(Yet) another excessive fee suit has been filed against a billion dollar 403(b) plan by the Capozzi Adler law firm.
Filing suit as participants (and former employees) of the Boston Children’s Hospital Corporation Tax-Deferred Annuity Plan are Adilson Monteiro, Karen Ginsburg, Jason Lutan, and Brian Minsk against the $1.1 billion plan’s fiduciaries (and those who appointed, and ostensibly oversaw their work), alleging that they:
1. failed to fully disclose the expenses and risk of the Plan’s investment options to participants;
2. allowed unreasonable expenses to be charged to participants; and
3. selected, retained, and/or otherwise ratified high-cost and poorly-performing investments, instead of offering more prudent alternative investments when such prudent investments were readily available at the time Defendants selected and retained the funds at issue and throughout the Class Period.
Now, as filings by Capozzi Adler go, this was a treatise—its 52 pages nearly twice the length of their typical filing. That said, and while the claims made and foundation for grievance laid was largely duplicative of other, similar excessive fee suits filed by the firm, there was at least one new element that seems to account for the “expansion.”
The suit (Monteiro v. Children’s Hosp. Corp., D. Mass., No. 1:22-cv-10069, complaint 1/18/22) alleges that, “since the start of the Class Period, Defendants allowed the Plan to be charged total amounts of RK&A fees that far exceeded the reasonable market rate,” going on to present a table that indicated that the plan paid between $57 and $93/participant, which the suit then compares (unfavorably) to allegedly comparable plans (at least based on participant count)—all of which (allegedly) pay between $23 and $42/participant.[1]
‘Clear and More Than Reasonable’
The plaintiffs continue that “based on fees paid by other large plans during the Class Period receiving materially identical RK&A services, it is clear and more than reasonable to infer that Defendants failed to follow a prudent process to ensure that the Plan was paying only reasonable fees.” Moreover, “in light of the amounts remitted to Fidelity throughout the Class Period, Defendants clearly engaged in virtually no examination, comparison, or benchmarking of the RK&A fees of the Plan to those of other similarly sized defined contribution plans, or were complicit in paying grossly excessive fees.”
Ultimately, they comment that “defendants’ failure to recognize that the Plan and its participants were grossly overcharged for RK&A services and their failure to take effective remedial actions amounts to a shocking breach of their fiduciary duties to the Plan.” And if they did have a process of review, the plaintiffs say it “…was imprudent and ineffective given the objectively unreasonable level of fees the Plan paid for RK&A services. Had Defendants appropriately monitored the compensation paid to Fidelity and ensured that participants were only charged reasonable RK&A fees, Plan participants would not have lost millions of dollars in their retirement savings over the last six-plus years.”
A Unique ‘Target’
A unique target (pun acknowledged) here was the singling out of the Fidelity Freedom Fund target-date suite, claiming that “Defendants failed to compare the Active and Index suites, as well as all other available TDFs (including actively managed TDFs), and consider their respective merits and features”—oh, and this alleged malfeasance was “exacerbated” by its role as the plan’s qualified default investment alternative (QDIA), compounded (literally) by the extra expense for active management, there was also (allegedly) a performance shortfall[2] relative to benchmarks, and 14 of the 24 lacked a 5-year track record they allege. In fact, more than half (53%) of the plan’s assets were invested in this active suite at Dec. 31, 2020, according to the suit.
“Considering just the gap in expense ratios from the Plan’s investment in the Active suite to the Institutional Premium share class of the Index suite, in 2020 alone, the Plan could have saved approximately $3.15 million in costs.”
The suit also criticizes “the plan’s excessively expensive investment menu” for its failure to include the lowest share class options, claimed that the fiduciaries failed to monitor or benchmark their fees.
In sum, the suit alleges that “Boston Children’s and the Committee breached their fiduciary monitoring duties by, among other things:
a. “failing to monitor and evaluate the performance of their appointees or have a system in place for doing so, standing idly by as the Plan suffered enormous losses as a result of the appointees’ imprudent actions and omissions with respect to the Plan;
b. “failing to monitor their appointees’ fiduciary processes, which would have alerted a prudent fiduciary to the breaches of fiduciary duties described herein, in clear violation of ERISA; and
c. “failing to remove appointees whose performances were inadequate in that they continued to maintain imprudent, excessively costly, and poorly performing investments within the Plan, all to the detriment of the Plan and its participants’ retirement savings.”
“Had Boston Children’s and the Committee discharged their fiduciary monitoring duties prudently as described above, the losses suffered by the Plan would have been minimized or avoided,” the plaintiffs claim. “Therefore, as a direct result of the breaches of fiduciary duties alleged herein, the Plan and its participants[3] have lost millions of dollars of retirement savings.”
Will these simplistic assertions be sufficient to get the case past the inevitable motion for summary judgment? We shall see…
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] The direct compensation paid to the recordkeeper disclosed on each plan’s Form 5500, as well as all indirect compensation, according to the plaintiffs.
[2] According to the suit, “of the 26 actively managed Fidelity Series Funds in the Active suite portfolio, half similarly trail their respective benchmarks over their respective lifetimes. Defendants never undertook a review of the performance of the funds comprising the Active suite portfolio during the Class Period.”
[3] The plan had 18,580 participants, according to the suit.
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