Compliance November 13, 2017

Nordstrom Faces 401(k) Plan Excessive Fee Suit

The lawsuit suggests Nordstrom should have offered managed accounts or collective investment trusts to participants in its 401(k) plan.

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A participant in the Nordstrom 401(k) Plan has filed a proposed class action lawsuit against Nordstrom Inc. and its 401(k) plan committee for breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA).

According to the complaint, with $2.6 billion in assets, the Nordstrom plan is one of the largest plans in the country, and as such, has enormous bargaining power to obtain low-cost administrative and investment management services. The suit notes that the overall trend among large 401(k) plans in the last decade has been for administrative fees to be reduced in half, but the Nordstrom plan administrative fees increased by 30% from 2011 to 2016, from $3,799,000 to $4,695,000.

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The lawsuit alleges that Nordstrom and its plan committee allowed unreasonable fees to be incurred by participants; it did not act prudently to lower costs; it failed to use lower cost investment vehicles; and it made inadequate disclosures about fees.

Specifically, the complaint says the administrative fees and trustee fees paid by the plan from 2011 to 2016 ranged from a low of $55.60 to a high of $66.56. It claims these fees are excessive and double the amount of reasonable fees. According to the complaint, a reasonable administrative and recordkeeping fee per person is $30. “The extra costs incurred by Nordstrom participants from 2011 to 2016 were $13.7 million,” it says.

In addition, the plaintiff alleges the fee disclosure Nordstrom provides fails to clearly tell participants if, in fact, their accounts will be charged for plan administrative expenses, and if so, how much. The plan, as a whole, paid administrative expenses of close to $26 million from 2011 to 2016, and this money directly reduced the amount of participant savings, the lawsuit says.

In addition, according to the annual Form 5500s filed by the plan with the U.S. Department of Labor, service providers to the plan received indirect payments from sources other than the plan or its sponsor, yet Nordstrom does not disclose to plan participants the amount of such revenue sharing payments, nor how the payments were applied, the participant alleges. “Without this information, it is not possible to determine whether the revenue sharing amounts were reasonable in relation to administrative costs,” the suit says.

Investment options

According to the complaint, the annual operating fees charged for many of the plan’s investment options were substantially higher than reasonable management and operating fees of comparable funds. It says $1.9 billion of the plan’s assets were in investments costing on average at least 42 basis points (bps) in annual operating fees, which it says are up to 16 times higher than comparable index funds, and up to 2.7 times higher than comparable actively managed funds. The lawsuit says the high-fee funds in the plan could have been easily replaced by lower cost index funds, target-date retirement funds, or actively managed funds. In addition, the lawsuit alleges many of the funds chosen for the plan were newly formed and did not have extensive track records: Of 21 funds in the plan as of October 2016, only four had performance records going back 10 years, and only five had track records going back 5 years. A table in the complaint compares the fees for funds in the plan to allegedly similar Vanguard funds.

The complaint suggests the plan fiduciaries could have offered separately managed accounts to participants. “Separately managed accounts can use the same investment style and same manager as more expensive mutual funds. Separate accounts offer various benefits such as the ability of the Plan sponsor to negotiate fees, directly control investment guidelines, and to avoid paying marketing costs which are included in the cost of mutual funds, and not having to hold large amounts of cash for shareholder redemptions. Nordstrom failed to take advantage of this lower cost alternative,” it says.

Similarly, the complaint suggests plan fiduciaries could have selected collective investment trusts (CITs) for the plan. “Collective investment trusts provide yet another much lower cost investment option for Plan holdings. They are pooled tax exempt investment vehicles which are available for 401(k) plans and are cheaper than mutual funds. While a few of the Plan’s holdings were in collective trusts, the Plan failed to utilize this much cheaper option with respect to the $1.1 billion in Nordstrom Target Retirement Funds,” it says.

The lawsuit seeks to make good to the plan all losses resulting from the breaches of fiduciary duties, and to restore to the plan any lost investment returns. In addition, the plaintiff seeks to reform the plan to comply with ERISA and to prevent further breaches of fiduciary duties and other such equitable and remedial relief as the court may deem appropriate.

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