$140 Million Settlement: What it Means to Your Retirement Plan Practice

[The following article by David Witz originally appeared on the eMoney Advisor blog and is reposted here with permission]

In December 2014, two parties in a high-profile ERISA fiduciary breach case filed a motion for the court to approve a settlement worth $140,000,000. This settlement is nearly 10-times greater than some other recent high-profile settlements. To date, this is the largest settlement ever in an ERISA fiduciary breach case involving the receipt of revenue sharing by a service provider.

The lawsuit was originally filed against the defendant in 2001 over undisclosed revenue sharing payments from non-proprietary mutual funds in violation of ERISA. By no means is this an indication that group annuity contracts are prohibited from use. However, the settlement does include a number of action items that I suggest represent a blueprint to mitigate litigation risk for any retirement plan whether it is funded with a group annuity contract or a trust.

If you are an advisor that sells and services retirement plans, you need to consider adopting the following recommendations in your business. These recommendations will require the establishment of new documented processes and procedures that will add to an advisor’s labor burden but result in mitigated litigation risk.

  1. Present all products offered by a single-covered service provider (“CSP”) that your prospect or client qualifies to purchase. Typically, multiple products are tied directly to different pricing scenarios that should be communicated to the responsible plan fiduciary (“RPF”) in order to make an informed decision. Any changes that affect pricing after the buying decision is made should also be reviewed with the RPF within 60 days. Clients using Legacy products that have been replaced with more efficient and cost-effective contemporary solutions should be informed of the opportunity to adopt a better solution.
  2. If the CSP offers the same investment option in multiple share classes, present your recommended menu with each share class, or at least the book-ends to demonstrate each pricing scenario or range.
  3. Identify which investment options are proprietary, non-proprietary, and sub-advised, and identify the cost impact by using one type of fund over another.
  4. Disclose the gross and net operating expense ratio, the 12b-1, and any other indirect fee by fund. In addition, disclose the amount as a percent and dollar amount, who can receive it, and who pays it.
  5. Provide the RPF with an estimate of the revenue sharing expected for each fund at the beginning of the plan year and a final tally of the revenue sharing paid for each fund at the end of the year. The amount of revenue sharing paid should be compared to other platforms to confirm that the amounts received are competitive.
  6. Document the file for any investment option additions, removals, or substitutions added during the course of the contract year by the plan sponsor and the effect that will have on overall cost. Documentation must include affirmative consent to the investment change by the plan’s trustees or the investment manager. Investment changes imposed by the CSP, i.e., product vendor, must provide the RPF with the option to terminate the relationship.
  7. Provide access to this information on your website and store the information in a document lockbox.

Keep in mind that these recommendations are not legal requirements, though some are imposed specifically on the defendant as a result of the settlement agreement. To learn how PlanTools technology can assist with meeting these objectives contact David J Witz by email or at 704-564-0482.

Court in Boeing Excessive Fee Case Rules for Plaintiffs, Sets Trial Date

On December 30, 2014, the district court in Spano v. Boeing denied the defendants’ motion for summary judgment on the merits and partially denied their motion for summary judgment based on ERISA’s statute of limitations. A trial date has been set for May 20, 2015 in Judge Nancy J. Rosenstengel’s East St. Louis courtroom.

The Spano case was filed over eight years ago on September 27, 2006, one of the very first excessive fee cases filed against the largest of American employers. The case has an extensive procedural history including having the district court’s first class certification order vacated by the 7th Circuit in a decision that many in the ERISA world thought was the final nail in the coffin to excessive fees cases after the 7th Circuit’s earlier decision in Hecker v. Deere. However, as Stephen Rosenberg (now of the Wagner Law Group) predicted back in 2009, Hecker would be a high water mark, the plaintiff’s bar would regroup, and the pendulum could swing back the other way. This decision in Spano now makes clear that the pendulum has swung…and swung hard.

