Compliance August 11, 2020

Mercy Health Corp. Faces 403(b) Plan Excessive Fee Lawsuit

Among other things, the lawsuit alleges the health care system unreasonably maintained investment advisers and consultants despite the known availability of others with lower costs and/or better performance histories.

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An Employee Retirement Income Security Act (ERISA) lawsuit has been filed against fiduciaries of Mercy Health Corp.’s 403(b) plan.

The complaint alleges that the fiduciaries breached the duties they owed to the plan and its participants by authorizing the plan to pay unreasonably high fees for recordkeeping and administration (RK&A); failing to objectively, reasonably and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; and unreasonably maintaining investment advisers and consultants for the plan despite the known availability of similar service providers with lower costs and/or better performance histories.

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The plaintiff contends that the defendants “did not engage in a prudent decision-making process and/or engaged in self-dealing, as there is no other explanation for why the plan paid these unreasonable fees for RK&A, investment management, and investment advisory and consultant services.” The plaintiff also brings prohibited transaction claims based on dealings between the defendants and the recordkeeper, investment manager, investment advisers and consultants to the plan.

The proposed class action lawsuit alleges that during the class period, the defendants failed to regularly monitor the plan’s RK&A fees paid to covered service providers, including but not limited to Voya, and failed to regularly solicit quotes and/or competitive bids from covered service providers in order to avoid paying unreasonable fees for RK&A services. According to the plaintiff, the defendants did not have a plan or process in place to ensure that the plan paid no more than a competitive reasonable fee for RK&A services.

Because the defendants failed to regularly monitor the plan’s RK&A fees paid to covered service providers, the fees were significantly higher than they would have been had the defendants engaged in this process, the complaint states. Using a graph and table, the lawsuit contends that during the year 2018, other plans of similar sizes with similar amounts of money under management as compared to the Mercy Health plan paid recordkeepers an average of approximately $536,914, or approximately $48.83 per participant. Mercy Health’s plan paid RK&A fees to Voya totaling approximately $1,294,361, or approximately $118.00 per participants.

The lawsuit also alleges that the defendants failed to ensure that the plan paid no more than a reasonable fee for expenses related to its target-date funds (TDFs) and that they did not have a plan or process in place to ensure that the plan paid no more than a reasonable fee for expenses related to its TDFs.

As with many other excessive fee lawsuits, the plaintiff in this case says the plan paid unreasonably high fees based on the share classes selected for funds in the plan. “Defendants: did not conduct an impartial and objectively reasonable review of the plan’s investments on at least a quarterly basis; did not identify cheaper, lower-cost, more prudent share classes available to the plan; and did not transfer the plan’s investments into these cheaper, lower-cost, and/or institutional shares, all to the substantial detriment of plaintiff and the plan’s participants,” the complaint states. It contends that because the defendants failed to act in the best interests of participants by engaging in an objectively reasonable investigation process when selecting its investments, the defendants caused unreasonable and unnecessary losses to participants in the amount of approximately $19,460,841.

The lawsuit also specifically calls out what it says are excessive fees associated with the plan’s stable value funds.

According to the complaint, during the class period, the defendants paid service providers in excess of $4,500,000 for fees and commissions. It says the services “provided by Regulus Advisors do not warrant the fees charged because there are other equally or superior services available to plan participants, including plaintiff, for free or at significantly lower rates than those charged by Regulus Advisors.”

Noting that Voya and Regent are parties in interest as they provide services to the plan, the complaint states that the defendants “knew or should have known that Regal and Voya, as dual-registered RIAs, had an inherent conflict of interest and/or interests materially adverse to the best interests of plan participants.” It says the defendants caused the plan to engage in transactions in which goods and/or services were furnished, either directly or indirectly, between the plan and parties in interest, including, but not limited to Regal and Voya. According to the complaint, the defendants engaged in prohibited transactions that do not qualify for a statutory exemption as reasonable compensation for plan service providers.

Mercy Health has not yet responded to a request for comment.

Investing August 11, 2020

Actuarial Firms, Treasury Clash Over Union Pension Cuts

Lead actuaries at Segal say the Treasury Department is preparing to wrongfully reject an application to reduce benefit payments made by one of its financially stressed union pension clients.

