Excessive fee litigation against retirement plan fiduciaries and service providers has grown from a one-off event into a cottage industry. Unfortunately, the success of retirement plan litigation industry has done more harm than good to the plan participants that proponents espouse. The harm comes from a lack of understanding of the structure, role, practices, and controls that exist and the consequences of lowered fees. This lack of understanding extends to the factors that affect plan expenses.
As a result of this lack of understanding, reckless allegations are made that produce million dollar settlements that are made to avoid defense costs and harm to defendants’ public image.
A recent lawsuit filed on 8/18/2022, McDonald v. Laboratory Corp. of America Holdings, M.D.N.C. (“LabCorp”) is a case in point. In this case the plaintiff claims to have “drawn reasonable inferences”, which are in fact unreasonable and improbable.
It is critical to establish several facts that have been misunderstood in making allegations:
- ERISA recognizes that plan fiduciaries are not experts in the administration of retirement plans and must rely on such experts for guidance. As a result, responsible plan fiduciaries are generally aware of their responsibilities but seldom involved in the technical details of administering all aspects of the plan.
- The role of recordkeepers extends far beyond ministerial duties listed in the allegations, to being the chief collection, disbursing and reconciling agent among all parties involved in providing and maintaining the plan and its investments.
- Reducing fees results in the termination of service providers, thus affecting the services provided to plan fiduciaries and participants.
- The recordkeeper is the chief compliance agent for the plan and for other parties serving the plan (plan fiduciaries, investment companies, insurance companies, trustees, custodians, broker/dealers, RIAs, third party administrators, educators, technology providers, etc.)
- Expenses to plans of similar sizes vary greatly (as much as 10 times), depending on factors such as:
- The role played by the employer in providing services to participants
- Service options used by the plan and participants and the amount of that usage
- Quality of services provided
- Investment mix selected by plan participants
- Level of automation and efficiency
- Composition of active and retired participant base
- Average assets per participants
McDonald v. LabCorp
The following allegations made in the complaint are in contradiction with facts known to and observed by DALBAR. The facts presented here are derived from four decades of researching, analyzing and evaluating ERISA plans.
Note: Full text of numbered allegations are available below.
Allegation: Nearly all recordkeepers in the marketplace offer this range of services. The services are essentially the same. (64)
- The “range of services” provided in the marketplace varies by orders of magnitude with respect to use made of the services, their quality and scope. The allegation is false.
Allegation: Many of the recordkeeping services can be provided by recordkeepers at very little cost. (64)
- Recordkeeping services cannot, by any measure, be considered to be “very low cost”. The cost to provide and maintain the vast number of service components in the changing regulatory and technological environment is a major hurdle to entry. This fact is supported by the industry consolidations due to the high cost of competing.
Allegation: …managed account services, self-directed brokerage, QDRO processing, and loan processing are often a profit center for recordkeepers. (64)
- The costs of these services are sometimes bundled but itemized at other times. The description as “a profit center” is immaterial since the costs are, by regulation, included in fee disclosures provided to plan fiduciaries and plan participants.
Allegation: The market for recordkeeping is highly competitive, with many vendors equally capable of providing a high-level service. (65)
- Vendors are far from being equally capable of providing a high-level service. As a usual practice, recordkeepers define an applicable service set and this varies from a basic service that is ERISA compliant, to valuable additions such as personal investment advice, plan administration, post-retirement services and participant education. In many cases services are obtained from third party specialists.
Allegation: The cost of providing recordkeeping services depends on the number of participants in a plan. (66)
- The number of participants is only one of many cost variables. Other key considerations include the services being provided, their quality, the level of use, labor required, technology needed, average participant age, knowledge, income and net worth.
Allegation: …employers and employees believe the plan is ‘free’ when it is in fact expensive. (69)
- By regulation, the total plan costs are reported annually to all plan fiduciaries and participants. Such a misunderstanding can, at best, be improbable.
Allegation: Because revenue sharing payments are asset based, they bear no relation to actual services provided and, likewise, bear no relation to a reasonable recordkeeping fee and can provide excessive compensation. (70)
- The method of compensation is material only to the extent that it is an incentive to cause certain behaviors such as increasing retirement savings. Of relevance is only the total cost incurred by participants, regardless whether paid by a flat fee, asset based fee or per participant.
- Competitors pursue business and select targets based on the total fee and not on the fee arrangement.
Allegation: …documents that summarize and contextualize the recordkeeper’s compensation… (72)
Allegation: … no more than a reasonable fee for the services provided to a plan… (73)
Allegation: … must remain informed about overall trends in the marketplace… (74)
- These requirements are obligatory and met by ERISA regulation 408(b)(2) and 404(a)(5).
Allegation: Defendant failed to prudently manage and control the Plan’s recordkeeping costs and other compensation paid … (75)
- This allegation presumes that the plan fiduciary also violated the ERISA regulation, 408(b)(2) that requires such controls. This is highly improbable.
Allegation: … Fidelity has been the Plan’s recordkeeper during the entirety of the Class Period. (76)
- Suggests that a change in recordkeeper is necessary to demonstrate prudent management. This is obviously false and ignores the fact that the recordkeepers’ expenses continually increase due to labor costs, regulatory changes and technology.
- Change of recordkeeper incurs a major expense that may be waived initially, but is ultimately paid by the plan participants. Such a change is also disruptive and error prone and should not be undertaken without careful consideration of long and short term service quality.
Allegation: The 2020 Form 5500 filed with the U.S. Department of Labor reveals Fidelity received (and continues to receive) “indirect” compensation via recordkeeping… (89)
- Definitions for 5500 differ from 408(b)(2) where such disclosures are made.
Allegation: Fidelity performs tasks for the Plan such as validating payroll data, tracking employee eligibility and contributions, verifying participant status, recordkeeping, and information management (computing, tabulating, data processing, etc.) (91)
- This allegation does not include the recordkeepers largest expenses. These include personal investment advice to plan fiduciaries and to participants, education, post-retirement services, contact center support (24/7), technology support, plan administration, participant communication, and regulatory compliance.
Allegation: The services that Fidelity provided were nothing out of the ordinary… (92)
- This statement is fundamentally false. Fidelity has established itself as a superior quality service provider, arguably the best in the business.
Allegation: …recordkeeping costs for other plans of a similar size shows that the Plan was paying higher recordkeeping fees than its peers – an indication the Plan’s fiduciaries failed to appreciate the prevailing circumstances surrounding recordkeeping and administration fees… (93)
- Asset size alone is an outdated basis for comparison… assumes costs can be spread over a larger base of assets but fails to consider high variable costs such as electronic delivery and disproportionate use of services such as call centers, investment advice and participant education.
- The level of quality of Fidelity’s recordkeeping services justifies charging the highest fees.