In the decision, the district court describes each of the plaintiffs’ claims:

Plaintiffs allege that Defendants caused the Plan to pay unreasonable administrative fees to its recordkeeper State Street/CitiStreet. Additionally, Plaintiffs allege that Defendants selected and retained mutual funds as Plan investment options until 2006, which charged excessive investment management expenses and were the vehicle Defendants used to funnel excessive Plan recordkeeping and administrative fees to State Street/CitiStreet via revenue sharing.

Plaintiffs further allege that the Small Cap Fund provided additional revenue sharing fees to State Street/CitiStreet and charged its investors one hundred and seven basis points per year in fees, which was grossly excessive, in order to benefit Defendants’ corporate relationship with State Street/CitiStreet.

Plaintiffs further allege that Defendants failed to monitor and remove an imprudently risky concentrated sector fund, i.e. the Technology Fund, and instead retained this fund for the purpose of benefiting its corporate relationship, rather than for the sole benefit of the Plan Participants.

Lastly, Plaintiffs allege that the Boeing Company Stock Fund incurred excessive fees and held excessive cash, impairing the value of the Plan assets. With regard to this fund, Plaintiffs also allege that Defendants failed to remedy the resulting transaction and institutional drag.

Defendants raised a number of arguments in seeking to have plaintiffs’ claim thrown out. First, they argued that the interpretation of ERISA’s statute of limitations in Tibble v. Edison should apply here and that because all of the funds were selected prior to six years before the lawsuit was filed, there can be no fiduciary breach. The court rejected the Tibble interpretation, as well as plaintiffs’ arguments that the fraud and concealment exception should apply. Citing the briefs in support of plaintiffs in the Tibble appeal to the Supreme Court, the court found that in the 7th Circuit, there is a clear duty to monitor investments after they have been selected, regardless of whether they were selected prior to 6 years before the lawsuit. The court made clear then that the claims in the case begin on September 28, 2000.

Next, the court addressed merits arguments for each of the four claims, however, they are too extensive for us to go into enough detail without simply repeating 20 pages worth of opinion. We highly suggest you read the opinion starting at page 24. Instead, we will pull out the broad highlights.

First, the court found compelling plaintiffs’ argument that the defendants failed to solicit competitive bids for the plan’s administrative services. The court noted that when they finally did, the fees paid ($32 per head) were directly in line with the expert testimony put forth by the plaintiffs.

Second, the court did an extensive job of limiting the Hecker opinion, which the defendants sought to use expansively. The court stated:

Hecker makes clear that revenue sharing does not inherently violate ERISA. In the instant case, however, Plaintiffs assert that Defendant fiduciaries put the mutual funds into the Plan, which generated revenue sharing for State Street/CitiStreet, so that these funds could provide this revenue sharing to State Street/CitiStreet. Plaintiffs cite to the testimony of various Boeing employees to argue that Defendants either “deliberately steered revenue to State Street or were conveniently oblivious to these excessive fees.”…Further, Plaintiffs here argue that the total fees (or expense ratios) for these mutual funds were excessive. Additionally, in Hecker, there was no argument that the administrative fees were not reasonable. See also George v. Kraft Foods Global, Inc., 674 F. Supp. 2d 1031, 1048, n. 17 (N.D. Ill. 2009) (“at a fundamental level, Hecker says nothing regarding the duty a fiduciary holds with respect to a 401(k) investment plan’s administrative services fees.”). Lastly, Boeing’s Plan has fewer available investment options than the plan in Hecker. See Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 596 n. 6 (8th Cir. 2009) (“The far narrower range of investment options available in this case makes more plausible the claim that this Plan was imprudently managed.”). Plaintiffs assert that, in contrast to the twenty-three retail mutual funds and the brokerage window (by which the participants could invest in approximately 2,500 mutual funds) offered in Hecker, Defendants offered only eleven investment options, and the four mutual funds were deliberately included to benefit Boeing’s corporate relationship with State Street/CitiStreet.

