Archetypal Fee Litigation Case Targets Liberty Mutual

Plaintiffs say Liberty Mutual allowed excessive recordkeeping fees and failed to remove poorly performing investments.

A new Employee Retirement Income Security Act (ERISA) complaint filed in the U.S. District Court for the District of Massachusetts alleges a host of fiduciary breaches on the part of Liberty Mutual in the operation of its own 401(k) retirement plan.

The complaint names the company as a defendant, along with the 401(k) plan administrative committee and more than 40 individuals alleged to be either named or functional fiduciaries.  

The text of the complaint closely mirrors a host of other lawsuits that have been filed against large national employers in the U.S. in recent years—from its allegations that Liberty Mutual failed to use its size to negotiate for better investment and recordkeeping pricing to the allegations that the plan fiduciaries inappropriately selected and then failed to remove poorly performing investment options.

“Multibillion dollar defined contribution [DC] plans, like the [Liberty Mutual] plan, have tremendous bargaining power to obtain high quality, low-cost administrative, managed account and investment management services,” the complaint states. “Instead of using the plan’s bargaining power to benefit participants and beneficiaries, defendants allowed unreasonable expenses to be charged to participants for administration of the plan and for managed account services, and retained poorly performing investments that similarly situated fiduciaries removed from their plans.”

Specific allegations regarding the investment menu include that the defendants retained the Sterling Mid-Cap Value Portfolio “despite the fact that it had grossly underperformed its benchmark and similar mid-cap value funds for years.” Further, the defendants are accused of selecting and retaining the Wells Fargo Government Money Market Fund “as the only stable income investment option in the plan despite the fact that stable value funds provide a similar stable income option with much higher returns in all markets.”

On the recordkeeping front, the allegations are summarized as follows: “The plan’s recordkeeper was Hewitt from at least 2009 until July 2018. In July 2018, Fidelity became the plan’s recordkeeper. Since at least January 1, 2014, the defendants failed to analyze whether the direct and indirect compensation paid to Hewitt and Fidelity, including revenue sharing Hewitt received from Financial Engines, was reasonable compared to market rates for the same services. Defendants also failed to retain an independent third party to appropriately benchmark Hewitt and Fidelity’s compensation.”

The complaint suggests the plan did not change recordkeepers from at least 2009 until July 2018. During that time, the plan allegedly paid Hewitt an asset-based recordkeeping fee of 5 basis points (bps), “which amounted to millions of dollars each year,” from at least 2013 until 2018.

The complaint states that this period brought about “a dramatic decrease in recordkeeping fees across the market and dramatic growth in assets in the Liberty Mutual plan.”

“During that period, the assets in the plan increased from $6.4 billion to $7.1 billion, thereby increasing the recordkeeping fees with no additional services,” the complaint states. “Similarly … the asset-based compensation that Hewitt received from Financial Engines increased. If defendants had been monitoring and benchmarking the plan’s recordkeeping fees, they would not have allowed the plan to pay the same asset-based fee for over five years as the assets in the plan grew by nearly $700 million, allowing the recordkeeping fees to increase dramatically based upon nothing but asset growth. … It is clear that defendants also failed to conduct a competitive bidding process for the plan’s recordkeeping services from prior to 2009 until at least 2018.”

The complaint goes on to state that the defendants’ “failure to monitor, control and ensure that participants were charged only reasonable fees for recordkeeping services” caused the plan to lose over $9.8 million during the proposed class period. It also goes into significant detail in debating the role of money market funds in 401(k) plans, arguing like many other cases that stable value funds are a more appropriate option for retirement plan investors.

The full text of the complaint is available here. Liberty Mutual has not yet responded to a request for comment.