Oracle Sued by Schlichter Bogard & Denton After Recent Cases Against Anthem, Reliance Trust, and BB&T

[This blog is approaching its 3rd Birthday this spring and in celebration we have a new logo and have made some much needed updates to the site. All cases in the menu at the top should be current as to whether it is an active or closed case. We have also started using MailChimp to send out emails of posts with the plan to send them out on the day of, rather than the day after, the post happens here. If you have any comments, questions, or inquiries, please feel free to reach out to me at tclark@wagnerlawgroup.com]

As most readers are probably aware, there has been a significant uptick in the number of ERISA fiduciary breach lawsuits filed in the last couple of months. We will be adding these cases to the blog over the next few weeks as we also add our commentary. In today’s post, we will address all of the recent lawsuits filed by Schlichter, Bogard & Denton, the 800 pound Gorilla in this space. The most recent case filed was just last week against Oracle. The case against Anthem has received a lot of attention. But one that has slipped through the cracks a bit is against Reliance Trust and one its clients. This case may the first of its kind on this scale to go after an outsourced fiduciary who is not related to the plan sponsor. Finally, the case against BB&T will be familiar to readers as involving claims of a providers own in-house plan.

Troudt v. Oracle Corp.

Just this past Friday, January 22, 2016, an excessive fee lawsuit was filed against Oracle Corp., a Fortune 100 company based in Redwood City, California. Troudt v. Oracle Corp. was filed in the District of Colorado and alleges that the plan’s fiduciaries allowed excessive recordkeeping fees to be paid to Fidelity. The complaint alleges that Oracle allowed Fidelity to be paid between $68 to $140 per participant rather than a reasonable per head fee of $25. The plan’s participant count increased from 38,000 in 2009 to about 60,000 today. Over that same time period, the plan’s assets increased from $3.6 billion to over $11 billion.

The complaint also alleges that the following funds underperformed and should not have been selected:

The Artisan Small Cap Value Fund

PIMCO Inflation Response Multi-Asset Fund

TCM Small-Mid Cap Growth Fund

This is not the first time a major client of Fidelity has been sued, which includes cases such as Tussey v. ABB and previously dismissed lawsuits against John Deere, Exelon, and Unisys.

Notably missing from the lawsuit are allegations that cheaper share classes were available but not used, as is alleged in the next lawsuit we will discuss.

Bell v. Anthem

On December 29, 2015, an ERISA lawsuit was filed against Anthem Inc. in the Southern District of Indiana federal court. The allegations in Bell v. Anthem have without question ruffled the feathers of plan sponsors and fiduciaries of large 401(k) plans. This is the first time, to our knowledge, that a plan sponsor has been sued on this scale where Vanguard has been the recordkeeper and their funds have made up the lion’s share of the core options available.

The primary allegation in the complaint is that the plan’s fiduciaries caused Vanguard to be paid excessive recordkeeping fees. Only in 2013, were more expensive share classes of the plan’s funds replaced with cheaper alternatives. This resulted in a reduction of the recordkeeping fees paid to Vanguard through the revenue sharing generated from the funds. Plaintiffs allege that these cheaper share classes were available much earlier than selected, even as far back as the late 1990s. The complaint states that this failure caused $18 million in losses to the plan.

The complaint also goes on to allege that the Artisan Mid Cap Value Fund and the Touchstone Sands Capital Growth Fund were imprudently included in the plan because they were excessively prices as compared to similar Vanguard funds, in addition to more expensive share classes being used until 2013. The plaintiffs also claim that the plan’s fiduciaries failed to use separate accounts for these two funds and collective trusts for the Vanguard target date funds in the plan instead of mutual funds and that this changes would have resulted in less fees paid by participants.

The excessive recordkeeping fees alleged by plaintiffs was between $80 and $94 per participant until 2013 when Anthem negotiated a flat per head fee of $42. This is based on a plan that had between $3.3 and $5.1 billion during the time period in question in the lawsuit. The plaintiffs also allege that the $42 is too much and was excessive by at least 40%.

Finally, the complaint alleges that the plan should have included a stable value fund instead of a money market fund.

