Health System and Plan Providers Sued Over Plan Fees

March 12, 2014 ( – The St. Louis-based law firm of Schlichter, Bogard & Denton filed a class action on behalf of participants in the retirement plans of Novant Health Inc., seeking the repayment of millions in fees and losses.

The suit names Novant’s administrative and retirement plan committees as defendants, and also implicates Great-West Life & Annuity Insurance Company, D.L. Davis & Company and MassMutual as collecting excessive compensation for services provided to Novant’s two defined contribution retirement plans. The case, Karolyn Kruger, M.D. et al., v. Novant Health Inc., et al., (case no. 14-208), was filed in the U.S. District Court for the Middle District of North Carolina.  

The complaint alleges that Novant, which is a hospital and physician office system based in Winston-Salem, North Carolina, breached its fiduciary duties by causing plan participants to pay millions of dollars in excessive recordkeeping and administrative fees to third-party service providers. In addition, the complaint alleges breaches of fiduciary duties resulting from Novant’s decision to offer imprudent investment options. These breaches resulted in a substantial reduction in the retirement assets of many plan participants, according to the compliant.

The complaint also alleges that the Novant defendants consistently and fraudulently concealed their breaches, and the breaches of others by, in part, informing plan participants that they were not paying certain fees for the plan, but that Novant paid.

Jerry Schlichter, the lead attorney for the Novant plaintiffs, said in a statement announcing the suit that the hospital system has a duty to ensure that fees charged to its employees for retirement-related services are reasonable, that prudence is used in selecting and monitoring investment options, and that conflicts of interest and self-dealing are systematically avoided.

“It has failed in that duty,” Schlichter said.

The six plaintiffs listed by name in the suit are all residents of North Carolina and current or former employees of Novant. Regarding the providers mentioned in the suit, the complaint alleges that Great-West Life & Annuity Insurance Company, an administrative and recordkeeping service provider for the plans, received excessive compensation of approximately $8.6 million between 2009 and 2012. Additional payments received by Great-West from the investment companies providing the plan’s investment options constituted excessive amounts of revenue sharing, the compliant states, which amounted to “kick-backs.”

The complaint also alleges wrongdoing by D.L. Davis & Company, which is based in Winston-Salem and is a brokerage company that provides the Novant plans with limited marketing and enrollment services. The complaint states that D.L. Davis, under CEO and president Derrick L. Davis, was paid excessive fees up to $9.6 million between 2009 and 2012 in the form of “commissions.” The complaint states that D.L. Davis also received a second source of revenue in the form of “kick-backs” from the managers of the plan investment options. D.L. Davis is a registered broker of MML Investors Services, a subsidiary of the Massachusetts Mutual Life Insurance Co.

According to the compliant, Derrick Davis has had a long-term, ongoing relationship with Novant, starting in 1996. The complaint details that Davis, through other corporate entities he owns or controls, has entered into a variety of land development projects and office building leasing arrangements in the greater-Winston-Salem area with Novant, raising the possibility of conflicts of interest.

The complaint also highlights that early in Davis’ business relationship with Novant, he made a charitable gift to Novant in excess of $5 million. In addition, at nearly the same time that Davis reportedly gave Novant the $5 million, a Davis-owned development company in which he is an officer, manager and/or owner, East Coast Capital, announced plans to develop the Southeast Gateway project. The project included Novant Health as occupying 40,000 square feet of this office development for a call center.

The complaint points out that retirement plan fiduciaries are required to avoid self-dealing under the Employee Retirement Income Security Act (ERISA).

Novant’s retirement program consists of approximately 25,000 participants with total assets around $1.2 billion. Novant offers its employees and retirees an ERISA-ruled retirement program known as the Retirement Plus Plan. The program includes two plans, the Tax Deferred Savings Plan of Novant Health Inc., and the Savings Supplement Retirement Plan of Novant Health Inc.

Novant provided the following statement to PLANSPONSOR: 

“We have not been officially served with the lawsuit and cannot comment on active litigation, but overall Novant Health has a Retirement Plan Committee, which is appointed by Novant Health’s board of trustees, which carefully oversees the selection of the retirement plans’ investment options and all associated fees.

“The committee receives professional advice from independent legal counsel and retirement plan experts and is deeply committed to selecting and administering the investment options under the plans in the best interest of participants, all in accordance with all applicable laws and regulations. Our retirement plan participants also receive detailed explanations of their investment options and plan fees on an annual basis.”

A full copy of the compliant is available here.