The recent Anthem class action settlement (Bell v. ATH Holding Company, LLC) reflects some trends in 401 (k) litigation: focus on share classes, arguments for including investments in funds other than mutual funds in defined contribution plans and the evolution of oversight of service providers.
The lawsuit against Anthem and its fiduciary plan committee alleged that, among other issues, they selected overpriced share classes (given what was available for a multibillion-dollar plan). The matter was recently settled for $ 23,650,000 and for certain non-monetary conditions. In this article, we review and comment on non-monetary conditions.
The complaint contains allegations regarding investments and record keeping costs, but the most striking allegations relate to investments:
All but two of the plan’s investment alternatives were Vanguard mutual funds. Although Vanguard funds were often cited by complainants as examples of low-cost investments, in this case, the complainants alleged that the committee should have selected even cheaper share classes. Two examples: the plan used a Vanguard Institutional Index Fund with a commission of 4 basis points, but a share class of 2 basis points was allegedly available; and the plan offered the Vanguard Extended Market Index Fund, which charged 24 basis points, while there was a 6 basis point share class allegedly available.
The complainants did not stop there. They alleged that there were collective trusts and separately managed accounts that were even cheaper … and that these cheaper but virtually identical investments should have been used.
In other words, as in other similar cases, the plaintiffs have argued here that the plan committee should seek the cheapest share classes available to the plan, regardless of other relevant factors. They also argued that the committee needed to determine whether the plan had access to reasonably similar group trusts or separately managed accounts that would have been even cheaper. The message that applicants send to plan committees and their advisers is that, in the view of applicants, these are the cheapest rules and, in this light, the investment search requirement has evolved over time. – beyond mutual funds.
While monetary settlement was quite important, there were also several “non-monetary conditions”:
The committee should engage an independent investment advisor who has experience with investment options in defined contribution plans. The consultant should review and make recommendations on the plan’s range of investments, including whether to include a stable value option.
The committee should meet and consider the recommendations of the investment adviser and decide whether and to what extent to implement them.
The Committee should consider, with the assistance of the Investment Advisor, among other things, (1) the least expensive equity class mutual funds available to the Plan; (2) the availability of revenue sharing discounts; and (3) the availability of collective trusts and / or separately managed accounts which present similar risks and characteristics to those of a mutual fund.
After consideration of the recommendations by the committee, he must provide the plaintiff class action lawyers with a written summary of the committee’s recommendations and decisions. (This means that plaintiffs’ attorneys will oversee the implementation of the settlement agreement for a period of three years, which is unusual in a 401 (k) plan litigation.)
The committee should also issue a request for proposals for record keeping services for the plan. Responses from archivists must include a fee proposal “on the basis of a total fixed amount and on a per participant basis. “Again, the committee’s decision must be communicated to the plaintiffs’ lawyers, but only for a period of 18 months.
Break the rule
So what do the regulations show us? Here are our main observations:
Complainants continue to emphasize low-cost share classes, disregarding other factors that a committee is entitled to consider, such as the availability of revenue sharing that could produce a lower net cost to participants. In addition, there is a new push towards the use of even cheaper group trusts and separately managed accounts, despite the fact that low cost is not the only factor committees should consider. While institutional mutual funds, group trusts, and separately managed accounts may be readily available to large plans, small plans may not have access to all of these investments at low cost. That said, we are starting to see a movement away from mutual funds towards group trusts for midsize and even smaller plans. (In fact, this is how stable value funds are often offered to small plans.)
We see a preference among plaintiffs (or at least plaintiffs’ lawyers) for setting the record keeping fee on a per-participant basis rather than on a pro-rata basis. Their argument seems to be that this results in fees that more closely reflect the costs of the services and that the fees do not automatically increase with increasing asset values or with new contributions. (Their argument about how a registrar’s fees are determined, such as a fixed dollar amount per participant, does not necessarily extend to how the costs should be allocated among participants’ accounts. Fee allocation can be pro-rated.) This position has gained ground among complainants despite the fact that there are no legal or regulatory guidelines requiring per participant fees.
It is also clear that the plaintiffs’ lawyers prefer that the plans avoid investments with revenue sharing or that, if there is revenue sharing, it should be paid into the accounts of participants whose accounts generated the revenue sharing. . In all cases, their positions remain focused on the transparency of providers and the control of the regime committees.
Diet committees and their advisers should resist the temptation to dismiss the anthem’s claims and regulations as only applying to large regimes. Instead, they must view the case as illustrating possible trends the Complainants Bar says about the fiduciary processes that plan committees must follow … or proceed at their peril. They must be aware of the costs of services and investments and weigh the impact on the participants. Since planning committees may not be aware of all the alternatives and may not have the resources to gather relevant information and make decisions, they should consider obtaining professional advice from advisers who have worked with plans similar to theirs. And these advisors should consider the benefit to themselves and their clients of assuming a fiduciary role.
© 2021 Faegre Drinker Biddle & Reath LLP. All rights reserved.Revue nationale de droit, volume IX, number 162