Pledger v. Reliance Trust

On December 22, 2015, Pledger v. Reliance Trust Company was filed in the Northern District of Georgia federal court. The issues raised in this complaint are unique to this case and should be carefully studied by any service provider offering outsourced 3(21), 3(38), or 3(16) services.

The lawsuit was filed by participants in a plan sponsored by a company called Insperity Inc. that is a professional employer organization (“PEO”). As a PEO, Insperity provides outsourced human resources and business solutions to small and medium sizes businesses. Typically, these outsourced employees become employees are co-employed by Insperity as well as the client business. Part of the package of services is that these outsourced employees become part of a 401(k) plan sponsored and administered by Insperity rather than the client company.

The participants plaintiffs make a number of claims in the complaint and we will take each in turn. First,  plaintiffs claim that Insperity used the plan’s asset to start and seed a 401(k) recordkeeping business it started to supplement its core business functions. Previously the plan was with another industry recordkeeper and after Insperity started its recordkeeping division, the plaintiffs claim the plan was moved to it without a competitive bidding process. As support for its claims, plaintiffs allege that the plan’s $1.9 billion in assets represented 95% of Insperity’s recordkeeping assets. It is also worth noting that Insperity had a different plan for its corporate workforce and that it was also recordkept by Insperity.

Plaintiffs allege that Insperity derived excessive compensation from the recordkeeping activities and that Reliance Trust Company, also a defendant, was part of the scheme. The complaint alleges that Reliance was hired as the plan’s 3(38) fiduciary investment manager as well as a discretionary trustee. Essentially, the plaintiffs accuse Insperity and Reliance of a quid pro quo that allowed Reliance to pick its own investments for the plan, such as the target date funds selected, which then allowed Reliance to select funds that generated excessive revenue sharing that went to Insperity. The complaint alleges that Insperity received between $119 and $142 per participant per year in recordkeeping fees.

Plaintiffs further accuse Reliance of selecting “untested” and “newly-established” target date funds it managed as collective trusts. Plaintiffs claim that Reliance was charged a sliding scale for managing these assets. What is unclear from the complaint is whether Insperity selected the collective trusts and simply hired Reliance as an investment manager or whether all investment decisions were outsourced to Reliance and they then selected their own products for inclusion. The plaintiffs claim it is the latter. In either case, the Plaintiffs bolster their claims by alleging that the more expensive share class of the Reliance collectives were selected to generate additional revenue sharing to benefit Insperity. They also claim the target date funds had terrible performance that caused losses to the plan of between $41 million and $56 million.

In what may be the most troublesome allegation in the complaint, plaintiffs claim that the Insperity corporate plan, which had only $208 million in assets, had the same investment lineup but used cheaper share classes than the $2 billion plan in six instances. They also claim that the corporate plan was offered a stable value fund, where the plan for the outsourced employees was not, in violation of ERISA.

Smith v. BB&T

On October 8, 2015, current and former employees of BB&T Corporation filed a lawsuit in the Middle District of North Carolina federal court alleging self dealing by BB&T with regard to its own in-house 401(k) plan.

Plaintiffs allege that BB&T has benefited at the expense of plan participants by using BB&T’s own funds which also include those managed by its wholly owned subsidiary Sterling Capital Management. The plan is alleged to currently have about $2.93 billion in plan assets.

According to plaintiffs, until 2009, the plan only had BB&T mutual funds, but since then non-proprietary funds have been added. BB&T has also been the plan’s recordkeeper in addition to the primary asset manager of the plan. Plaintiffs allege that through this setup, BB&T profited at the expense of the plan’s participants by allowing the plan to generate excessive revenue sharing which went to BB&T and not engaging in an arm’s length RFP process to find a different recordkeeper. Like other lawsuits filed by the Schlichter firm, they claim these funds are also imprudent when compared to a lineup of Vanguard fund or if separate account or collective trusts had been used rather than mutual funds.

The complaint also alleges that many of the BB&T funds in the plan were poorly performing including Sterling Capital International Fund. Finally, the complaint also attacks the use of a BB&T money market type product rather than a stable value fund, as well as the unitized structure of the BB&T company stock fund in the plan, an issue that also has been litigated in previous cases.

