Forgive us if you have heard this scenario before, but another purported “excessive” fee complaint has been filed that fails to inform the court that the plan is filled with low-cost index funds. This time the plaintiffs assert that a few active funds are imprudent, but do not disclose that the plan’s QDIA with the majority of plan assets is invested in the Vanguard index target date funds – the gold standard of institutional investments. This is the third time in the last month that the plaintiff excessive fee bar has filed a misleading complaint alleging excessive investment fees against a plan with overall low investment costs.
The Clean Harbors “Excessive” Fee Complaint
By way of background, the plan had 12,935 participants with $814,744,166 in assets in 2020. The primary claim in the complaint is that eight actively managed investment options in the plan are in the wrong share class because the same funds are offered in an alternative share class with revenue sharing that purportedly lowers the overall investment fees. Plaintiffs allege that the eight investment options averaged .59% with minimal .02% revenue sharing, but the plan should have paid a higher 1.02% investment fee with higher .54% revenue sharing, for a total investment fee of .48% – a modest .11% investment fee differential, but an increase in revenue sharing of .52%. For example, the American Beacon Small Cap Value 1 fund was offered in the plan at .83% with no revenue sharing, but plaintiffs allege that the plan should have offered the Val A share class at 1.27% with .50% revenue sharing for a .77% net fee. In other words, the plan fiduciaries should have allowed .52% revenue sharing for a net .06% savings for this investment option.
We have three serious problems with this complaint: (1) the complaint fails to inform the court that the plan is filled with low-cost index funds in which the majority of the plan is invested; (2) adding 54 basis points of revenue share would not lower the overall fees for the plan and would not be prudent; and (3) the only way to judge whether an individual plan investment is prudent is in the context of the entire plan, which contained low-cost index funds. Finally, we comment on what is missing in the continued barrage of purported excessive fee lawsuits – perspective on actual fee levels. Perspective has been lost in these cases as to whether a plan has low-fee investments versus a plan that offers high-fee investments, and what could be a plausible excessive fee claim. To the extent there might be legitimate excessive fee claims, this is not one of them. And the reason is that the plan has overall low investment fees.
- The Plan’s QDIA is the Low-Cost Vanguard Index Funds with the Majority of the Plan’s Invested Assets; and Every Investment Category Has a Low-Cost Vanguard Index Alternative Option
The complaint against the Clean Harbors lists eight investments, but does not disclose how much is invested in each option. Nor does it disclose what other investments are in the plan. But there is no mystery, and no need for discovery to give the proper perspective. The same 2020 Form 5500 cited in the complaint has a chart in the attached financials that gives the full list of the plan’s investments. The investments are listed from high to low in terms of invested assets in the plan:
Schedule H, Line 4(i) – Schedule of Assets (Held at End of Year) (a) (b) (c) (d) (e) Cost Current value Investment contract, non-benefit responsive:
Great-West Trust Company, LLC Key Guaranteed Portfolio Fund $69,772,334
Pooled Separate Account:
Prudential Retirement Insurance Prudential Day One Income Flex Target and Annuity Company Balanced Fund ** $4,635,212
Mutual Funds:
Harbor Capital Appreciation Retirement: $111,490,935
Vanguard Institutional Target Retirement 2030 $56,517,095
American Funds $51,296,687
Vanguard Vanguard Institutional Target Retirement 2035 $47,339,539
Vanguard Vanguard Institutional Target Retirement 2025 $46,480,334
PGIM Total Return Bond R6 $44,469,762
MFS Value R6 $43,301,474
Carillon Eagle Mid Cap Growth R6 $39,773,794
Vanguard Institutional Index Fund $39,576,014
Vanguard Institutional Target Retirement 2040 $35,053,249
Vanguard Institutional Target Retirement 2045 ** $33,249,586
American Funds EuroPacific Growth Fund R6 $25,425,513
Vanguard Vanguard Institutional Target Retirement 2050 $21,532,003
American Beacon Small Cap Value I $17,931,324
Vanguard Institutional Target Retirement 2020 $17,421,772
Vanguard Institutional Target Retirement 2055 $16,596,216
Loomis Sayles Small Cap Growth $12,071,463
JPMorgan Mid Cap Value L $11,433,601
MFS International Value R6 $9,861,575
Vanguard Total Bond Market Index Fund A $7,211,688
Vanguard Institutional Target Retirement 2015 $6,830,709
Vanguard Institutional Target Retirement 2060 $6,466,281
Vanguard Small-Cap Index Admiral Fund $6,049,070
Vanguard Mid-Cap Index Admiral Fund $5,960,054
Identity of issue, borrower, lessor or similar party Description of investment, including maturity date, rate of interest, collateral, par or maturity value
