Lawsuit Against Nestle Takes New Approach at Challenging Managed Account Fees

A participant in the Nestle 401(k) Savings Plan has filed a proposed class action lawsuit alleging that the company, its board of directors and various other defendants breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA).

According to the complaint, the plaintiff alleges that from October 9, 2014, through the date of judgment, the defendants breached their fiduciary duties by, among other things, authorizing the plan to pay unreasonably high fees for recordkeeping and administration, authorizing the plan to pay unreasonably high fees for managed account services and engaging in self-dealing with regard to administration of the plan.

The lawsuit alleges that because the defendants failed to regularly monitor recordkeeping and administrative fees, and because they failed to regularly solicit quotes or bids from providers, including their own recordkeeper, “fees were significantly higher than they would have been had defendants engaged in these processes.” The lawsuit also contends that any process the defendants may have had in place was performed ineffectively.

“The plan had on average 39,557 participants and paid an average effective annual recordkeeping and administrative fee of at least approximately $2,357,846, which equates to an average of at least approximately $60 per participant,” the complaint says. The document includes a table and graph intended to “illustrate that a hypothetical prudent plan fiduciary would have paid on average an effective annual [recordkeeping and administration] fee of around $28 per participant, if not lower.”

The participants in the plan are offered a managed account service provided by Voya Retirement Advisors. The lawsuit says that through the end of last year, the Nestle defendants had allowed participants to pay an annual fee of at least 0.5% on the first $100,000, 0.4% on the next $150,000 and 0.25% on assets greater than $250,000. The complaint includes a chart intended to illustrate that these fees are greater than what participants in similarly situated plans pay. In addition, it says there are other managed account providers whose services are virtually identical to the services provided to Nestle plan participants and whose fees range from 0.25% to 0.3% on all assets.

The lawsuit contends that the managed account service added no material value to participants to warrant the additional fees, saying that, in most cases, the asset allocation created by the service was not materially different than the asset allocation of the age appropriate target-date option for participants, which was cheaper. “As a result, … the reasonable fee for the plan’s ‘Professional Management’ service was zero or very close to zero,” the complaint states.

Of note, another participant in the Nestle 401(k) plan filed a lawsuit in 2017 claiming Voya Financial and Voya Retirement Advisors engaged in prohibited transactions in violation of ERISA regarding fees for the “Professional Management” service and an advice service. The original lawsuit and a second attempt by the participant were dismissed. When dismissing the second attempt, U.S. District Judge Lorna G. Schofield of the U.S. District Court for the Southern District of New York said any claim based on Voya Retirement Advisors’ allegedly excessive fee arrangement lies against only Nestle, which retained ultimate authority to accept or reject the proposed terms of the agreement.

The current lawsuit’s final allegation is that Nestle paid itself for providing some sort of administrative service to its 401(k) plan that did not provide any value to the plan, were not provided for the exclusive benefit of the participants and did not warrant the payment of the fees to Nestle. It says the services can be provided by the plan’s recordkeeper. “Nestle’s payment of these fees to itself out of plan assets represents a clear conflict of interest with the plan and plan participants and violates the duty of loyalty it owes to plan participants,” the complaint states.

Nestle has not yet responded to a request for comment about the lawsuit.