2023 Mid-Year Update on Excess Fee and Imprudence Litigation

By Daniel Aronowitz

A number of plaintiff law firms serve as ERISA police, filing class action lawsuits as freelance prosecutors, claiming that many of the large retirement plan fiduciaries in America are asleep at the wheel.  The cases allege that plan fiduciaries imprudently allowed recordkeepers and investment providers to charge excessive fees and load up plans with underperforming funds.  This is a lucrative business that has been in hyper drive in recent years.  At the half-way point of 2023, therefore, it is noteworthy that the number of cases filed in the first six months is down by fifty percent.  This is largely because of the activity in pending litigation is keeping legacy law firms too busy to find more disgruntled employees to file new cases.  But while legacy firms like Walcheske & Luzi and Capozzi Adler have filed less cases so far as they digest their high volume of pending cases, new entrants like Wenzel Fenton Cabassa and Christina Humphrey have filed the most cases in 2023 year-to-date.  

We believe that the short-term slowdown in filings reflects the normal pattern following the near record 2023 filing levels.  The case filings continue the trend of gravitating from fee challenges to investment underperformance claims.  But the most significant trend is that the cases filed by the two newer firms break the mold by introducing a new theory of liability alleging imprudence against plan sponsors in failing to monitor float and other indirect income as a component of total recordkeeper compensation.  Whereas many historical excess fee filings have used artificially inflated fee data and misleading comparisons, these new firms assert somewhat more credible recordkeeping fee claims based on plan services, and some complaints even include participant fee disclosures with accurate fees charged to participants.  For the first time, these firms are filing cases that anticipate plan sponsor defenses and evolving case law, including attempting to address a comparison of services when comparing recordkeeping fees.  This is the first significant change in how excess fee claims are filed in recent years.  

Consider this your 2023 mid-year ERISA police report.  This edition will summarize the case filings, the law firms filing the cases, and the types of claims being asserted in 2023 excess fee and investment imprudence cases.  This is Part 1 of our mid-year update.  Part 2 will review first-half court decisions on motions to dismiss and summary judgment, and the key issues that animate excess fee and imprudent investment litigation.  Part 3 will review the settlements in the first half of 2023.  

Reduced Frequency in the First Half of 2023 – Leading Law Firms Have Filed Less Cases As They Digest Their Current Inventory, But New Firms Have Filed More Cases

At the June 30 mid-point of the calendar year, we have tracked twenty-one excess fee and imprudent investment cases filed in the first half of the year.  This is down from forty-one complaints filed at the midpoint last year, and far from the pace of eighty-nine cases filed in total in 2022.  We are on track for 40-50 cases filed this year.  

Excess Fee and Investment Imprudence Lawsuits by Year

The trend appears to be repeating the 2020-21 cycle in which a record volume of cases was filed in 2020, and then filings in 2021 were lower, largely because the most prolific law firm Capozzi Adler filed less cases in the subsequent year (compared to forty in 2020) as they digested their pending volume of cases.  As the chart below shows, the most prolific law firms in 2022 were Capozzi Adler, Miller Shah, and Walcheske & Luzi.  The lower volume of cases in 2023 is attributable to the reduced filings of these three law firms.

2022 Plaintiff Law Firms on Excess Fee Lawsuits

2023 Plaintiff Law Firms on Excess Fee Lawsuits

In 2023 year-to-date, the Capozzi law firm has filed only two cases; the Walcheske law firm has filed three cases; and Miller Shah has filed none, likely because they are busy in their quixotic claims against twelve plan sponsors that offer low-cost BlackRock LifePath target-date funds.  The Schlichter Bogard firm has filed no cases so far in 2023, as they completed the trial in the Yale case and are half-way through the trial against the Wood Group.  They are also advertising on LinkedIn to investigate purported ERISA violations involving health plans sponsored by State Farm and Target.  