Vanguard Total International Stock Index Fund A $2,333,547
Invesco Real Estate Fund R6 $2,228,366
Vanguard Institutional Target Retirement 2065 $1,496,141
Vanguard Target Retirement Income Fund I 41,356,016
Notes receivable from participants Interest ranging from 3.25% to 9.25%, Maturing through 2030 – $18,582,812
If you add it up, nearly $400 million – or one-half – of the plan is invested in low-cost Vanguard index and target-date funds. We are not pretending that this plan has the ideal investment mix, but the participant disclosure given four times a year to each plaintiff suing the plan would show that the plan has offered: (1) a qualified default investment option with Vanguard index target-date funds at .09%; and (2) a low-cost index fund alternative for four different investment categories. For example, the complaint alleges the American Beacon Small Fund is imprudent because it is not in the revenue sharing share class, but participants who want a small cap fund have the option to select the .05% Vanguard Small Cap Index fund; for Mid Cap Funds, the low-cost alternative to the offending MFS Value R6 fund at .47% is the Vanguard Institutional Index fund at .04%; and the alternative to the PGIM Total Return Bond R6 fund at .41% is the Vanguard Total Bond Market Index fund at .05%. Participants are given a low-cost index fund for target-date funds, and the option to select a low-cost index or higher-cost active fund for every major investment category.
Our simple point is that if you are going to allege the serious offense of malpractice by plan fiduciaries, you need to give a full representation of the plan to the court. Plaintiffs’ attorneys had the entire investment lineup and fees from the Form 5500 and participant disclosures. The bare minimum to satisfy the duty of judicial candor should be to give the full investment lineup and fees. If they had done this, the court would know upfront that this plan is dominated by low-cost index funds from a leading investment firm known for low fees and high performance – the mark of sound fiduciary practice.
- Adding 54 Basis Points of Revenue Would Not Lower the Overall Fees for the Plan and Would Not be Prudent.
After dozens of complaints that allege that revenue sharing is improper, it is hard to take any complaint seriously that advocates an average of .54% revenue sharing for eight investment options. The problem with revenue sharing is that it creates high recordkeeping fees based on a percentage of assets that is uncapped – the revenue sharing increases as the plan grows, but the cost of recordkeeping does not go up. It also creates the situation in which some participants carry an inordinate burden of the plan’s recordkeeping costs.
Plaintiffs are alleging that the plan should have chosen a different share class for eight investments that include revenue sharing. According to plaintiffs, the plans should have paid a higher investment fee of 1.02% versus .59%, because the alternative share class would have charged revenue sharing of .54% and lowered the investment fees. Doing the quick math, the Form 5500 chart shows that the eight plan investments had an aggregate of $208.8m in assets. Multiplying that by .0052% would yield revenue sharing of $1,085,760. This would reduce the investment fees, but increase the recordkeeping by the same amount, which is more than the entire current recordkeeping total of the plan. And the revenue sharing would increase as the amount invested increased. Unless the revenue sharing was rebated, this would do nothing to decrease the cost of the plan, and only serves to increase plan complexity.
We realize that excessive fee cases are all about alleging malpractice by second-guessing plan fiduciaries, but advocating for high revenue sharing is dubious on its face. Some would argue that any plan fiduciary adopting 54 basis points of revenue sharing would be acting imprudently. In the excessive fee world, you are damned if you do, and damned if you don’t. The only possible conclusion is that the complaint is based on faulty logic – and is not a legitimate basis upon which to allege malpractice.
- The Only Way to Judge Whether an Individual Plan Investment is Prudent is in the Context of the Entire Plan.
In the Northwestern excessive fee case, the Department of Labor advocated before the Supreme Court, and now the Seventh Circuit, that plan fiduciaries must ensure that every investment option is prudent. The Supreme Court adopted this position in the Hughes v. Northwestern opinion. We have no problem with this proposition, and agree that any imprudent investment option should be removed. But how you judge whether an investment option is imprudent cannot be done in isolation for most investment options. You can only make a fair judgment as to whether an investment option is imprudent by reviewing the investment in the context of the overall plan investment lineup. And that is why it is prejudicial to allege malpractice by challenging individual investment options without giving the court the entire investment lineup.