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Last week, PLANSPONSOR reported on the situation unfolding at the American Federation of Musicians and Employers’ Pension Fund (AFM-EPF), which applied last year to reduce the benefits being paid and accrued by pensioners, based on authorities granted under the Multiemployer Pension Reform Act of 2014 (MPRA).

The plan’s application was among more than 30 filed in the past several years by severely financially stressed multiemployer pension plans. So far, the applications have mainly covered workers in transportation and the building trades, but upward of 120 plans in a number of industries are considered “critical and declining.” Under the MPRA, this status means they are expected to run out of money within 20 years. Such plans may suspend benefits if that would prevent outright insolvency, subject to a majority vote by participants and approval by the U.S. Treasury.

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Our coverage explained how the Treasury’s staff had told the AFM-EPF it will recommend that the Treasury leadership deny the benefits reduction plan. In a statement about the news, the fund said it had been informed that the Treasury staff disagrees with two of the actuarial assumptions used in its application. On that basis, Treasury staff will apparently recommend that the Secretary of the Treasury deny the application.

The actuary involved in that matter is Milliman, but the publication of our story garnered an immediate response from Segal, another actuarial firm that is highly active in serving the multiemployer union pension marketplace. In a subsequent interview with PLANSPONSOR, three of the firm’s lead actuaries voiced frank frustration that their client, the Local 807 Labor-Management Pension Fund, is facing the same situation. The 807 Fund had $136.5 million in assets as of August 2019, when it was 41.3% funded on a Pension Protection Act of 2006 basis.

Simply put, the trio feel the Treasury staff’s disagreement with certain investment assumptions generated by Segal’s in-house experts and used by the Local 807 Fund’s proposal is arbitrary and inconsistent with the agency’s stated policies.

“Like the situation with the Musicians’ Fund, we have been made to understand that the Treasury staff intends to recommend that the Secretary deny the 807 Fund’s application, in our case because it cannot accept the reasonableness of the selected investment return assumption used to demonstrate that the 807 Fund will remain solvent after the proposed suspension,” explains Eli Greenblum, senior vice president and chief actuary at Segal. “We firmly believe that the investment return assumption used in the fund’s application is clearly reasonable for its intended purpose.”

Greenblum says the projection conforms to all statutory requirements and applicable regulatory guidance, and that it further adheres to applicable actuarial standards of practice embraced by industry professionals. For this reason, he and the other Segal leaders say they are left confused and frustrated by the Treasury staff’s stance.

To be clear, the Segal leaders say it is not abnormal for stressed union benefit cut applications to be denied under MPRA’s rules. In fact, not a single early application was approved under the Obama administration, and it took until 2016 for the first proposal to win approval by the Treasury. What they say is different in this case is that the Treasury staff has seemingly decided to simply change their expectations for how benefit cut plans are generated—not based on any actual piece of legislation, regulation, interpretation or guidance.

Jason Russell, a Segal consulting actuary and senior vice president, says the actual details of how the Treasury’s expectations have changed are rather technical, as they are tied to the way benefit reduction plans must spell out their investment assumptions over the first 10 years of the projection versus the time period from year 11 through the end of the benefits payment period. There are also matters to consider in terms of whether the projections are dollar-weighted or time-weighted, he says. The full technical details can be found in the letter Segal sent recently to the Treasury, asking the senior leadership at the agency to overrule the staff recommendations in this and similar cases.

The Segal experts say they are not sure what to expect in this case, but as Greenblum put it, “the Treasury Secretary has a lot going on right now, and it is probably not likely that this matter will be a priority.” This means it is likely that the 807 Fund will have to restart its application process from scratch, which is also likely the case for the American Federation of Musicians and Employers’ Pension Fund.

“Every day you have to delay one of these applications, and when you have to arbitrarily reduce the investment assumptions in the way the Treasury is seeming to demand, this means the pensioners will face even deeper cuts,” Greenblum says.

Alan Sofge, another Segal senior vice president and senior benefits consultant, adds that the Treasury staff, during a number of discussions with the 807 Fund and Segal, had not voiced any concern about the investment assumptions included in the benefits reduction plan. Instead, they seemed more interested in discussing the impact of the coronavirus pandemic on the 807 Fund, which has actually been muted, given the diverse employer base in the union.

“It was only about a week and a half ago that we first learned about their disagreement with our investment assumption,” he says.

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