The latest class action 401k lawsuit was filed in Texas on Tuesday against San Antonio-based grocery chain H-E-B, which plaintiffs allege is the plan sponsor of one of the “most expensive” retirement plans in the country.
The lawsuit accuses H-E-B of fiduciary failure by not properly monitoring and controlling the plan’s expenses. The plan’s fees, the lawsuit says, were nearly three times the average, and at least 50% higher than the 90th percentile, to propel it toward that “most expensive” status.
In a statement, H-E-B said it will defend against the “unsubstantiated allegations,” telling FOXSanAntonio,”We’ve made significant commitments to provide our partners quality retirement benefits, helping them achieve their financial and retirement goals.”
The lawsuit says plan participants have suffered “significant losses” as a result of H-E-B’s failure to rein in costs.
The H-E-B Savings & Retirement Plan had about $2.5 billion in assets at the end of 2017, the most recent figure publicly available. About 67,000 current and former H-E-B employees were part of the plan at that time, reports the San Antonio Express News.
Alleged fiduciary failures
To protect workers from mismanagement of their retirement assets, ERISA imposes strict duties of loyalty and prudence upon retirement plan fiduciaries.
The lawsuit states that, “contrary to these fiduciary duties, Defendants have failed to administer the Plan in the best interest of participants and have failed to employ a prudent process for managing the Plan.”
The “fiduciary failures,” the suit continues, have manifested themselves in the following ways:
- First, Defendants failed to properly monitor and control the Plan’s expenses, and allowed the Plan to become one of the most expensive “jumbo” 401k plans in the country. In 2016, among defined-contribution plans (like the Plan) with more than $1 billion in assets, the average plan had participant-weighted costs equal to 0.25% of the plan’s assets, and 90% of plans had annual costs under 0.48% per year. However, the Plan’s fees were, at a minimum, nearly three times the average and at least 50% higher than the 90th percentile, making it one of the most expensive plans in the country with over $1 billion in assets. And these fees were not attributable to enhanced services for participants, but instead Defendants’ use of high-cost investment products and managers, and their continued retention of those managers even after performance results demonstrated that those high fees were not justified.
- Second, Defendants failed to prudently monitor the expenses charged within the Plan’s index funds (the U.S. Stock Index Fund, the U.S. Bond Index Fund, and the Global Stock Index Fund). These index funds charged fees that were up to seven times higher than comparable alternative index funds that tracked the exact same indexes with the same level of effectiveness. This further contributed to the Plan’s high fees. Had Defendants prudently monitored the Plan’s expenses and investigated marketplace alternatives, the Plan’s participants would have paid several times less for comparable index funds. These index funds charged fees that were up to seven times higher than comparable alternative index funds that tracked the exact same indexes with the same level of effectiveness. This further contributed to the Plan’s high fees. Had Defendants prudently monitored the Plan’s expenses and investigated marketplace alternatives, the Plan’s participants would have paid several times less for comparable index funds.
- Third, Defendants also breached their fiduciary duties by utilizing an imprudent process to manage and monitor the Plan’s target-risk funds, or “LifeStage funds,” and by retaining those funds in the Plan. Despite a marketplace replete with competitive target-risk fund offerings and experienced investment managers, Defendants utilized an internal team to design and manage the LifeStage funds, with no previous experience managing investments for defined-contribution plans. The team’s inexperience resulted in fundamentally flawed asset allocations for the LifeStage funds. Additionally, the underlying investments used to populate the LifeStage funds were inappropriate given their high costs, speculative investment methodology, and ongoing poor performance. Had Defendants prudently considered other target-risk options in the market, they could have readily identified alternative target-risk funds from established fund managers with lower costs and a better performance track record. However, Defendants failed to conduct such an investigation. This further contributed to the Plan’s high fees, and also contributed to the Plan’s overall poor performance, which fell in the bottom 3% of peer plans overall.
- Fourth, Defendants failed to prudently consider alternatives to the Plan’s money market fund, which offered only negligible returns that failed to keep pace with inflation. If Defendants had prudently considered other fixed investment alternatives, they would have discovered that stable value funds offer superior investment performance while still guaranteeing preservation of principal. For this reason, the vast majority of large retirement plans include stable value funds, and prudent fiduciaries overwhelmingly prefer stable value funds over money market funds. However, the Plan only included a money market fund, and did not offer a stable value fund as a capital preservation option, giving rise to an inference that Defendants failed to prudently monitor the Plan’s fixed investment option and investigate marketplace alternatives. In this respect as well, Defendants failed to adopt a prudent decision-making process for managing the Plan’s investment lineup.
- Fifth, Defendants authorized millions of dollars in direct payments from the Plan to H-E-B. This type of self-dealing is antithetical to the duty of loyalty, and is per se unlawful under ERISA’s prohibited transaction provisions. Moreover, the amount of these payments was entirely unreasonable and unjustified.
- Finally, Defendants failed to properly investigate and negotiate a reasonable share of returns for the Plan’s securities lending program. It is customary for securities lending revenue to be split between a plan and the securities lending vendor, which in this case was State Street. Part of a fiduciary’s duty after enrolling a plan in such a program is to monitor the fees being paid and monitor the marketplace, to ensure that the plan is maximizing available revenue and minimizing fees. With over $400 million in assets enrolled in the securities lending program, the Plan should have been able to negotiate an arrangement whereby the Plan was retaining 70% to 80% of securities lending revenue. Indeed, State Street offered this rate to most of its other clients with similar amounts invested. Yet under the deal struck by Defendants, which has never been renegotiated, the Plan receives only 40% of securities lending revenue, resulting in higher fees and lower investment returns to the Plan. This rate is unreasonable under the circumstances, and further demonstrates Defendants’ failure to engage in prudent fiduciary practices related to monitoring the Plan’s service providers and minimizing the administrative expenses borne by the Plan.
The suit, which seeks unspecified financial damages and class action status, is the latest in a string of similar lawsuits brought under ERISA to be filed against plan sponsors in recent years. The suit estimates the class could number between 33,000 and 45,000 participants.
Overall, the number of settlements and monetary value in these types of fiduciary failure cases dropped significantly in 2018 compared to 2017. A report by the Chicago law firm Seyfarth Shaw found the top 10 ERISA settlements fell to $313.4 million last year from $927 million in 2017.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