Any Slowdown is Likely Temporary:  In addition to the normal cycle of high- and low-volume years, we have seen evidence that any short-term slowdown in the frequency of filings will be temporary.  We continue to see ERISA rule 104(b) information demands from plaintiff law firms, and many of these turn into lawsuits.  Notably, we have seen a plaintiff’s law firm that specializes in securities fraud class actions and with no experience in excessive fee cases sending demand letters to multiple companies threatening litigation based on purported excess recordkeeping fees.  Unlike the usual rule 104(b) demand seeking information, this law firm is not requesting any information.  Instead, the identical letters are pure threats to elicit a pre-litigation settlement.  The form letters cite to a Bloomberg article that most excessive fee cases settle, and that the plan sponsor should settle to avoid litigation.  Like the Capozzi Adler lawsuits, the threat letters allege that the 401k Averages Book shows a $200m plan with 2,000 participants with a $13 recordkeeping fee, and demands that the plan sponsors with larger plans are liable for huge damages because their recordkeeping fees are higher than this smaller plan.  Never mind that the Capozzi claims are just as dishonest as the threat letter from this securities law firm, as the same page of the 401k Averages Book clearly shows $140 in revenue sharing for a total of $153 per participant in recordkeeping fees.  The letter is a crass shakedown.  Making it worse, the identical letters we have seen have been sent to large plans with very low recordkeeping fees.  It shows that we are nowhere near an end to strike lawsuits alleging excess recordkeeping fees and investment fees.

The more interesting trend is the two newer law firms filing the most cases in 2023 year-to-date.  The Wenzel law firm has continued its move from COBRA threat litigation to excess fee cases by filing five cases year-to-date, mostly focused on excess recordkeeping fees.  And Christina Humphrey Law entered the space by filing four lawsuits.  Her lawsuits focus on both claims of excess recordkeeping fees and investment fee claims alleging imprudence in choosing investment funds in the wrong share class.  As discussed below, these new law firms are asserting new theories and more credible excess fee evidence than the historical trends.  Their complaints are worth studying to understand where the litigation is moving.

The 2023 Lawsuits Trends:  More Claims of Investment Imprudence, With the Newer Firms Asserting Novel Theories and Comparators for Excess Recordkeeping Claims

2023 Types of Excess Fee and Investment Imprudence Claims

We have identified five trends from the 2023 excess fee and imprudent investment lawsuits.

TREND #1:  More Investment Imprudence Claims:  This list shows that while many cases assert excess recordkeeping, more cases are alleging investment imprudence.  For example, the two cases filed by the Capozzi law firm are mostly focused on alleged investment underperformance [Macias v. Sisters of Leavenworth Health System, filed 06-13-2023 (D. Colo.) – alleging “mediocre” and “chronic underperformance” of the JP Morgan Smart Retirement target-date funds; and Fitzpatrick v. Nebraska Methodist Health System, Inc., filed 01-24-2023 (D. Nebr.) – alleging “chronically underperforming Wells Fargo target date funds].  Nichols Kastor filed a case alleging underperformance of TIAA funds, asserting that the plan sponsored $1.5B plan sponsored by Southwest Research Institute is the only ERISA plan in the country with over $250 million in assets (out of 9,000) to have an exclusive TIAA investment lineup.  See Drust v. Southwest Research Institute, No. 5:23-cv-00767-XR (filed 06/16/2023 W.D. Tex.).  The Edelson Lechtzin law firm teamed up with McKay Law to sue University of Vermont Medical Center for imprudently retaining ten TIAA-CREF legacy investment options.  See Baker v. The University of Vermont Medical Center, Inc., No. 2:23-cv-87 (D. Vt. Filed 05/10/2023).  This lawsuit also alleged imprudence in failing to monitor or disclose float income to the recordkeeper, which we will discuss below.  

Another noteworthy case alleging imprudent investment options is the case filed by Hacker Stephens and Sharp Law LLP that alleges American Airlines selected and included twenty-five or more investment options in its sponsored defined contribution plan that are more expensive and underperformed, or otherwise included funds from investment managers who voted for egregious examples of ESG proxy mandates.  Based on our research, American Airlines does not even have twenty-five investment options in its plan, and offers zero ESG investment options in its sponsored plans.  The lawsuit is pure fabrication, and we are waiting for this case to be dismissed, and appropriate sanctions awarded for maligning a great American corporation.  

TREND #2:  Excess Recordkeeping Fee Claims Expanded to Include Failure to Monitor Float Income:  As noted above, the most significant change in excess fee lawsuits in 2023 include claims that plan fiduciaries failed to monitor float interest in the clearing accounts of the plan’s recordkeeper.  Float claims were brought in 2016 against Fidelity, but this is the first time, to our knowledge, that float claims have been brought against plan sponsors.  

