Participants in the Anthem 401(k) Plan (the Plan) have sued plan fiduciaries, claiming that the plan (1) overpaid for investment and recordkeeping services and (2) imprudently included a money market fund, and not a stable value fund, in the plan’s fund menu. Plaintiffs claim, among other things, that inclusion of low-fee (e.g., 4 basis points) passive funds in the Plan’s fund menu violated ERISA because there was an even lower-fee alternative available. Plaintiffs are represented by Schlichter, Bogard & Denton, the firm behind most of the last 10 years of 401(k) fee litigation.
In this article we review plaintiffs’ complaint.
The following recitation of facts is taken from the complaint – we will have to wait for further proceedings to determine if these facts are true.
The Plan has over $5.1 billion in assets and over 59,000 participants. Plaintiffs are three participants in the Plan. The defendants include the Plan’s committee and the sponsor’s (Anthem’s) board of directors.
Prior to 2013, the Plan’s fund menu included higher-cost share classes of mutual funds “instead of identical lower-cost share classes of those same mutual funds which were readily available to the Plan.” Moreover, according to plaintiffs, the sponsor “failed to adequately investigate and to offer non-mutual fund alternatives, such as collective trusts and separately managed accounts prior to 2013.”
Prior to 2013, recordkeeping was paid for with revenue sharing and based on assets under management. According to the complaint, “the Plan paid approximately $80 to $94 per participant per year from 2010 to 2013.” At the end of September, 2013, the Plan changed to a flat $42 per participant fee. Plaintiffs claim that, given its size, “a reasonable recordkeeping fee for the Plan would have been $30 per participant.”
The Plan includes a money market fund and does not include a stable value fund.
Plaintiffs claim that Plan fiduciaries violated ERISA’s exclusive purpose and prudence requirements by:
Overpaying for recordkeeping services.
Including a money market fund, and not including a stable value fund, in the Plan’s fund menu.
Retail vs. institutional share classes
In recent years 401(k) plan sponsors have gravitated to lower cost passive investments as a defense against lawsuits based on claims that fees are too high. But plaintiffs’ victories in investment fee litigation have thus far generally been limited to situations in which the plan has invested in a (typically retail) share class of a fund when there was an identical (typically, institutional) lower-priced share class available (see, e.g., Tibble v. Edison International). Thus, the issue hasn’t been whether fees are ‘high’ in the abstract but whether they were higher than an identical alternative – a lower-fee share class.
In what will probably be a key point in their argument, the Anthem plaintiffs compare share classes of funds included in the Plan vs. identical lower cost share classes. Here is the chart included in the complaint:
|Plan Investment Options||Plan Fee||Identical Lower-Cost Mutual Fund||Identical Lower-Cost Mutual Fund Fee||Plan’s Excess|
|Vanguard Prime Money Market Fund (Inv) (VMMXX)||16 bps||VMRXX||9 bps||78%|
|Vanguard Institutional Index Fund (Instl) (VINIX)||4 bps||VIIIX||2 bps||100%|
|Vanguard Total Bond Market Index Fund (Inv) (VBMFX)||20 bps||VBMPX||5 bps||300%|
|Vanguard Wellington Fund (Inv) (VWELX)||26 bps||VWENX||18 bps||44%|
|Vanguard Total International Stock Index Fund (Inv) (VGTSX)||22 bps||VTPSX||10 bps||120%|
|Vanguard PRIMECAP Fund (Inv) (VPMCX)||45 bps||VPMAX||36 bps||25%|
|Vanguard Extended Market Index Fund (Inv) (VEXMX)||24 bps||VEMPX||6 bps||300%|
|Vanguard Windsor II Fund (Inv) (VWNFX)||36 bps||VWNAX||28 bps||29%|
|Vanguard Explorer Fund (Inv) (VEXPX)||50 bps||VEXRX||34 bps||47%|
|Vanguard Inﬂation-Protected Securities Fund (Inv) (VIPSX)||20 bps||VIPIX||7 bps||186%|
|Artisan Mid Cap Value Fund (Inv) (ARTQX)||120 bps||APHQX||98 bps||22%|
|Touchstone Select Growth Fund (Y) (CFSIX)||103 bps||CISGX||80 bps||48%|
We note that some of the funds the Anthem plaintiffs are challenging are ‘low-fee,’ passive funds.