Also worth noting is that a separate lawsuit has been filed against BB&T by a different plaintiffs firm. That suit, Bowers v BB&T will be litigated along with Smith v. BB&T.

Our Thoughts

What is immediately worth noting is that the cases against Oracle and Anthem do NOT involve allegations of self dealing under ERISA. Such allegations have been the lynch pin of trial decisions and settlements in the recent successes by the plaintiff’s ERISA bar. Instead, the claims attack the process and substance of the fiduciary decision making by the defendants.

On the other hand, the cases against Reliance/Insperity and BB&T both involve allegations of self dealing. The case against BB&T has a familiar pattern and is similar to ones previously filed against Ameriprise and Fidelity.

Also worth noting is that the Pledger v. Reliance Trust case may be the first case to address the common practice of outsourced investment managers using their own products/solutions as substitutes for more mainstream target date funds. This is become a more common thing to see in the form of model portfolios and collective trusts. It will be important to pay close attention to the way in which the relationship was established by Reliance and Insperity, as there is definitely a right way to do it and a wrong way. We will make sure to pass along more information when it becomes available in the case.

One final thought I’d like to discuss is one that anyone who has seen me speak has heard…having an outsourced fiduciary provider in most instances will NOT stop a plan sponsor from also being sued. In Pledger v. Reliance Trust, the complaint states that Reliance was selected as the outsourced investment manager and discretionary trustee. But yet Insperity was still sued and it is alleged that they are as much responsible for the claims involving investments as is Reliance, the outsourced fiduciary. While I understand that Insperity has its own independent claims against it, it is worth emphasizing that Insperity as the plan sponsor still needs to fight its way out of this lawsuit, like any other plan sponsor who might get sued would. While a plan sponsor in another situation, or Insperity here, may be able to show that all responsibility over investments was that of the outsourced fiduciary, the time and expense of defending a lawsuit is very real and many times may be more or as much as the ultimate damages that a court could find against them. The ultimate conclusion here is that for a plan sponsor, outsourcing a fiduciary role to a service provider is not a total insulation from risk. And this lawsuit provides a nice example of that. Instead, there should be other valid reasons (of which there are many) for outsourcing fiduciary roles to service providers.

We will continue to monitor these cases and will be posting soon about the other new cases that have recently been filed.

3rd Circuit Grants Victory to Participants Challenging Church Plan Status

Yesterday, December 29, 2015, the 3rd Circuit Court of Appeals decided in favor of the plan participants in Kaplan v. Saint Peter’s Healthcare System. In the first circuit court opinion in the dozen+ cases that have been filed, the court ruled that the defined benefit plan sponsored by Saint Peter’s Healthcare System is not eligible for the church plan exemption from ERISA. Stated simply, this ruling holds the plan should have been complying with ERISA the entire time, but wasn’t. The consequences are staggering considering state law, which applied in the absence of ERISA, usually has little or no requirements related to funding. The plaintiffs have alleged the plan is severely underfunded. If the decision is enforced, it also means the plan sponsor will need to pay PBGC premiums going back in time. (see our previous coverage on the district court’s opinion that agreed with the plan’s participants: Court Finds St. Peter’s Pension Plan is NOT a Church Plan & A New Case is Filed in Chicago)

The 3rd Circuit’s decision answered this straight forward question: while the law allows a church agency to maintain a church plan, does it also allow an agency to establish one? The court’s decision ultimately said no, only a church can establish a church plan, and Saint Peter’s Healthcare System, which sponsors the plan, is not a church. The court based their decision on the plain reading of the statute and the remedial purposes of the ERISA statute to provide protection to plan participants, rather than exclude them from protection. In so deciding, the court rejected Saint Peter’s arguments that the 1980 amendment to the church plan exemption allows any plan maintained, even if not established, by a church agency to be exempt. In doing so, the court referenced a hypothetical from oral arguments that clarifies the issue and is worth repeating here:

Indeed, St. Peter’s essentially conceded the problem with its reading at oral argument when presented with the following scenario: Congress passes a law that any person who is disabled and a veteran is entitled to free insurance. In the ensuing years, there is a question about whether people who served in the National Guard are veterans for purposes of the statute. To clarify, Congress passes an amendment saying that, for purposes of the provision, “a person who is disabled and a veteran includes a person who served in the National Guard.” Asked if a person who served in the National Guard but is not disabled qualifies to collect free insurance, St. Peter’s responded that such a person does not because only the second of the two conditions was satisfied. This correct response only serves to highlight the fatal flaw in the construction of ERISA advanced by St. Peter’s.

