Their argument, at least at this early stage, is largely statistical. The plan, with $4 billion in assets and roughly 17,000 participants was, they argue, in a position to negotiate favorable rates for recordkeeping and other services. Instead, for years 2015 through 2019, the plan’s expenses per participant were more than double those paid by participants in comparable plans.
It looks like careless administration. But the question that swirls around Seidner, like other ERISA fiduciary breach lawsuits, is when does inept management break the law? Rather than providing an answer, the lawsuit may be headed toward settlement.
“Bundled” vs “ad hoc” services
Retirement plans buy an enormous number of services from outside third parties, like lawyers, accountants and investment advisors. These services include:
- Transaction processing;
- Participant communications, including legally-required summaries to participants;
- Plan document services, which include updates to plan documents that ensure compliance with new regulatory and legal requirements;
- Accounting and audit services;
- Legally-required testing including to ensure the plan complies with Internal Revenue nondiscrimination rules;
- Loan processing; and
- Processing of Qualified Domestic Relations Orders, under which retirement accounts may be divided in a divorce.
Large plans, according to the Complaint, typically buy these services as a bundle. Smaller plans may cobble together the services they need by working with a variety of service providers. The Kimberly-Clark Plan did both.
The Complaint claims that Plan fiduciaries failed to monitor costs and negotiate lower rates, which they plausibly would have been able to do because of the Plan’s large size. Further, the Plan allegedly failed to adequately notify participants of these excessive expenditures. The combination of these failures wasted the participants’ retirement savings. At this early stage of the lawsuit, the allegations in Seidner seem fairly routine.
The charts and graphs are more damning. The bottom line is that from 2015 to 2019 the Plan paid annual fees of at least $78 per participant for outside services instead of the $30 per participant reportedly paid by similar plans. In total for those years, the Complaint alleges that mismanagement actually cost participants a total, cumulative amount in excess of $6,273,391 in service fees.
Fiduciaries are required to discharge their duties: “solely in the interest of the participants and beneficiaries and (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan.”
Further, ERISA imposes a duty on plan fiduciaries to manage the plan “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” Often referred to as the “prudent expert standard,” this duty includes a continuing obligation to monitor plan expenses and to act to reduce unnecessary or wasteful costs.
On the other hand, ERISA fiduciaries are not guarantors of investment results. The obligation to act prudently does not require perfection or omniscience. As with many areas of the law, coming to the right resolution depends on balancing equities. It requires a knowledge of context. Perhaps the most telling bit of context for Seidner is the recent history of settlements.
Settlements of ERISA fiduciary breach lawsuits
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In recent years, participants have been successful in achieving favorable settlements of these ERISA lawsuits. As summarized in a 2019 article published in the American Bar Association Journal, some excessive expense ERISA lawsuits settled in the multi-million dollar range. These affected plan sponsors included:
- Citigroup (2018) $6.9 million;
- Allianz (2018) $12 million;
- American Airlines (2017) – $22 million;
- Northrop Grumman (2017) – $16.75 million;
- Mass Mutual (2016) – $30.9 million;
- Novant Health (2016) – $32 million;
- Boeing (2015) – $57 million;
- Ameriprise (2015) – $27.5 million; and
- Lockheed (2015) – $62 million.
Although a history of settlements does not guarantee a similar result in any other lawsuit, it may make plan sponsors more eager to settle quickly, rather than risk litigation or the cost of a protracted discovery process. That may be prove to be a good option for participants in the Seidner lawsuit, as well.