Third, the plaintiffs’ arguments of a conflict of interest regarding Boeing’s relationship with State Street/CitiStreet was clearly convincing to the court at this stage.

Fourth, in many instances the defendants failed to cite to any evidence of procedural prudence in support of its selection and monitoring of certain investments. This was extensively highlighted by the plaintiffs.

Our Thoughts

As noted above, this decision reflects the pendulum that has clearly swung in the participants’ favor in recent years. See also Victory for Plaintiffs: 7th Circuit Allows Class Certifications for Excessive Fee Cases; Tussey v. ABB Affirmed, Reversed, and Vacated in Part by 8th Circuit; and Supreme Court Rejects the Moench Presumption – Vacates and Remands Fifth Third Case)

Having been in the trenches in 2009 after the Hecker decision, betting a dollar that a decision such as this would be likely someday would have been a waste of a perfectly good dollar.

This decision makes two things clear. First, the ERISA plaintiff’s bar has refined the claims being brought and/or argued since Hecker and has doubled down on conflicts of interest. This shouldn’t come as a surprise. Cases such as Braden v. Walmart have provided a clear path of success, as did many of the earlier and recent settlements involving self-dealing (Bechtel, Caterpillar, Cigna, etc…) Second, Hecker doesn’t have teeth anymore…maybe just baby molars. Possibly it’s greatest lasting truth is that service providers such as Fidelity are not fiduciaries when they design a products such as a line up of funds.

As noted, trial is set for May 20, 2015. We will continue to monitor the case and report any future developments.

Another Court Finds Church Affiliated Hospital Pension Plan Subject to ERISA

On December 31, 2014, the court in Stapleton v. Advocate Health denied the defendants’ motion to dismiss holding that the church affiliated hospital pension plan at the heart of the case is subject to ERISA. Ruling in line with the courts in Rollins v. Dignity Health and Kaplan v. Saint Peter’s, the court here finds that only a church may establish a church plan. Because Advocate Health acknowledges that it is not a church, it therefore cannot sponsor a plan that falls within the church plan exemption to ERISA.

As we’ve previously reported, there are now nine cases challenging the interpretation of the church plan exemption. Decision in the cases are in various states, but currently there are three cases that have made it to the appellate level but only one of which is actually being heard. The first case, Overall v. Ascension, is on appeal to the 6th Circuit after the district court agreed with the defendants and long standing IRS interpretations that a plan sponsor affiliated and controlled by a church can establish and maintain a church plan. Briefs have been filed and oral argument will be held soon. In the other two cases, the district courts in Rollins and Kaplan certified interlocutory appeals to the 9th Circuit and 3rd Circuit, respectively. In both cases, the defendants have asked the circuit courts to hear the appeal but neither has yet had their motion ruled on.

Our Thoughts

These cases continue to inspire passionate arguments on both sides. As we’ve stated before, this issue will ultimately be resolved by one of two avenues: the Supreme Court or an act of Congress. I’d bet on the first, but wouldn’t be surprised to see the second.

After 13 years, Haddock v. Nationwide settles for $140,000,000

On Friday December 12, 2014, the parties in Haddock v. Nationwide filed a motion for the court to approve a settlement worth $140,000,000. Originally filed in 2001, the lawsuit concerned the plaintiffs’ allegation that Nationwide received undisclosed revenue sharing payments from non-proprietary mutual funds in violation of ERISA.

The procedural history is extensive with 6 published orders from the court and multiple trips to the 2nd Circuit Court of Appeals. A more thorough background of the case is included in the motion seeking settlement.

As noted above, the $140,000,000 is split between two different certified classes, with $110,000,000 for one and $30,000,000 for the other. The plaintiffs’ will seek up to 35% of the settlement amount in attorney’s fees or $49,000,000 and up to $2,000,000 in costs.

