U.S. District Judge Liam O’Grady of the U.S. District Court for the Eastern District of Virginia has found that a lawsuit alleging prohibited transactions against fiduciaries of a trade association’s 401(k) plan “contains sufficient well-pleaded facts to survive a motion to dismiss.”
National Rural Electric Cooperative Association (NRECA) is a national service organization that represents more than 1,000 rural electric cooperatives around the United States. One of NRECA’s primary functions is to administer three Employee Retirement Income Security Act (ERISA) plans covering member cooperatives’ employees—a health and welfare plan, a traditional pension plan, and a 401(k) plan. Participants in the 401(k) plan are accusing the association and the Insurance and Financial Services Committee of engaging in prohibited transactions with respect to the plan in violation of ERISA, to the detriment of the plan and its participants.
The complaint says the defendants failed to prudently monitor and control plan administrative costs in the interests of plan participants; appropriated the extra fees from the plan for their own benefit; and diverted monies from the plan to subsidize other expenses of NRECA and its member employers.
The complaint alleges the plan’s administrative costs are grossly excessive. It notes that the plan is one of the 75 largest defined contribution plans in the United States out of more than 650,000. As a result, it says, the defendants have access to the most competitive pricing and services in the marketplace. “While fiduciaries of similarly-sized plans typically incur administrative expenses well under $100 per participant, the plan’s administrative costs are wildly out of scale at more than $400 per participant,” the complaint states.
And the plaintiffs say the problem is also getting worse. According to the complaint, the plan’s administrative costs have increased each year since 2013, and the 2017 rate of $404 per participant is a 50% surge from the 2013 rate. They argue that based on trends in the overall marketplace, the plan’s administrative costs should have decreased on a per-participant basis during this time. Further, they say, the growth within the plan provided significant opportunities for the defendants to reduce the plan’s administrative expenses. Yet, the defendants failed to take measures to do so.
According to the complaint, the primary beneficiary of the plan’s exorbitant administrative costs is NRECA. It says the defendants have extracted an increasing amount of revenue for NRECA from the plan each year since 2013. NRECA took in $14.2 million from the plan in 2013, $15.8 million in 2014, $17.0 million in 2015, $19.0 million in 2016, and $20.9 million in 2017. “Defendants’ incentive to increase revenue for NRECA is at odds with their duty to administer the Plan in a loyal and cost-conscious manner,” the complaint states.
The plaintiffs also accuse the defendants of improperly using the plan to subsidize costs of NRECA’s overall benefits program. They say that since 2013, the revenue NRECA extracted from the plan increased by at least 32%, whereas NRECA’s in-house charges to other plans decreased or remained around the same. As a result, around half of the fees that NRECA withdrew from its benefits program in 2017 came from the 401(k) plan, up from only 36% in 2013. Likewise, the plaintiffs say, the defendants have increasingly allocated outside vendor charges to the plan. The plan paid $4.3 million to outside vendors that also served other NRECA benefit plans in 2017, up from $1.8 million in 2013.
In his opinion denying the defendants’ motion to dismiss the suit for failure to state a claim, O’Grady found the plaintiffs’ allegation that the plan’s increasing administrative costs in a marketplace which is exhibiting a down trend shows imprudent administration is plausible. He said the comparison showing a similarly situated plan incurs 25% of the administrative expenses, per participant, than their 401(k) “nudges the claim over the line from merely possible to plausible.”
In addition, O’Grady found the pleaded facts in the case support the inference that unreasonable and improper transactions with NRECA, a party in interest, were self-interested, or made on behalf of a party with interests adverse to the plan and/or participants. “The pleaded facts show that over recent years, while NRECA was able to charge other plans a constant or decreasing amount, NRECA allegedly unreasonably and improperly charge [the 401(k) plan] more,” he wrote in the opinion.Interestingly, in 2012, NRECA agreed to restore $27,272,727 to the three plans after an investigation by the Department of Labor’s Employee Benefits Security Administration (EBSA) found the association selected itself as a service provider to the plans, determined its own compensation and made payments to itself that exceeded NRECA’s direct expenses in providing services to the plans, in violation of ERISA.
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