The first float claims were included in four lawsuits filed by the Wenzel Fenton lawsuit as part of challenges to indirect compensation, and then copied by another law firm in the University of Vermont Medical Center case.  For example, in Barner v. McLane Company, Inc., No. 6:23-00301 (W.D. Tex filed 04/24/2023), the complaint alleges that Merrill Lynch was permitted under its recordkeeping contract to allow participant deposits or money withdrawn from the plan from individual accounts to first pass through a Merrill Lynch clearing account.  McLane allegedly agreed that any investment returns and/or interest earn on plan participant money in the clearing account – typically 2-3 days – belongs to Merrill Lynch.  The complaint asserts that this additional compensation of even a 1% return on $263,000,000 would account for $2,630,000 in indirect float compensation.  Plaintiffs allege that McLane imprudently permitted Merrill Lynch “to siphon millions of dollars from the Plan.”  This float imprudence claim was reprised in the Wenzel law firm’s complaint against The Nemours Foundation [filed 02/06/2023], CEMEX, Inc. [filed 01/12/023], McClane Company [filed 04/24/2023], and Baker Hughes [filed 04/24/2023].  In the Baker Hughes complaint, Wenzel alleges that the float was longer at five days, and used a 5.3% interest rate against average cash in the clearing account of at least $2 million to arrive at $7,843,000 in alleged excess fees from the float interest.  We do not understand the math, but we rarely understand plaintiff law firm math.  And, as we noted above, the lawsuit filed against University of Vermont Medical Center included a similar claim that the participant fee disclosure does not disclose revenue sharing or other transaction fees, including float income.  

TREND #3:  Recordkeeping Fee Claims Evolving to Include Participant Fee Disclosures for the First Time:  Our biggest pet peeve in excess fee litigation is when plaintiff law firms get away with alleging recordkeeping fees that are inflated and just plain wrong.  They do this by taking the Form 5500 number and dividing it by the number of participants.  The Walcheske law firm falsely estimates recordkeeping fees even though each of its participants serving as plaintiffs has received a participant fee disclosure with the true recordkeeping fee.  This may fool some federal judges, or take advantage of judges who are busy and want to kick cases to discovery based on “issue of fact.”  But that does not make it right.  The correct participant recordkeeping fee is disclosed on plan and participant fee disclosures.  To date, plaintiff law firms have largely acted like participants have no clue as to the recordkeeping fee charged.  

For example, in Walcheske’s two lawsuits against U.S. Bancorp and Pfizer, Inc., it estimated recordkeeping fees from the Form 5500, following its standard template.  Interestingly, in the recent June 20, 2023 filing against Amerisource Bergen Corporation, Walcheske for the first time acknowledges that his plaintiff received a fee disclosure with a $48 recordkeeping fee from 2017-2021, which was later reduced to $36 in 2022.  But despite this surprising admission, the claim of alleged excessive recordkeeping paid to Fidelity asserts from the plan’s Form 5500 that the actual recordkeeping fee was $61 per participant – a purported 96% premium form the Walcheske $30 benchmark.  This is the first time Walchekse has cited a fee disclosure, but then they ignore the true evidence to assert a false claim that has been rebutted in its own complaint by the fee disclosure [as the Form 5500 number contains transaction income that is not plan recordkeeping].  

But while Walcheske is playing a dishonest game of comparing inflated fees to misleading comparator plans, the Wenzel and Christina Humphrey law firms are filing the first complaints that acknowledge that participants receive fee disclosures with the plan’s recordkeeping fee.  We consider this historic for the excess fee genre, as most law firms pretend that there is some kind of mystery as to what participants pay for recordkeeping.  For example, in the January 12, 2023 filing against CEMEX, Inc., the Wenzel law firm (teamed with Morgan & Morgan) attached the participant fee disclosure as exhibit A.  Again, the participant fee disclosure should be Exhibit A in every excessive fee lawsuit, because that is the best evidence of plan recordkeeping and investment fees.  It is regulator-approved evidence of plan fees.  The complaint asserts that the recordkeeping fee was $50 plus the $24.00 in non-Fidelity fees for a total of $74.00.  For the first time, a complaint starts from an honest foundation to assert excess recordkeeping fees.