The settlement also calls for extensive non-monetary relief:

Defendants will supplement the disclosures for its new group variable annuity customer proposals, its new group variable annuity contracts, and its plan sponsor website that relate to Mutual Fund-related fees and expenses in connection with group variable annuity products. Defendants will also add language in new customer proposals or plan sponsor website(s) informing trustees of Plans holding group variable annuity contracts of the opportunity to be transferred to a product where Mutual Fund Payments are credited to the Plan in the form of reduced asset fees in an amount equivalent to the disclosed reimbursement rate received for each Mutual Fund investment option.

Defendants will also supplement the disclosures for its new individual variable annuity customer proposals and its new product prospectuses that relate to Mutual Fund-related fees and expenses in connection with individual variable  annuity products with specific language in these disclosures that Nationwide shall provide, upon Plan Trustees’ written request, its best estimate of plan-specific, aggregate data regarding the Mutual Fund Payments received in connection with the Plan’s investments for the previous calendar year.

Defendants will also supplement the disclosures for its trust customer proposals, new trust, custodial, services or program agreements, and plan sponsor website that relate to Mutual Fund-related fees and expenses in connection with trust products. Defendants will also add language to the new customer proposals; trust, custodial, service or program agreements; or plan sponsor website(s) informing trustees of Plans holding group variable annuity contracts of the opportunity to be transferred to a product where Mutual Fund Payments are credited to the Plan in the form of reduced asset fees in an amount equivalent to the disclosed reimbursement rate received for each Mutual Fund investment option.

Defendants will enhance the procedures for certain future changes to the Product Menus in connection with Annuity Contracts and the Program Menus for the Trust Platforms as follows:

For group variable annuity products and Trust Platforms, Defendants will specifically identify to Plan Trustees, via mail, electronic delivery, or Defendants’ plan sponsor website, any addition of a Mutual Fund investment option to a Product Menu or Program Menu at the time of the addition. Defendants will update the new customer proposals; trust, custodial, service or program agreements; or plan sponsor website(s), as applicable, to inform Plan trustees that such Product and Program Menu additions are identified on the plan sponsor websites.

For group variable annuity products and Trust Platforms, Defendants will provide to Plan trustees written notice of any removal or substitution of a Mutual Fund investment option from the Product and Program Menus that is initiated solely by Defendants, and will not remove or substitute that fund from the Product or Program Menu for a particular Plan until it has received affirmative consent from that Plan’s trustee(s). Such notice shall be provided via mail, electronic delivery, or published on the plan sponsor websites at least thirty (30) days prior to the removal or substitution of a Mutual Fund investment option, and shall state the effective date of such removal or substitution. Defendants will update their new customer proposals; trust, custodial, service or program agreements; or plan sponsor website(s), as applicable, to inform Plan trustees that such removals or substitutions from the Product and Program Menus are identified on the plan sponsor websites.

For group variable annuity products and Trust Platforms, Defendants generally will not substitute one fund for another or otherwise unilaterally remove or substitute a fund from a Plan Menu. Defendants will confirm this change in their business practices by modifying their contracts  and Trust Platforms to eliminate any authority to unilaterally remove or substitute a fund from a Menu (the group variable annuity modifications will be subject to State insurance department approval).

For group variable annuity products, in those circumstances where a substitution or removal is necessitated by the actions of Mutual Funds (such as decisions by Mutual Funds or corresponding separate accounts to liquidate a fund, merge funds, change investment advisers or sub-advisers, or make other changes that prevent Nationwide Life from offering an investment option on the Plan Menu, or otherwise require Nationwide Life to change the Plan Menu), where administratively feasible, Nationwide Life will provide sixty (60) days written notice to the trustee of each Plan affected by the change via notice sent by first class mail, fax, or email. The notice will: (1) explain the proposed modification to the Plan Menu; (2) fully disclose any resulting changes in the Mutual Fund Payment rate received by Nationwide; (3) identify the effective date of the change; (4) explain the Plan trustee’s right to terminate the Annuity Contract; and (5) reiterate that, pursuant to the contract provisions agreed to by the Plan trustee, failure to object or otherwise respond shall be deemed to be consent to the proposed change. Nationwide Life will confirm this change in their business practice by modifying their existing and future Annuity Contracts to reflect this notice process (the Annuity Contract modifications will be subject to State insurance department approval).