An even more concerning issue for sponsors of church plans where a church established the plan, but a church agency is maintaining it, is the court’s footnote on who can properly be considered a church agency (or church pension board) as they are commonly known:

Although we need not decide the issue, we have substantial reservations over whether St. Peter’s can even maintain an exempt plan. Subsection 3(33)(C)(i) requires that if a plan is to be maintained by an organization that is not a church, it must be an organization “the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches . . . .” In addition, the same subsection requires that the organization be “controlled by or associated with a church or a convention or association of churches.” Setting aside whether St. Peter’s is controlled by or associated with a church (as that depends on disputed facts not properly resolvable at the motion-to-dismiss stage), St. Peter’s itself does not appear to meet the principal purpose test, as its principal purpose is the provision of healthcare and not the administration or funding of the retirement plan. St. Peter’s contends, however, that its Retirement Plan Committee qualifies because the Committee’s principal purpose is to maintain the plan. However, this may be insufficient. See Rollins, 19 F. Supp. 3d at 914 (“[T]he statute does not say that the organization may have a subcommittee who deals with plan administration. Rather, the statute dictates that [the] organization itself must have benefits plan administration as its ‘principal purpose,’ which Dignity plainly does not.”).

If this interpretation would be enforced, it would seriously undermine the use of the church plan exemption in almost all instances except those involving plans sponsored by actual churches or plans maintained by traditional church pension boards, which are far fewer in number than the church affiliated schools and agencies that claim this exemption.

Like the district court before it, the 3rd Circuit also rejects the IRS private letter ruling received by Saint Peter’s on the grounds that the IRS is simply wrong and it should not be given deference because it is based on a memo from the IRS general counsel and not based on a formal adjudication or notice-and-comment rulemaking.

Finally, the court rejected all other arguments of Saint Peter’s regarding legislative history and constitutional grounds. A review of the decision by the interested reader is worth it.

Our Thoughts

This is a significant victory for those who have challenged the broad interpretation of the church plan exemption. It should be given serious persuasive consideration by the other circuit and district courts with similar cases. It is worth noting that this decision comes on the heels of the district court in Medina v. Catholic Health Initiatives deciding in favor of the church affiliated hospital system and against the plan participants. In the decision, decided on December 8, the court came to the opposite conclusion of the 3rd Circuit in Kaplan and held that plans that are just maintained church agencies can use the church plan exemption, as long as they also meet the affiliated and controlled test noted above. The court not only found the plan in that case did, but also strongly suggested the hospital system itself may meet the definition of a church itself.

As I have predicted all along, ultimately this issues will be decided by the Supreme Court or Congress. We are rapidly approaching the former, if Saint Peter’s seeks review. We may also see the latter, as my understanding is that proposed legislation is out there to address these cases.

Finally, the parties in Lann v. Trinity Health Corporation and Chavies v. Catholic Health East have filed notices in their respective cases that they have reached a tentative settlement. We will post on those settlement when they are filed.

 

Case Against Novant Health Settles Early for $32 Million

In the second settlement agreement filed in less than a week by the law firm of Schlichter, Bogard, & Denton, the parties in Kruger v. Novant Health have agreed to settle the case and have sought approval from the court in the Middle District of North Carolina. Defendants have agreed to pay $32 million and have agreed to very significant affirmative relief. Counsel for the plaintiff’s will seek no more than $10,666,666 in attorney’s fees and $95,000 in costs.

Novant Health, Inc. is a non-profit hospital system based in North Carolina. We broke the story on this case in March of 2014 when the plaintiffs filed their federal lawsuit accusing the fiduciaries of the multiple plans run by Novant of breaching their fiduciary duties by (1) allowing excessive fees to be paid to the plans’ broker, D.L. Davis & Company, Inc., (2) allowing excessive fees to be paid to the plans’ recordkeeper Great West, and (3) including more expensive share classes for all of the plans’ mutual funds.  (see Plan Sponsor Sued over $6 million Paid to Broker). More specifically, the complaint alleged that the broker, in just a few short years, had their compensation increase from about $800,000 to as much as $6 million as the assets of the plans drastically increased. In mid September, the district court denied the defendants’ motion to dismiss, allowing the case to move forward.

