ERISA Suit Questions Money Market Performance, Recordkeeping Fees

Because revenue-sharing payments are asset based in the plan, plaintiffs argue, “they bear no relation to a reasonable recordkeeping fee and can provide excessive compensation.”

Employees of Pioneer Natural Resources have filed an Employee Retirement Income Security Act (ERISA) lawsuit against their employer, alleging a variety of fiduciary breaches in the management of its 401(k) plan.

A close look at the complaint offers plan officials some important—if unwelcome—insight about just how widespread ERISA-based litigation has become and how difficult it can be to avoid a challenge once the plan has gained the attention of the plaintiffs’ bar. Perhaps most notably, in this suit the plan sponsor is called out for failing to remove a money market fund option that had low returns when a stable value fund was also already available in the plan, and yet other suits have been filed arguing essentially the exact opposite, that a given plan should have offered a money market fund option in place of a stable value fund.

The suit, Barrett vs. Pioneer Natural Resources, was filed in the U.S. District Court for the District of Colorado, and it names as defendants not only the company and the 401(k) committee, but also a number of the energy company’s HR and finance executives. The plan in question is a $500 million 401(k) program.

The list of fiduciary breaches alleged goes as follows: “Failing to offer institutional class shares for mutual funds, which resulted in the participants paying excessive costs to invest in the funds; failing to make sure that plan fees were reasonable; and failing to remove the poorly performing money market fund when the better-performing stable value fund was already available, causing losses to plan participants who maintained excessively high cash balances in money market funds rather than the stable value fund, which offered higher returns and the same risk level.”

Given the impermissibility of relying on hindsight in judging investment performance in the context of ERISA breaches, this last claim may be particularly difficult for plaintiffs to succeed on. Indeed, in a similar lawsuit filed against Fidelity regarding money market fund performance relative to other options available to retirement plan clients, the district court was unsympathetic to plaintiffs, dismissing their challenge on summary judgement for failure to establish a breach of either loyalty or prudence.

The claims regarding the purchase of inappropriate share classes may be harder to defend: “Despite having plan assets worth hundreds of millions of dollars, the Pioneer defendants routinely selected the higher-priced Investor share class of mutual funds, instead of the lower-cost Institutional/Admiral share classes of those same mutual funds which were readily available to the plan.”

Most helpful for readers thinking about their own litigation exposure, the text of the suit examines in detail steps the plan sponsor went through to start using the cheaper share classes for some investments. The sponsor clearly communicated its fee-saving activities to plan participants and even told them directly that all plan expenses, “no matter how small, were important.” Yet the Pioneer defendants, after making some share-class changes, continued to offer higher-cost Investment class shares for nine Vanguard funds.

NEXT: Failure to consider CITs also alleged 

Plaintiffs forward similar allegations regarding the plans’ failure to utilize the fee efficiency of collective investment trusts (CITs), as follows: “Vanguard offers five different low-cost collective trust funds to qualified retirement plans, including Target Retirement Trust Select, Target Retirement Trust Plus, and Target Retirement Trust I–III. These target-date funds are managed by the same investment adviser as those mutual funds, but have far lower fees than the Vanguard target-date mutual funds offered as investment options by the plan. The plan offered the higher-cost mutual fund version of the Vanguard Target Retirement Funds, even though much lower-cost collective trust Vanguard Target Retirement Funds were available to the plan.”

The suit further suggests 10 of the 12 Vanguard CITs the plan could have accessed have been available since 2007. Exacerbating the problem, plaintiffs suggest, “the Pioneer Defendants had no annual review or other process in place to fulfill their continuing obligation to monitor and control plan investment options, or, in the alternative, failed to follow their own processes.”

Plaintiffs allege additional fiduciary breaches relating to the plan’s recordkeeping fees. “Between 2012 and 2015, plan participation increased 11.9% from 3,939 in 2012 to 4,410 and assets increased by 40.5% from $355,855,632 to $500,187,132. However, the plan’s direct compensation paid to Vanguard increased by 106% from $141,924 to $291,794.” Plaintiffs argue this arrangement is at best irrational and at worst flatly conflicted.

The text continues: “Vanguard received additional annual fees through revenue sharing from at least 10 mutual funds offered as past or present plan choices. In a revenue-sharing arrangement, a mutual fund or other investment vehicle directs a portion of the expense ratio—the asset-based fees it charges to investors—to the 401(k) plan's recordkeeper putatively for providing recordkeeping and administrative services for the mutual fund … Prudent fiduciaries monitor the total amount of revenue sharing a recordkeeper receives to ensure that the recordkeeper is not receiving unreasonable compensation. A prudent fiduciary ensures that the recordkeeper rebates to the plan all revenue-sharing payments that exceed a reasonable, flat per participant recordkeeping fee that can be obtained from the recordkeeping market through competitive bids.”

Because revenue-sharing payments are asset based in this plan, plaintiffs argue, “they bear no relation to a reasonable recordkeeping fee and can provide excessive compensation … The mutual funds paid Vanguard annual revenue-sharing fees based on a percentage of the total plan assets invested in the fund, which were ultimately paid by plan participants who invest in those funds. For example, the Oppenheimer Developing Markets Fund charged 0.87% annually to plan participants to invest in the fund. Oppenheimer then paid Vanguard .25% in marketing, distribution and other fees to be part of the plan investment options. Had the Pioneer Defendants negotiated a rebate by Vanguard of those fees, plan participants investing in the Oppenheimer funds would have earned .25% more per year on their investment.”

Finally, regarding the money market versus stable value question, plaintiffs argue the following: “Offering both the Vanguard Retirement Trust V and the Vanguard Federal Money Market funds as short-term reserve investment options in the Plan provided no benefit to the plan participants, but instead confused and misled the plan participants by leading them to believe there was a material difference in the funds. As a result, many plan participants who were eligible to invest in the Vanguard Retirement Trust stable value fund instead invested in the Vanguard Federal Money Market fund, which cost them an annual investment return of almost 2%.”

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