, have the ability to use their bargaining power to obtain institutional classes of shares without 12b-1 fees and, therefore, lower operating expenses,” the complaint says. “Defendants’ selection of mutual funds with 12b-1 fees instead of offering identical funds without those fees is imprudent since participants derive no benefit from those fees.”

The plaintiffs point out in the lawsuit that the retail class funds offered by the plans are the only class of TDFs offered, but also constitute a majority of the mutual fund options offered by the plans.