Compliance

Asset-Based Fees Questioned in Nationwide ERISA Challenge

The text of the complaint takes a deep dive into the services generally provided by recordkeepers and administrators of ERISA plans—pushing the conclusion that asset-based fees are less rational or fair than per-participant fees.

By John Manganaro editors@assetinternational.com | June 29, 2017

The latest Employee Retirement Income Security Act (ERISA) lawsuit, filed in the U.S. District Court for the Southern District of Ohio’s Eastern Division at Columbus, names Nationwide Life Insurance Co., Nationwide Bank and Nationwide Trust Co. as defendants.

Plaintiffs are participants and beneficiaries of the Andrus Wagstaff PC 401(k) Profit Sharing Plan—the retirement plan of a law firm focused on mass tort personal injury claims, headquartered in Denver. They are seeking the return of “excessive and unreasonable asset-based fees” charged by Nationwide for recordkeeping and administrative services, “and to prevent Nationwide from charging those excessive fees in the future.”

Background information included in case documents show the plan is quite small compared with many of Nationwide’s clients: At the end of 2015, the AW Plan had 27 participants and $1,100,000 in plan assets.

As the text of the complaint lays out, the AW Plan contracted with Nationwide under the company’s Retirement Flexible Advantage Retirement Plans Program to provide recordkeeper and other services for a fee of “one percent per year of the AW Plan assets.” Nationwide describes the fee in the annual AW Plan participant fee disclosure required by 404(a)5 as follows: “AMC/Net Asset Fee - This is a fee charged by Nationwide to recover expenses that may include compensation paid to financial advisers, administrative service fee payments to Administrative Firm/Authorized Representative, and any expense credits issued to the plan. Additionally, this fee pays for services provided by Nationwide including access to a variety of investment options, the recordkeeping platform, customer service, etc.”

As a result of this arrangement, plaintiffs suggest, in 2014 the AW Plan paid approximately $9,400 for recordkeeping services for a plan that had 15 participants at the end of the year, amounting to $625 per participant. In 2015, recordkeeping fees increased to $11,000 for 22 participants amounting to $500 per participant.

“Nationwide’s fees are almost 10-times more than the reasonable amount of compensation that should have been charged to the AW Plan,” plaintiffs argue.

Interestingly, the suit calls out the employer for potentially breaching ERISA by willingly entering into this arrangement, but it does not actually name the law firm as a defendant, instead zeroing in on the various Nationwide brands that touch the plan. Here is how the decision is explained: “Although the AW Plan fiduciaries may have breached their fiduciary duties to the AW Plan by entering into the Nationwide contract, the U.S. Supreme Court made it clear in Harris Trust and Savings Bank v. Salomon Smith Barney (2000), that 29 U.S.C. 1132(a)(3) authorizes a civil action against a non-fiduciary who participates in a transaction prohibited by 29 U.S.C. 1106(a).” It will be an interesting facet of this case, whether the employees' apparent reluctance to sue their own employer will impact their ability to first prove standing and then to prove Nationwide's culpability under ERISA.  

The text of the complaint takes a deep dive into the services generally provided by recordkeepers and administrators of ERISA plans—pushing the conclusion that asset-based fees are less rational or fair than per-participant fees.

“Recordkeeping services for a qualified retirement plan, like the AW Plan, are essentially fixed and largely automated,” plaintiffs argue. “The cost of recordkeeping and administrative services depends on the number of participants, not the amount of assets in the participant’s account. Thus, the cost of providing recordkeeping services to a participant with an average account balance of $100,000 is the same as the cost of recordkeeping for a participant with $1,000 in her retirement account. For this reason, responsible recordkeepers charge recordkeeping fees for each plan participant rather than as a percentage of plan assets. Otherwise, as plan assets increase through participant contributions or investment gains, the recordkeeping revenue increases without any change in the services provided.”

The complaint goes on to argue that, although the Nationwide Retirement Flexible Advantage Program website emphasizes efficiency and cost savings, “in fact, the Nationwide Retirement Flexible Advantage Program takes advantage of the lack of sophistication and bargaining power of the AW Plan and other similarly situated plans.” Plaintiffs suggest their investment options are presented with “unscrupulously” added markups, ranging from 75 to 100 basis points. 

In a statement to PLANSPONSOR, Nationwide says it is "aware of the recent fee allegation that has been made against us, and we are assessing the complaint. We are confident in the value of the services that we offer, and we will respond to the allegation accordingly." 

Read the full complaint here.

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