The latest retirement industry class action challenge, filed in the U.S. District Court for the District of Minnesota, names as defendants the Allina Health System and a sizable number of individual retirement plan committee officials in finance and human resources.
The allegations concern both the 401(k) and 403(b) plans offered to Allina employees and cite Employee Retirement Income Security Act (ERISA) sections 409 and 502. According to background information contained in the complaint, the plans in question at all relevant times had over $1 billion in combined assets, making them “jumbo” plans in the defined contribution plan marketplace and among the largest in the U.S. As such, the proposed class is sizable, representing more than 10,000 individuals.
The familiar and wide-ranging complaint argues the defendants “did not try to reduce the plans’ expenses or exercise appropriate judgment to scrutinize each investment option that was offered in the plans to ensure it was prudent. Instead, defendants abdicated their fiduciary oversight, allowing the plans’ trustee, Fidelity, to lard the plans with high-cost, non-Fidelity mutual funds through which Fidelity received millions of dollars in revenue-sharing payments.”
The complaint also suggests the retirement committee ceded to Fidelity “discretion to add any Fidelity mutual fund that Fidelity had available, regardless of whether the funds were duplicative of other options, had high costs, were performing poorly, or were otherwise inappropriate as retirement savings options for the plans’ participants.…Indeed, the plans regularly had more than 300 separate mutual fund options, most of which were Fidelity’s own mutual funds that charged retail prices or were funds that paid a portion of the investment management fee to Fidelity.”
Plaintiffs go on to suggest that their plan fiduciaries failed to establish a prudent investment monitoring process while also failing to monitor those to whom discretion over employee assets was granted. Readers may take note that a substantial portion of the 100+ page compliant is dedicated to defining the large number of defendants, ranging from company directors and executives down to lower-level staff.
NEXT: Analysis of the complaint
While there is nothing inherently problematic about delegating investment responsibilities under ERISA, the plaintiffs allege that Fidelity Management and Trust Company, as trustee of the 401(k) plan and custodian of the 403(b) plan, was subject only to “rubber stamp” approval by the Allina Health officials. The same is alleged regarding a firm providing services via the plans’ qualified default investment alternatives (QDIA). Important to note, the challenge does not actually name Fidelity or the other firms as defendants, instead targeting officials within the plan sponsor organization.
The plaintiffs’ allegations continue: “By an agreement dated January 1, 2012, the Plan hired Fidelity to serve as trustee for the trust holding the 401(k) plan’s assets … Schedule C to the Trust Agreement listed the investment options in which the plan’s participants could invest their retirement assets. There were thirteen (13) mutual funds listed as core investments, of which four were managed by Fidelity. The plan also included expanded investments, which included all Fidelity mutual funds available for investment by defined contribution retirement plans, all Fidelity mutual funds to be created in the future which will be available for investment by defined contribution retirement plans, and one-hundred and three (103) additional mutual fund options that were labeled ‘Non-Fidelity Mutual Funds,’ each of which paid Fidelity for inclusion in the plans through revenue sharing or other service credits.…Thus, the plan administrator gave Fidelity unlimited, unchecked authority to add its own mutual funds as investment options for the plan.…By virtue of this agreement, Fidelity added over 150 Fidelity Mutual Funds without any fiduciary review by defendants.”
According to the complaint, Allina Health officials deny that they selected the remaining hundreds of options, many of which are available through a “mutual fund window” rather than formally presented on the plan menu. “However,” plaintiffs counter, “the mutual fund marketplace is substantially larger than the 300 or so options available for selection in the plans, thus some selection process took place to provide those 300 investment options.”
The full text of the complaint, which includes other lines of argument retirement plan professionals may find informative, is available here.