It is uncommon, but not unheard of, for excessive fee cases to settle so early in litigation before any type of dispositive motion is filed or class certification is sought. According to filings by the parties, shortly after the complaint was filed, the parties exchanged thousands of documents and entered into early mediation. All defendants in lawsuits are entitled to their day in court, but the severity of the allegations by the plaintiffs may have had a strong influence on the early settlement.

For example, the plaintiffs alleged in the complaint that Davis had an extensive business and land development relationship with Novant Health, including companies owned, controlled, or substantially invested in by Mr. Davis, which entered into land development projects and office building leasing arrangements in the greater-Winston-Salem area with Novant Health. Davis was also accused of providing Novant Health a gift in excess of $5 million by a Davis-owned development company, East Coast Capital, just as the company announced the plans of a large business development known as the Southeast Gateway, which included Novant Health occupying 40,000 square feet of this office development for a call center.

Whether these allegations are true or not, the extensive affirmative relief agreed to by the parties demonstrates their plausibility. During the four settlement period, the defendants have agreed to:

  1. conclude a comprehensive request for proposal (“RFP”) competitive bidding process, conducted and led by an outside consultant, for recordkeeping, investment consulting and participant education services for the Plans;
  2. engage a mutually agreed upon Independent Consultant to assess the adequacy of the RFP process and assess Defendants’ anticipated selection of service providers for the Plans;
  3. ensure that Plans’ administrative service providers are not reimbursed for their services based on a percentage-of-plan-assets basis;
  4. review all current investment options in the Plans and revise the investment options, as needed, ensuring that those options are selected or retained for the exclusive best interests of the Plans’ participants;
  5. the Independent Consultant reviewing the investment option selection process and provide recommendations, if necessary;
  6. the Independent Consultant conducting an annual review, for four years, of Novant’s management of the Plans;
  7. removing Davis, and related entities, from any involvement with the Plans;
  8. removing Davis and related entities from Novant employee benefit plans;
  9. not enter into any new real estate or business relationships with Davis and related entities;
  10. not offer any Mass Mutual investments in the Plans or any other investment that provides compensation to Davis and related entities;
  11. provide accurate communications to participants in the Plans;
  12. not offer any brokerage services to the Plans; and
  13. adopt a new investment policy statement to ensure that the Plans are operated for the exclusive best interests of the Plans’ participants.

According to the settlement agreement, the Independent Consultant will be Innovest Portfolio Solutions, LLC based in Denver, CO. It does not suggest how or why they were retained. Additionally, the defendants will retain an independent fiduciary to approve the settlement, but the agreement did not specify who that party will be.

Our Thoughts

As discussed above, no allegation is proven true until a court of law decides so (and then years later an appeals court agrees). But where there is an abundance of smoke, there is usually fire. And the early settlement of this case suggests that the plan fiduciaries were engaging in conduct that did not meet the stringent standards of ERISA. While the allegations of real estate deals and money payments are dramatic, the fiduciary of the average plan can look to this lawsuit and settlement as an example that ERISA requires you to act in the best interest of plan participants at all times. That often involves hiring conflict free experts and regularly reviewing a plan’s investments and service provider arrangements.

Spano v. Boeing Excessive Fee Case Settles for $57 Million

Yesterday, November 5, 2015, the parties in Spano v. Boeing Co. filed for court approval of a Settlement Agreement that was finally made public. Earlier this year in August, the case was settled in principle on the first day of trial but the terms of the settlement were not disclosed.

We have now learned that the defendants have agreed to a $57 million payment. Schlichter, Bogard, & Denton, attorneys for the plaintiffs, with court approval will receive $19 million in attorney’s fees and $1,845,000 in costs. (For a review of the claims at issue in the case, see our earlier post Court in Boeing Excessive Fee Case Rules for Plaintiffs, Sets Trial Date.)

