A multibillion-dollar 403(b) plan has been sued for the second time in a year.
Now, MITRE had been sued in 2021—in a case just dismissed a few weeks back—because the named plaintiff, one Aaron Brown, was found to have invested his plan account in a single fund that belonged to the lowest-cost share class and paid no revenue-sharing fees.
This time (Brown v. MITRE Corp., D. Mass., No. 1:22-cv-10976, complaint 6/22/22) participant-plaintiff Brown has been joined by Peter A. Young, Nina Daniel, Russell S. Crabtree, Kimberly L. Nesbitt and Erin N. Wheeler[1] on behalf of the MITRE Corporation Tax Sheltered Annuity Plan (“TSA Plan”) and the Qualified Retirement Plan (“QRP Plan”) in a suit filed in the same US District Court for the District of Massachusetts. These are large plans—more than 23,000 participants and more than $8 billion in assets between them. As you might imagine considering the history here, this suit takes pains to specify the fund(s) in which the named plaintiffs were invested where they were “was subject to the excessive administration and recordkeeping costs” alleged by the suit—and they also commented that “both Plans are managed in an identical fashion, have identical managers and have identical Trustees…”
More specifically, the suit alleges that, “from at least 2015, preceding the start of the Class Period, to at least 2020, there was an unreasonably high revenue requirement to pay for RKA costs that was tacked onto the Plans’ funds in the form of an increased expense ratio”—an increased ratio the suit claims “ranged from .10 basis points in 2015 to .039 basis points in 2020.” Moreover, the suit asserts that “each of the Plaintiffs were invested in funds that had this tacked-on expense ratio that was unreasonably high.”
The suit notes that one of the named plaintiffs (Aaron Brown) unsuccessfully requested copies of the committee meeting minutes. Not that that refusal slowed them from making accusations. “Reviewing meeting minutes, when they exist, is the bare minimum needed to peek into a fiduciary’s monitoring process. But in most cases, even that is not sufficient,” the suit states. Citing the “For, “[w]hile the absence of a deliberative process may be enough to demonstrate imprudence, the presence of a deliberative process does not … suffice in every case to demonstrate prudence. Deliberative processes can vary in quality or can be followed in bad faith. In assessing whether a fiduciary fulfilled her duty of prudence, we ask ‘whether a fiduciary employed the appropriate methods to investigate and determine the merits of a particular investment,’ not merely whether there were any methods whatsoever.”
That said, and “For purposes of this Complaint, Plaintiffs have drawn reasonable inferences regarding Defendants’ decision-making processes based upon the numerous factors set forth below.”
Revenue Sharing
The plaintiffs here had issues with the plan’s revenue-sharing structure—and, while acknowledging (as these suits typically do) that “…utilizing a revenue sharing approach is not per se imprudent, unchecked, it is devastating for plan participants. At worst, revenue sharing is a way to hide fees. Nobody sees the money change hands, and very few understand what the total investment expense pays for. It’s a way to milk large sums of money out of large plans by charging a percentage-based fee that never goes down (when plans are ignored or taken advantage of).”
The suit goes on to cite a Record Keeping Agreement, “Where the Employer with respect to a Plan maintains a balance in and makes active contributions to any of the mutual funds, other investment vehicles, and/or TIAA-CREF annuity contracts recordkept on TIAA’s platform, TIAA will compare the Revenue Requirement to the revenue generated by such Plan on a quarterly basis to determine if the Plan generated sufficient revenue to meet TIAA’s Revenue Requirement.” The suit explains that excess amounts were placed in a Revenue Credit Account, except if the excess amount was “less than $2,500” for any given year. “Here, using additional revenue sharing to pay for over-priced Recordkeeping services cost participants out-of-pocket money which compounded over time leaving participants with significantly less for their retirement. First, they suffered lost opportunity costs with regard to the money that was in excess of the Revenue Requirement. Second, they lost opportunity costs with regard to the overpriced Revenue Requirement.”
But, having acknowledged that revenue-sharing is not “per se” imprudent, the suit proceeds to state “…while it may not be per se imprudent for a plan to have two recordkeepers, here it seems that it had disastrous effects on participants retirement savings. It’s difficult to understand how the Plans could take advantage of its economies of scale to get the best possible record-keeping fees when it continues to utilize two recordkeepers, a job which is traditionally handled by only one.”
Reference ‘Points’
As a reference point, it cited what Fidelity paid itself as recordkeeper for its own plan (at least per what was cited in excessive fee litigation against that firm, $14-$21 per person per year), and then it also held forth a table of allegedly comparable plans (at least based on participant count and size and the fees they were said to have paid—five of which used Fidelity as recordkeeper, the not-so-subtle inference of course being that this plan should have been able to negotiate fees in those ranges. And if that weren’t enough, the plaintiffs here invoked the NEPC 2020 Defined Contribution Progress Report (which captured its findings based on 121 plans), and purportedly found that the majority of those plans paid just slightly over $40/participant.
‘Staying’ Power
After asserting that part of a prudent process would be to conduct a request for proposal (RFP) every three to five years, and acknowledging that they had no idea whether that had been done here or not, they went on to state that “the fact that the Plans have stayed with the same recordkeeper, namely TIAA and Fidelity since 2006, paid an increasing amount in recordkeeping fees from 2018 to the present, and paid outrageous amounts for recordkeeping from 2015 (before the start of the Class Period) to 2017 (nearly 5x the amount similarly-situated plans paid), there is little to suggest that Defendants conducted a RFP at reasonable intervals—or certainly at any time prior to 2016 through the present—to determine whether the Plans could obtain better recordkeeping and administrative fee pricing from other service providers given that the market for recordkeeping is highly competitive, with many vendors equally capable of providing a high-level service.”
The plaintiffs also cited “the failure to identify and utilize available lower-cost share classes of many of the funds in the Plans during the Class Period.”
“it would appear that the MITRE did the opposite of what’s required of a prudent fiduciary,” the suit continues. “Instead of seeking to lower the amount of revenue sharing in the Plans, MITRE instead increased it to cover the already excessively high asset based administrative and recordkeeping fees. To provide just one example, in 2020, the Plans moved from the institutional classes of the Fidelity Freedom Index target date funds having an expense ratio of only 0.12% to a much more expensive line up of target date funds which paid additional revenue sharing so the Plans could afford the excessively high asset based administrative and recordkeeping fees. In particular, in 2021, the Plans moved to the retail versions of Fidelity target date funds, which cost plan participants an additional expense of between .20% and .25%. The Defendants should have sought to reduce the overall recordkeeping and administrative expense rather than seek to increase the Plans’ revenue sharing to pay for it.
What’s Next
So, it now appears that a major defect of the first filing—the lack of a plaintiff that had actually been injured by the alleged practices (and thus had standing to bring suit)—has been remedied. On the other hand, the benchmark references used here to establish a case that the management of the plan was imprudent have just been rejected as insufficiently “meaningful.” Will this court conclude the same? We shall see.
Footnote
[1] Once again, the plaintiffs are represented by Capozzi Adler PC and Jeffrey Hellman of New Haven, Conn., represent the proposed class. Oh, and yes, once again, the recordkeeping fees were described as “astronomical.” Indeed, it’s not the first time the Capozzi Adler firm has affixed the “astronomical” label to 401(k) fees—having previously done so in suits involving the $1.5 billion Baptist Health South Florida, Inc. 403(b) Employee Retirement Plan, the $1.2 billion 401(k) plan of the American Red Cross, the $700 million Pharmaceutical Product Development, LLC Retirement Savings Plan, and the $2 billion plan of Cerner Corp., though it’s not the only litigation firm to do so.
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