The allegations in a new excessive fee suit are familiar—but the plaintiff has clearly been attentive to pleading failures that have led to other, similar cases being dismissed.
Commenting that “the proliferation of 401(k)plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers,” the participant-plaintiff[1] here is Jason Zimmerman, who has filed suit “on behalf of all similarly situated participants and beneficiaries on behalf of the Cedars-Sinai Health System 403(b) Retirement Plan against the plan fiduciaries,[2] the Cedars-Sinai Board of Directors’ Pension Investment Committee, and John Does 1-10” for breaching their fiduciary duties in the management, operation and administration of the Plan.”
As of Dec. 31, 2021, the plan had 16,140 participants with account balances and over $2.15 billion in assets—meaning that, as the suit asserts, it was large enough to have “…tremendous bargaining power to demand low-cost administrative and investment management services and well-performing, low-cost investment funds.” As you might expect, the plaintiff here didn’t believe they had done so.
Breach ‘Reach’
More specifically, the suit (Zimmerman v. Cedars-Sinai Med. Ctr., C.D. Cal., No. 5:23-cv-01124, complaint 6/13/23) alleges that the defendants breached their fiduciary duties of prudence and loyalty to the Plan by:
- Overpaying for covered service providers (by paying variable direct and indirect compensation fees through revenue-sharing arrangements with the funds offered as investment options under the Plan, which exceeded costs incurred by plans of similar size with similar services and which were in excess of and not tethered to the services provided).
- Offering and maintaining funds with higher-cost share classes when identical lower-cost class shares were available and could have been offered to participants resulting in participants/beneficiaries paying unnecessary costs for services that provided no value to them and resulted in a reduction of compounded return gains.
- Retaining and offering poorly performing funds within the Plan which failed to meet or exceed industry standard benchmarks, including Morningstar category indices and best fit indices as determined by Morningstar.
- Depriving participants of compounded returns through the excessive costs and investment in expensive underperforming funds; and
- Failing to maintain and restore trust assets.
The suit further asserts that the plaintiff “was injured during the Relevant Time Period by the Defendants’ flawed processes in breach of their fiduciary duties. As a result of Defendant’s actions, participants invested in subpar investment vehicles and paid additional unnecessary operating expenses and fees with no value to the participants and resulting in a loss of compounded returns.”
‘Due Care’ Questioned
This particular suit spent some time outlining not only the duties and importance of the recordkeeping function but noted that “courts that have considered the issue have made it clear that ‘the failure to exercise due care in selecting . . . a fund’s service providers constitute a breach of a trustee’s fiduciary duty’”—and that (citing 28 U.S.C. § 1108(b)(2)) “services must be necessary for the plan’s operation.” The suit continues by referencing Labor Department guidance on the importance of prudent selection, the need for an objective process of selection, and that that process must be “designed to elicit information necessary to assess . . . the reasonableness of the fees charged in light of the services provided.” The suit also states, as has other, similar litigation, that “the cost of recordkeeping and administrative services depends on the number of participants, not the amount of assets in the participant’s account.”
The suit proceeds to detail the plaintiff’s determination that “each Participant in the Plan pays an asset-based fee of 7.5 basis points (.075%) for recordkeeping and administrative services,” alongside an assertion that “this asset-based fee bears no relation to the actual cost of providing services or the number of plan participants and resulted in the payment of unreasonable recordkeeping fees.” The suit goes on to state that “recordkeepers receiving an asset-based fee accrue significant ongoing pay increases simply as a result of participants putting money aside biweekly for retirement and the growth of participants’ accounts,” and then claims that this meant that “in 2021, the Plan paid VOYA and other covered service providers approximately $1.7 Million even though VOYA and the other covered service providers had provided the same services for approximately $1.35 million the year before for approximately the same number of participants (16,140 vs. 15,975).” Moreover, the suit claims that between 2017 and 2021, the number of plan participants with account balances increased 18%, but the recordkeeping and administrative fees more than doubled over the same time period (through the end of 2021).”
Plan ‘Points’
And—in what is the first time we’ve noticed this type reference—the suit notes that Cedars-Sinai also offers employees a different defined contribution plan with a similar number of participants, that VOYA also acts as recordkeeper for that plan, but that in 2021 the administrative costs for that plan were $41 per participant, “proving that VOYA can provide recordkeeping services for at or under $42 per participant for a plan of this size,” the suit claims. And then proceeds to note that there “are numerous recordkeepers in the marketplace who are capable of providing a high level of service to the Plan, and who will readily respond to a request for proposal,” recordkeepers that “primarily differentiate themselves based on service and price, and vigorously compete for business by offering the best service for the best price.”
Now, here’s where things begin to get a little different in terms of assertions. The suit claims that “the package of recordkeeping services the Plan received included standard recordkeeping services such as government reporting services, plan sponsor support services, recordkeeping services, and plan investment services and reporting,” but more importantly that “the Plan did not receive any unique services or at a level of quality that would warrant fees far greater than the competitive fees that would be offered by other providers as the Plan was charged by VOYA.” That assertion matters because a number of suits have been dismissed for not making specific assertions about the services provided, only the fees paid.
