The RK Target Excessive Fee Suit, Managed Account Fees
Another large 401(k) plan was sued for breach of fiduciary duty involving excessive fees for record keeping and managed account services that he said were worthless.
This was filed in the United States District Court for the Northern District of Illinois by a certain Ryan K. Gosse, individually and as representative of a class of participants and beneficiaries of the Retirement Savings Plan of $1.5 billion from Dover Corporation which the suit says has some 18,331 participants. Specifically, the lawsuit alleges that the plan trustees “breached their duty of care to the plan by requiring the plan to ‘pay[ ] excessive account fees [and managed account fees],’ and failing to timely remove their high-cost registrars, Wells Fargo Bank NA (“Wells Fargo”) (at least from 2009 through September 2020)1 and Bank of America, NA d/b/a Merrill (“Merrill”) (September 2020-present) and Managed Account Provider, Financial Engines (2017-2020).”
Borrowing a point of reference from the recent decision of the Supreme Court of the United States in Hughes v. Northwestern Universitythe applicant here (Kid vs. Dover Corp., ND Ill., No. 1:22-cv-04254, Complaint 8/11/22) preemptively noted that, “These objectively unreasonable fees for maintaining records and managed accounts cannot be justified by the context and do not fall within ‘the range of reasonable judgments a fiduciary may make based on their experience and expertise.'” Also in a precautionary note, the suit asserts “that it is not necessary to allege the actual improper fiduciary actions taken because “an ERISA claimant alleging breach of fiduciary duty need not plead details to which they do not have access, as long as the alleged facts tell a plausible story That said, the suit alleges, “The unreasonable record keeping and account servicing fees paid by inference tell a plausible story that the defendants breached their fiduciary duty of care under ERISA.”
With respect to the harm suffered, the lawsuit asserts that “these breaches of fiduciary duty caused plaintiff and class members millions of dollars in harm in the form of lower retirement account balances than they would otherwise have had in the absence of such unreasonable plan fees and expenses.”
Now, just in case the court finds their arguments a little superficial, the plaintiff here (as is customary for plaintiffs in these lawsuits, especially since the Supreme Court Judgment on “actual knowledge” and its impact on the determination of the start date of the limitation period), noted that “the plaintiff and all plan participants were unaware of all material facts (including, between others, excessive record keeping and managed account fees) necessary to understand that the defendants breached their fiduciary duty of care until shortly before the filing of this complaint. Additionally, “having never managed a mega 401(k) plan, i.e. a plan with over $500 million in assets, … The plaintiff and all plan participants lacked actual knowledge of the reasonable fee levels available for the plan.”
Another precautionary statement – certainly in the context of a number of lawsuits that have been dismissed recently for “solely” alleging fee disparities without the contextual basis of potential service differentials, the lawsuit asserts “there is nothing in the Dover Plan’s Form 5500 filings during the Class Period, nor anything disclosed in the Dove Plan Participant’s Section 404(a)(5) Fee and Service Disclosure Documents, which suggests that the annual administrative fees charged to Dover plan participants included unusual or beyond the norm registrar and administrative services provided by all national registrars to megaplans.
After laying the groundwork, the suit goes into detail here, explaining that the Dover plan paid revenue sharing to Wells Fargo and Merrill, as shown on the plan’s Forms 5500 during the class period. While acknowledging that the amount of compensation paid to archivists should be reasonable, but “not the cheapest or average in the market”, the lawsuit goes on to state that “the costs of providing managed account services have declined and competition As a result, the fees that providers are willing to accept for managed account services have been falling for many years.”
Plaintiff goes on to state that, for both record keeping and managed account services, “prudent trustees will regularly monitor the amount of managed account service fees the plan pays and ensure that the fees are reasonable by compared to what is available in the market for substantially similar services” and that “the most effective way to ensure that a plan’s managed account service fee is reasonable is to periodically solicit offers from other managed account service providers, keep abreast of market rates for managed account solutions and/or negotiate most – favored nation clauses with managed account service providers and/or records. And, as might be expected, the plaintiff here alleges that the excess managed account fees resulted from the failure of the trustees to do so.
The plaintiff here – represented by Walcheske & Luzi LLC – argues here, like other lawsuits in which this firm has served as class counsel – that “prudent fiduciaries implement three related processes to prudently manage and control costs records of a plan”. Specifically, “a hypothetical prudent trustee tracks archivist expenses by requiring documents that summarize and contextualize archivist compensation, such as expense transparencies, expense analyses, expense summaries, relationship pricing, cost competitiveness analyzes and multi-practice, self-contained pricing reports. “…conservative hypothetical trustees should identify all fees, including direct compensation and revenue sharing paid to the plan accountant”, and “…should stay informed of general market trends regarding fees paid by other plans, as well as the record keeping rates that are available. By soliciting offers from other registrars, a prudent plan trustee can quickly and easily understand the current market for the same level and quality of registrar services.
Getting down to business, the plaintiff claims that during the period in question, “the scheme had an average of 18,926 participants with account balances and paid an average annual registrar/RKA fee of at at least about $1,623,121, which equates to an average of at least about $86 per participant” — and the suit then presented a table of purportedly comparable plans (at least by size, more specifically, “of similar sizes with similar amounts of money under management”), with fees ranging from $23 to $39/participant.
Oh, and as if that weren’t enough, with respect to the Managed Account Services, the Claimant asserts that “the Plan’s Managed Account Services did not add any material value to the Claimant or other Plan Participants to warrant any additional fees,” that “asset allocations created by managed account services were not materially different from asset allocations provided by ubiquitous age-appropriate target date options for defendants in the marketplace,” and that “offering asset allocation solutions to plan participants in the form of target-to-date funds is a best practice and significantly less expensive than managed accounts.
Plaintiff argues that Wells Fargo promoted the Financial Engines managed account service over other potential managed account solutions “because Wells Fargo earned more revenue when plan participants used the Financial Engine services. and that “defendants separately breached their duty of care to plan participants by charging excessive managed account fees, costing participants millions of dollars in lost retirement income.”
Will this court be convinced this time? Stay tuned.
 In yet another potential precautionary argument, the plaintiff here states that “a benchmarking survey alone is inadequate. Such surveys tend toward higher “average prices,” which promote inflated record-keeping fees. To receive truly “reasonable” registrar fees in today’s market, prudent plan trustees regularly engage in competitive bidding solicitations, every three to five years.