Institutional funds vs. separate accounts
But Anthem takes this line of argument a step further, extending the retail vs. institutional share class claim to a mutual fund vs. an ‘identical’ collective trust or separate account claim.
In this regard, plaintiffs cite the Department of Labor for the proposition that “separate accounts … can ‘commonly’ reduce ‘[t]otal investment management expenses’ by ‘one-fourth of the expenses incurred through retail mutual funds.’” Thus, the complaint alleges that “[e]ven after the Plan’s transition to institutional share classes for funds on July 22, 2013, the Plan continued to pay excess fees compared to the DOL separate account fee as of December 31, 2014.”
Here is plaintiffs’ comparison of institutional mutual funds vs. separate account fees:
|Plan’s Institutional Share Class||Separate Account rate as per DOL: 1/4 of the cost of retail||Plan’s Fee||Plan’s Excess|
|Artisan Mid Cap Value Fund (Inv) (ARTQX)||30 bps||95 bps||217%|
|Touchstone Select Growth Fund (Y) (CFSIX)||34 bps||79 bps||132%|
Just to be clear about what is going on in this table, the separate account ‘fees’ are made-up numbers – they are just 1/4 of the retail fees. Plaintiffs, as we said, make that calculation based on DOL’s claim that separate account fees are 1/4 of retail fees.
Key takeaway for plan sponsors – low fees do not equal protection from litigation
This case is in its early stages, and we do not know whether plaintiffs will succeed. But if plaintiffs can make progress with their line of argument, we want to emphasize its significance for plan sponsors: Low fees are no guarantee of safety from litigation. The key issue is, is there an ‘identical’ investment with an even lower price?
In other words, if you don’t get the best price, you are vulnerable.
Take a look at the Vanguard Institutional Index Fund (VINIX) that the sponsor included in the fund menu. The plaintiff in this case is claiming that, even though that fund menu option had an expense ratio of only 4 bps, the fees on it were too high because there was an even lower fee (2 bps) share class available for the identical investment.
Must the comparator fund be identical?
Plaintiffs’ argument is easy to make when you are discussing different share classes of the same mutual fund – e.g., the two Vanguard index fund share classes (VINIX and VIIIX). The argument is only slightly more difficult when what is being compared is two different funds with ‘identical’ (passive) strategies, e.g., two different fund management companies’ S&P 500 index mutual funds or an S&P 500 index mutual fund and a separate account indexed to the S&P 500. The argument reaches its outer limits when what is being compared is two different funds with the same ‘style.’ Plaintiffs in this case claim that:
It will be interesting to see whether, when and if this case is litigated, the court will buy this line of argument.
Is active less risky than passive?
If the court does not buy this argument, then we are in a (somewhat ironic) situation: passively managed funds may present a greater litigation risk (because it is easier to compare ‘identical’ alternatives) than actively managed funds.
Briefly summarizing plaintiffs two other claims:
The plan overpaid for recordkeeping: As noted above, according to plaintiffs, the plan paid an assets-under-management recordkeeping fee for the period 2010-2013 of $80 to $94 per participant per year and a flat fee of $42 per participant thereafter. Plaintiffs argue that for a plan the size of the Anthem plan, “a reasonable recordkeeping fee for the Plan would have been $30 per participant.” This argument is identical in form to the one made (by the plaintiffs represented by the same law firm) in Tussey v. ABB. We simply note that this claim reflects the continued pressure (1) on the use of assets-under-management fees (typically associated with revenue sharing arrangements) for recordkeeping and (2) on sponsors to get the best possible deal for recordkeeping.
Inclusion of a money market fund and not a stable value fund was a fiduciary breach: Plaintiffs’ argument in this regard is that stable value funds outperform money market funds while delivering the same downside guarantee. As a basis for a claim of fiduciary breach, this argument looks like a stretch. And the argument that there is a fiduciary obligation to include a stable value fund in the fund menu is novel. It will be interesting to see whether this claim survives a motion to dismiss.
We will continue to follow this issue.