Featuring a familiar set of allegations, an excessive fee lawsuit seeking class certification has been filed against the Board of Trustees of the Supplemental Income 401(k) Plan, a multiemployer plan for union members.
Plaintiffs—participants in the plan via their employment with San Bernardino Steel—allege that the board of trustees and its individual members breached their fiduciary duties of prudence and loyalty under the Employee Retirement Income Security Act (ERISA) by offering retail class mutual fund shares when identical lower cost institutional class shares were available; and by overpaying for recordkeeping by paying the plan recordkeeper, John Hancock Retirement Plan Services and its predecessor, New York Life Insurance Company, excessive fees through revenue-sharing arrangements with the mutual funds offered as investment options under the plan.
According to the complaint, the plan offers 21 investment options; 20 mutual funds and a stable value fund. The board selects the plan’s investment options. The complaint included a chart that compared the expenses for Class A shares of funds offered in the plan to Class I shares of the same funds. For example, the plan offered Class A shares of the Fidelity Advisor Freedom 2010 fund, with an expense ratio of 0.78%, when Class I shares, with an expense ratio of 0.53%, were available.
In 2016, the board replaced the Retail Class Fidelity Advisor Freedom target-date funds with JPMorgan SmartRetirement target-date funds; however, the complaint says, the board once again chose Retail Class A shares in the JPMorgan SmartRetirement target-date funds instead of the lower cost institutional Class R-6 shares available to qualified employer retirement plans.
As seen in many excessive fee suits against single-employer plans, the complaint says the defendants failed to use the plan’s bargaining power to leverage lower-cost mutual fund options for the plaintiffs. In addition, it says the defendants had no adequate annual review or other process in place to fulfill their continuing obligation to monitor plan investments, or, in the alternative, failed to follow the processes. The lawsuit contends that the total amount of excess mutual fund expenses paid by the class over the past six years exceeds $10 million.
As a result of the defendants’ improper choice of mutual fund share classes, the plan paid unreasonable fees to its recordkeeper John Hancock, according to the complaint. As an example, the lawsuit notes that the Columbia Small Cap Value Fund II charged operating expenses of 1.27% annually to plan participants who invested in the fund. The fund then paid John Hancock 0.50% in Rule 12b-1 and shareholder service fees. Had the defendants offered Y Class shares of the Columbia fund, which pays no Rule 12b-1 fees, plan participants would have paid 0.42% less in operating expenses, John Hancock would have received 0.42% less from the mutual fund, and the participants’ return on investment would have increased by 0.42%.
The lawsuit accuses the defendants of failing to use the plan’s bargaining power to leverage John Hancock to charge lower recordkeeping fees for plan participants. In addition, it says the defendants failed to take any or adequate action to monitor, evaluate or reduce John Hancock’s fees.“Because revenue-sharing arrangements pay recordkeepers asset-based fees, 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 per participant recordkeeping fee that can be obtained from the recordkeeping market through competitive bids,” the complaint says. “Because revenue-sharing payments are asset based, they bear no relation to the actual cost to provide services or the number of plan participants and can result in payment of unreasonable recordkeeping fees.”