‘Bespoke Sets of Services’
The plaintiff continues to note that they requested copies of service provider contracts that would have allowed them to identify the specific services—but that those requests were not accommodated, but that “recordkeeping services are largely standardized because the recordkeepers must provide these services at scale to a large number of plans and must comply with regulatory requirements. They cannot offer bespoke sets of services to each individual plan.”
But the plaintiff here wasn’t just focused on asset-based versus per participant charges. The suit further states that “the unreasonable fees paid to covered service providers through an asset-based fee arrangement directly resulted in part from the Defendants’ choice of improper mutual fund share classes and failure to monitor the providers.” The suit alleges not only that “the mutual funds paid 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 invested in those funds,” but that “the Plan participants realized lower returns on their investments because they paid higher fund operating expenses.” The suit alleges that “VOYA’s fees so far exceeded reasonable recordkeeping fees to the point that no differentiation in services could explain the level of recordkeeping fees paid by the Plan.”
‘Flawed and Reckless Provider Selection Process’
The plaintiff, of course, has an explanation for that: “the clear explanation for this is that Defendants have a flawed and reckless provider selection process that is ‘tainted by failure of effort, competence, or loyalty.’” He goes on to assert that the “defendants clearly failed to use the Plan’s bargaining power to leverage its CSPs to charge lower administrative fees for the Plan participants,” and that at least so far as they know, “defendants failed to bid the Plan out to other service providers during the Class Period.” Additionally, the suit alleges that the “defendants further failed to take any or adequate action to monitor, evaluate or reduce their service provider fees, such as:
- Choosing mutual fund share classes with lower revenue sharing for the Plan;
- Monitoring costs to compare with the costs being charged for similar sized plans in the marketplace; or
- Negotiating to cap the amount of revenue sharing or ensure that any excessive amounts were returned to the Plan.
The plaintiff concludes by alleging not only that “the Plan unreasonably paid broker-dealer intermediaries including VOYA fees far in excess of what the Plan needed to pay for their services,” but that those fees “were not tethered to the actual services rendered, but rather increased based on the amount of Plan funds which increased over time.”
The suit continues by alleging that “the use of expensive share classes was likely motivated by an improper desire to hide fees from Plan participants by using revenue sharing to pay some or all of the participants’ fees instead of directly drawing them from the Plan or Defendants being billed directly for the fees.” The suit notes that “other fiduciaries in similar circumstances have migrated Plan funds to cheaper share classes in recognition of the fact that investment in the more expensive share class is not in the pecuniary interest of the Plan,” and that that holds true for all of the funds in question. “Rather than benefiting the Plan, the use of expensive share classes benefits the investment advisor at the expense of the Plan because it generates excess fees which are only partially rebated over a period of time to the Plan and may also generate additional kickbacks to the investment advisor.”
‘Impermissible Discrimination’
As for whether there might actually be revenue-sharing rebates back to the plan—well, the plaintiff also took issue there, commenting that “rebates are only made after a set period of time, the Plan effectively lends out the rebated funds until such time as the rebate comes through, rather than keeping them in the Trust and accruing gains during that time.” Beyond that, the suit commented that “plan participants are generally not aware of the fee burden that their 401k/403b accounts bear from indirect fees. Unlike direct fees, which are clearly listed on participants’ statements, indirect fees are unshown and unknown to those paying those costs. Here, the indirect fees may have appeared as a credit against administrative fees although the indirect fees were also paid by the participant, further confusing participants.” And, as if that weren’t enough, the suit concludes that “…because not all funds generate fees for revenue sharing, only those participants invested in the revenue sharing funds pay for the revenue sharing and the other participants get a free ride—which is impermissible discrimination against participants.”
The suit also took issue with the rebate process that might “not equitably return funds to participants if participants make withdrawals or transfer out of the fund prior to the credit being posted.”
But ultimately it all came back to share class selection, with the suit noting that, “The erosive effect of excessive fees and the resulting lost returns compounds over time substantially lowering the corpus of participants’ retirement investments. In selecting share classes with higher fees, Defendants demonstrated a lack of basic skill and prudence when selecting investments.”
More than mutual funds, the suit went on to question the selection of the VOYA Stable Value Fund (including charges of “excessive spread fees” and “a failure to issue an RFP regarding this option.”
All in all, the suit goes deeper than many do in highlighting potential issues with fees and fund selection, and takes pains to acknowledge not only service levels, but to assert that there was nothing exceptional provided in terms of services for those fees. However, it also acknowledges that without access to a service agreement, it’s not precisely certain on that point.
Will that be enough for a judge to put aside the inevitable motion to dismiss?
Stay tuned.
NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.
Footnotes
[1] Represented by Christina Humphrey Law PC and Bradley Grombacher LLP.
[2] The suit notes that “although not named as a Defendants at this time, certain service providers are relevant parties to this Litigation,” going on to reference Schedule C of the Form 5500s filed by the Plan, to acknowledge that Cedars-Sinai contracted with VOYA Financial Partners to serve as the Plan’s Investment Advisor, and also commenting that Cedars-Sinai contracted with VOYA Retirement Insurance & Annuity (“VOYA Retirement” and together with VOYA Financial, “VOYA”), to serve as the Plan’s recordkeeper during the relevant time period. All this alongside a statement that “Cedars-Sinai had a concomitant fiduciary duty to monitor and supervise those appointees and contracted parties.”
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