We note that the CEMEX complaint compares the participant fee disclosure to the Form 5500, and then takes the position that indirect payments are not disclosed to participants.  They allege that the fee disclosure constitutes “double speak.”  The answer to this is that the exact amount charged to any participant is shown on participant account statements.  Also, the plan fee disclosure should be admissible in any motion to dismiss context, and it shows the amount of revenue sharing and each investment in which revenue sharing applies.  It was the Department of Labor who chose the formats for the respective plan and participant fee disclosures.  But while we disagree on the complaint’s assertions about the participant fee disclosure, it is heartening that a law firm suing for excessive fees is at least asserting the correct fee paid to plans.  This is after so many lawsuits filed with dishonest fee claims that ignore the regulator-mandated fee disclosures.  We can have the argument about how to account for indirect revenue sharing, but at least the fee disclosure amount is an honest and transparent starting point for the debate.  

TREND #4:  Recordkeeping Claims that Address Defenses and Case Law By Comparing Service Codes:  The key issue in recent cases addressing the pleading standard for excess recordkeeping fees is whether plaintiffs need to support their excess fee claim based on comparator plans with similar recordkeeping services.  The three cases filed by the Walcheske law firm follow the historical pattern of making no effort to compare recordkeeping services.  Instead, the Walcheske law firm alleges in each complaint that recordkeeping for large plans are a “fungible” commodity in a competitive market that competes only on price.  For example, in the lawsuit filed June 8, 2023 against Pfizer, Inc., the Walcheske complaint alleged that Fidelity has conceded in its own lawsuit filed involving the Fidelity plan that recordkeeping is commoditized and only worth $14-21 per plan.  In the case against U.S. Bancorp filed on January 5, 2023, Walcheske alleges that “bundled RKA services are a commodity with little variation in price.”

By contrast, the recent complaints filed by the Wenzel law firm acknowledge the case law from the Sixth Circuit decision in CommonSpirit and the Seventh Circuit in Oshkosh that a recordkeeping fee claim must compare apples-to-apples services by recordkeepers.  After those cases, several defense firms had cited the service codes in the Schedule C of the plan’s Form 5500 in motions to dismiss.  Now for the first time, the Wenzel law firm is citing the Form 5500 service codes in comparator plans.  For example, in CEMEX, Inc., the complaint compares the $74 recordkeeping fee from the plan fee disclosure to four comparator plans than have the exact same service codes checked in the Form 5500 [37, 60, 64, 65, 71].  In the case against McLane Company, the McLane plan is compared to three other plans with the same 15 and 64 service codes. [We note that the Wegman plan is cited as having a $4.05 recordkeeping, which defies credibility, but at least the plaintiff firm is trying to compare comparable services or transaction fees, albeit with a statistically insufficient number of plans].  Similarly, in the case against The Nemours Foundation, the Nemours plan is compared against three other plans with similar service codes [12, 15, 28, 37, 38, 50, 54, 59, 61, 62, 63, 64, 65].  This is a sea change for excess fee cases.  We still believe most of these complaints lack merit, but at least they are starting from a more honest and transparent footing with the correct recordkeeping fee and attempts at more credible comparators.

While not the same service code tactic, we also note that the lawsuit filed by the Tower Legal Group against Amy’s Kitchen on March 23, 2023 employed another entirely new tactic.  The complaint is a rambling 200-page mess, and mostly challenges a $300,000 per year fee paid to Cetra Advisors.  But the complaint in paragraphs 147-148 alleges that they sent the Form 5500 of Amy’s Kitchen’s plan to solicit recordkeeping quotes, and received bids of $44 and $60 per year per participant, which they compared to the alleged Transamerica alleged fee of $250 per participant, including indirect revenue sharing.  Plaintiffs do not disclose what companies gave the recordkeeping bids, so this assertion is suspect, but this would be a groundbreaking tactic if recordkeepers were willing to provide valid quotes to help plaintiff law firms support their excessive fee cases against the industry.  The whole tactic seems farcical, but that is exactly what is alleged in an excessive fee lawsuit.  Maybe this belongs in the category of an imprudent investment lawsuit for ESG investments that are not even available in the plan, but there is a low ethics bar on filing class action lawsuits in American federal courts.

TREND #5:  Most Excess Investment Fee Claims Include Alleged Failure to Use the Lowest Available Share Class:  The final trend is that eight of the lawsuits, including all four lawsuits filed by Christina Humphrey, include what her lawsuits label “clear share class violations.”  These lawsuits cite the case law from the TriHealth case in the Sixth Circuit that failure to use the lowest fee share class contains an embedded benchmark.  Plaintiff firms know that share class claims are the most difficult claims to dismiss at the pleading stage, and will remain a staple of excessive investment fee claims.