Plan Sponsor Sued over $6 million Paid to Broker

by Thomas E. Clark, Jr. JD, LLM – March 13, 2014

On March 12, 2014, a class action ERISA lawsuit, Kruger v. Novant Health, Inc., was filed in the Middle District of North Carolina by a group of current and former participants in two 401(k) plans sponsored by Novant Health, Inc., a major hospital system in the southeast. The plaintiffs allege that the plans’ fiduciaries violated ERISA 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. In 2012, the plans’ combined assets totaled $1.42 billion with about 25,000 participants.

Excessive Fees Paid to Broker

The plaintiffs allege that the broker, headed by principal Derrick L. Davis, received excessive fees for the allegedly minimal services provided to the plans. According to the complaint, in 2009 Davis received $827,885 in commissions. By 2012, according to the plans’ 5500s, Davis was receiving nearly $6 million in brokerage commissions (although the 5500s were amended just a few weeks ago to change this amount to about $3.7 million). Over this time period, the plans’ assets increased from $600 million to over $1.42 billion.

Providing possibly damning factual support to their claims, the plaintiffs allege that Davis:

  • receives payments from other Novant Health qualified plans including Novant’s employees’ vision, accidental, life, long term disability, temporary disability, and long-term care plans;
  • receives compensation from the Novant employees’ defined benefit plan known as the Pension Restoration Plan of Novant Health, Inc. (“Novant Restoration Plan”);

  • is a member of the Board of Directors of Novant Health’s Forsyth Medical Center;
  • has an extensive business and land development relationship with Novant Health, including companies owned, controlled, or substantially invested in by Mr. Davis which have entered into land development projects and office building leasing arrangements in the greater-Winston-Salem area with Novant Health; and
  • provided 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.

Excessive Fees Paid to Great West

The plaintiffs allege that the plans’ recordkeeper, Great West, was paid excessive fees in violation of ERISA when they were paid between $98 and $150 per participant on average, when a prudent per participant fee would have been just $35. The plaintiffs further allege that over the 2009 to 2012 time period, as Great West’s compensation increased, from $195,899 to $2,277,606 (later amended to $2,255,411) as reported in the 5500s, the services they performed did not increase in comparison.

More Expensive Share Classes

The plaintiffs allege that every single mutual fund in the two plans, which total about 20, have available share classes that pay lower revenue sharing. According to the list of the funds that can be found on page 12 and 13 of the Complaint, the plans were invested in share classes that were over 100% more expensive than the cheapest share class available. Here is the chart as alleged by the plaintiffs:

Kruger Chart 1

Kruger Chart 2

Additionally, the plaintiffs made allegations that these funds were imprudent as compared to a lineup of Vanguard funds, which is in line with previous excessive fee complaints.

Our Thoughts

This is the first excessive fee complaint we’ve seen filed against a non-financial services plan sponsor in a while (think the cases filed last year against Fidelity and Mass Mutual). The allegations regarding the broker are by far the most serious, although we were surprised to see those claims only brought under ERISA 404 rather than ERISA 406 (a) or (b).

The $6 million alleged paid in 2012 to the broker, which we were able to see as well looking at the plans’ 5500s, amounts to about 40 basis points on $1.42 billion. If it ends up being that this was a case of the runaway train that can happen when providers are paid with uncapped revenue sharing, we think this complaint should be a wake up call to plan sponsors everywhere with similar setups.

One thought on “Plan Sponsor Sued over $6 million Paid to Broker”

  1. A couple of questions.

    Curious as to why more such lawsuits have not been enacted and whether anyone believes this is the tip of the lawsuit iceberg? i.e.) more on the horizon

    Curious as to who was actually named in the suit- did it go as far as naming individuals at Novant? Was there an independent ‘consultant’ providing advice, perspective, opinion on the plan line up and investment options? If not, why not?

    To what extent did the broker provide advice to the sponsor? To what extent did the broker disclose to the sponsor potentially less expensive share classes? To what extent did the sponsor inquire about that?

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