The following are some selected terms of the settlement:

  1. The plaintiffs agreed to a sweeping release of claims.
  2. Boeing agreed to hire an independent fiduciary to approve the settlement, assumed in the settlement agreement as Gallagher Fiduciary Advisors unless another is agreed to by the parties.
  3. If a technology sector strategy fund remains as a core option in the Plan, Boeing shall obtain an opinion and recommendation of an Independent Investment Consultant on the question of whether and how to provide participants access to a technology sector strategy as a core option. The Independent Investment Consultant is assumed as Mercer, Aon Hewitt or Towers Watson under the settlement agreement unless another is agreed to by the parties.
  4. The agreement acknowledged that Boeing has a cash target for their company stock fund, and have hired a fiduciary to monitor the cash levels.
  5. The remaining amounts in the settlement fund after paying for attorneys fees and costs and other costs associated with the settlement, will be allocated as follows:
    1. 50% to the Recordkeeping Class
    2. 20% to the Mutual Fund Sub-Class
    3. 15% to the Technology Fund Sub-Class
    4. 10% to the Company Stock Fund Sub-Class; and
    5. 5% to the Small Cap Fund Sub-Class.

Our Thoughts

This is a very significant settlement for the plaintiffs in this case, as it is second in gross amount only to the settlement of the Lockheed Martin excessive fee case earlier this year.  One notable thing different about this agreement, however, is the lack of substantial affirmative relief that is normally agreed to by the defendants in such a suit. The settlement agreement does not explain why it is missing.

 

 

 

 

Additional Thoughts on the Latest Tussey v. ABB Decision: Fiduciary Lessons Aplenty

As we covered in our last post, the district court’s latest decision in Tussey v. ABB found ABB breached their fiduciary duties but imposed no monetary damages on a procedural technicality. The moral victory for the plaintiffs, however, can still prove to be instructive for other fiduciaries responsible for the selection and monitoring of plan investments. Based on this case, past case law, as well as Department of Labor publications including the most recently issued Field Assistance Bulletin 2015-02, there are six basic obligations a fiduciary must consider when selecting and monitoring investments including:

  1. Engage in an objective, thorough and analytical search,
  2. Avoid self-dealing, conflicts of interest, or other improper influence,
  3. Consider the risk associated with the investment versus alternatives,
  4. Consider ALL costs in relationship to services provided,
  5. Ensure the investment is diversified to minimize the risk of large losses, and
  6. Consult with experts when that expertise is lacking.

Not adhering to this six step process, ultimately resulted in a finding of a breach. According to the court, “ABB’s inconsistent explanations for removing the Wellington Fund and mapping its assets to Fidelity Freedom Funds, the fact that ABB took a substantial part of the PRISM Plan’s assets and put them in an investment that was so new that ABB needed to make an exception to the IPS, and Fidelity’s explicit offer to give ABB a better deal if the Wellington assets were mapped into the Fidelity Freedom Funds” were all reasons cited for the court’s conclusion that ABB was conflicted when it chose to replace Wellington with Fidelity Freedom Funds. Had ABB adhered to the six step process, the outcome would likely have been different because documentation showing compliance with ERISA’s fiduciary duties would have been in place to exonerate ABB.

So what is the lesson here for other ERISA fiduciaries? If you are faced with the opportunity to reduce costs by using proprietary investments, consider documenting your reasons to adopt proprietary funds by answering the following questions:

  1. Are we using proprietary funds?
  2. Are we replacing an existing fund with a proprietary fund?
  3. Have we selected proprietary funds based on the standards and criteria established in the IPS?
  4. If an exception is necessary to use a proprietary fund, should we change the IPS standards and criteria permanently?
  5. Are we using a proprietary fund because it is in the best interests of participants or because it reduces the cost to the Plan Sponsor?
  6. How are we accounting for any additional revenue sharing from the use of the proprietary funds?

It is worth noting that case law has not prohibited the use of proprietary funds, the collection of revenue sharing, or the payment of plan expenses from plan assets. However, fiduciaries must understand that the use of proprietary funds creates an opportunity for additional liability issues to arise that must carefully and deliberately be addressed.