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Compliance September 25, 2017
Participant Says ‘Large Plan’ Failed to Negotiate Better Fees
An excessive fee lawsuit has been filed against fiduciaries of the Novitex Enterprise Solutions Retirement Savings Plan, a 401(k) plan which had more than $157 million in assets as of the end of 2015.
Reported by Rebecca Moore
A participant in the Novitex Enterprise Solutions Retirement Savings Plan has sued plan fiduciaries for allowing unreasonable expenses to be charged to plan participants.
The complaint calls the plan “a significant and large 401(k) plan in terms of assets, with more than $157 million in assets as of December 31, 2015 and more than 10,000 participants.” It argues that a plan of this size has “significant bargaining power and the ability to demand low-cost administrative and investment management services within the marketplace for administration of 401(k) plans and the investment of 401(k) assets.”
The lawsuit says the fiduciaries breached their duties under the Employee Retirement Income Security Act (ERISA) by failing to fully disclose to participants the expenses and risks of the plan’s investment options; by allowing unreasonable expenses to be charged to participants for administration of the plan; and by selecting and retaining opaque, high-cost, and poor-performing investments instead of other available and more prudent alternative investments.
For the stable value investment option in the plan, the Prudential Guaranteed Income Fund, the lawsuit not only calls into question the fees, but also the crediting rate used for the fund. According to the complaint, the fund guarantees a 1.50% return before the application of a 0.40% “asset charge,” and provided only a net rate of return to 1.35% from January 2017 to June 1, 2017. It says the stable value industry benchmark, the Hueler Analytics Stable Value Pooled Fund Index, has a return of 1.82% from January 2017 to May 31, 2017. “The discrepancy is egregious in light of the Plan Investment Policy Statement, which specifically provides that, with respect to the stable value option, a review of applicable fees and revenue sharing (i.e., the asset charge) shall be a selection criteria,” the complaint says. It compares the Prudential Guaranteed Income Fund to the Vanguard Stable Value Fund, which has a lower expense ratio of 0.35%, and a higher crediting rate of 1.86%.
The participant, individually and on behalf of the plan, seeks to recover and obtain all losses resulting from each breach of fiduciary duty, as well as other equitable or remedial relief for the plan as the court deems appropriate.
Specific AllegationsThe complaint notes that with the exception of the Vanguard Institutional Index fund, all of the variable investment options are actively managed. And, with the exception of the Vanguard Institutional Index fund (0.04% expense ratio) and the actively-managed Vanguard Inflation-Protected Securities fund (0.10% expense ratio), all are costly, with expense ratios ranging from 0.69% to 1.08%, with a mean of 0.78% and a median of 0.89%.
“Despite the negotiating leverage based on its size, the plan did not even utilize the cheapest share class for most of its investment options,” the lawsuit says.
It also alleges “any revenue sharing paid from the investment options offered by the plan to compensate for administrative, recordkeeping and other services was unreasonable on its face because a retirement plan with the assets of the plan could have easily achieved lower total plan cost by adopting a zero revenue sharing menu of investment options and/or by properly achieving all available savings from revenue sharing by establishing a properly structured and designed plan expense account that credited all revenue sharing to the benefit of the plan and equalized the amount of participant fees (both direct and indirect) paid by participants of the plan.”
The complaint calls out UBS, the plan’s fiduciary investment adviser, saying Novitex and the Benefits Committee breached their fiduciary duty of prudence by retaining and/or permitting UBS to be excessively compensated. According to the complaint, in addition to a $125,000 per annum base fee (which it says is excessive given the size of the plan), UBS also receives “additional compensation from third parties in connection with assets in which clients’ advisory accounts are invested.” UBS may also receive compensation as a result of “intercompany profit and servicing agreements.” The participant says this means “UBS has a vested interest in obtaining more compensation from third parties and related entities, which may run counter to the interests of the plan of choosing the most prudent investment options.”
Likewise, the complaint says the plan’s recordkeeper, Transamerica, was paid excessive recordkeeping and related fees in light of the assets and other characteristics of the plan. It charges Novitex and the Benefits Committee with breaching their fiduciary duties by failing to monitor and ensure that Transamerica was paid reasonable compensation.