For Trust Platforms, NFS has enhanced its notification procedures in those circumstances where a substitution or removal is necessitated by the actions of Mutual Funds (such as decisions by Mutual Funds or corresponding separate accounts to liquidate a fund, merge funds, change investment advisers or sub-advisers, make other changes that prevent NFS from offering an investment option on the Plan Menu, or otherwise require NFS to change the Plan Menu). These notification enhancements are substantially the same as the proposed enhancements to the group variable annuity products’ notification procedures.

For Individual Variable Annuities, Nationwide Life agrees to follow applicable U.S. Securities and Exchange Commission regulations, including notice requirements, with regard to the addition, substitution or removal of any investment option.

As part of the Settlement, current and future group variable annuity contract holders and those holding trust, custodial, services or program agreements, shall be offered the opportunity to be transferred to a product or Trust Platform where Mutual Fund Payments are credited to the Plan in the form of reduced asset fees in an amount equivalent to the disclosed reimbursement rate received for each Mutual Fund investment option. Defendants agree that they will continue to make available at least one Trust Platform offering for which Mutual Fund Payments are passed through in their entirety and/or the Mutual Fund Payment amounts are disclosed, subject to the restrictions on Defendants’ ability to substitute one fund for another as set forth in the Stipulation.

Defendants shall begin to implement these changes within six (6) months of the Settlement Effective Date, and will make diligent and good faith efforts to ensure that the implementation of these changes is concluded within twelve (12) months of the Settlement Effective Date, unless there is a change in applicable law or regulatory policy that renders any change or practice unlawful or impracticable or imposes different disclosure or other substantive requirements.

Our Thoughts

Needless to say, this is the most substantial settlement ever in an ERISA fiduciary breach case involving the receipt of revenue sharing by a service provider. It is unclear from the settlement how much of the conduct at issue in the lawsuit is still being done by Nationwide. Nonetheless, this settlement is nearly 10 times greater than recent settlements against ING (see ING Settles ERISA Class Action Lawsuit Over Revenue Sharing Practices) and MassMutual (see MassMutual Settles Excessive Fee Lawsuit).

 

Excessive Fee Case Against Lockheed Martin Goes to Trial – UPDATED

[UPDATE – On Sunday, the court entered an order entertaining a joint motion by the parties to delay the start of the trial until Tuesday. The parties filed such a motion stating “Plaintiffs and Defendants hereby jointly request a one-day continuance so that the parties can determine whether the case can be resolved short of a full trial. ” We will continue to monitor.]

On Monday, December 15, 2014, the excessive fee lawsuit against Lockheed Martin goes to trial in the Southern District of Illinois after 8 years since the case was filed, two trips to the 7th Circuit and one failed cert petition to the Supreme Court. It is the third such fee lawsuit to go to trial against employer fiduciaries since a “blitzkrieg” of lawsuits was filed against Fortune 500 companies on September 11, 2006. The previous trials were against Edison International and ABB, Inc.  and those cases have been covered extensively on this blog, as has the case against Lockheed Martin. See Victory for Plaintiffs: 7th Circuit Allows Class Certifications for Excessive Fee Cases and Supreme Court Declines to Hear Lockheed Martin Class Cert Appeal.

The three primary issues to be decided at trial concern the payment of excessive administrative fees, the stable value fund, and the company stock fund. Here are the final trial briefs as filed by the parties:

We will be monitoring the trial and will report on any major developments.