The Clean Harbors case proves this point. If the plan only offered eight higher-cost actively managed investments, you might be able to argue that the plan has a potentially imprudent investment lineup. But that is not what the fiduciaries of the Clean Harbors plan offered their participants. To the contrary, the participants had access to the highly regarded Vanguard index target-date funds. And for every investment category from small cap to bonds, participants had the choice of an active fund or a low-cost index fund. You cannot fairly evaluate whether a plan investment is imprudent without the context of the entire plan lineup. The access to index funds gives participants a balanced investment menu.
We fully realize that the Supreme Court expressly rejected the argument that you cannot validate an imprudent investment based on the fact that the plan gave the alternative choice of index funds. But we are arguing something different. We are saying that you cannot judge whether most investment options are prudent or imprudent in isolation. You can only judge prudence in the context of the entire lineup. And yes, offering index funds helps validate the fiduciary decision to offer active funds. We are making the point that the active investment options were never imprudent – and one of the reasons why is that the investors were encouraged to have at least half to three-quarters of their lineup in index funds, and then supplement their choices with some active funds.
Context matters. In the Northwestern case, the investment lineup was seven index funds in the mix of 242 overall investments. The Northwestern plan was larded with active investments as the predominant investment choice. That is radically different from the Clean Harbors investment lineup with index target-date funds as the QDIA and several other Vanguard index options in each major investment category. The best practice has always been to offer both index and active funds, and that is precisely what the prudent fiduciaries of the Clean Harbors plan have done. There is not enough to justify the second-guessing of the fiduciary process of this plan.
Finally, another way to judge whether an investment is prudent is by looking at its performance track record – before and after the investment is added to the plan. All of the challenged investments in the complaint have stellar performance. Look up any of the eight options on Morningstar, and you will see performance that exceeded the benchmark. For example, the MFFS Value R6 fund has exceeded the Morningstar US Large Value TR USD benchmark; the American Funds American Balanced R6 has crushed the S&P Target Risk Moderate TR USD benchmark by over 50%; and the PGIM Total Return Bond R6 has exceeded the Bloomberg Barclays US Universal TR USD benchmark by more than double. The performance of the investment options challenged in the complaint more than exceed the purported 11 basis points of “excessive” fees. This is just another example as to how the Clean Harbors complaint attempts to mislead the court into believing that participants are somehow harmed when they are not. To the contrary, they have access to a low-cost, high performing investment options to fund their retirement.
Perspective has been lost as to what constitutes low investment fees versus high investment fees.
Euclid continues to try to offer perspective as to what is really happening in the excessive fee cases. We continue to believe that plaintiffs believe (or at least assert) that all large plans have excessive fees, and all defense lawyers think that all excessive fees lawsuits are invalid and should be dismissed at the pleadings stage. This has created a mess in the federal, district and circuit courts, with decisions that are contradictory and inconsistent. This is what happens when motions to dismiss are filed in every case, including cases with high fees. This leaves courts without any perspective as to whether a plan has high fees. In an ideal world with context and perspective about excessive fees, plans with low fees would be dismissed at the pleadings stage, and plans with high fees would be litigated. But whether the fees are high or low has been lost in the court decisions.
Let us compare the Salesforce case to the Clean Harbors case. Salesforce.com Inc. was sued in March 2020 by the Capozzi Adler law firm. The Salesforce defined contribution plan had over $2 billion in assets and 25,849 participants in 2018 and offered nineteen investment options. Plaintiffs asserted imprudence in investment fees by failure to use the lowest available share class; failure to use collective trusts and separate accounts, which were alleged to be cheaper than mutual funds; and that the plan could not justify the actively managed funds over passive funds. The complaint alleged that the plan’s QDIA of the JP Morgan SmartRetirement 2020 Institutional index funds and two Fidelity funds (Fidelity Contrafund Class K and Fidelity Diversified International Class K) contained excessive investment fees. Although not fully disclosed, the plan offered five Fidelity low-cost index funds out of the nineteen investment options (counting the target-date funds as one investment option) to counter-balance the active options. Notably, the 2018 Form 5500 shows that the plan offered the JP Morgan active target-date funds, but switched to the lower-cost index versions in 2019. Not soon enough to avoid being sued, but that is not the point on which we focus here. Instead, we want to compare the active target-date funds in the Salesforce.com plan prior to 2019 to the Clean Harbors plan, because the fees in the Salesforce.com plan are more than 50 basis points higher:
| Plan | Target-Date Offering | Investment Fees |
| Clean Harbors Plan | Vanguard Index Target-Date Funds | .09% |
| Salesforce.com Plan (prior to switch to index funds in 2019) | JP Morgan SmartRetirement Institutional (active funds) | .61-.72% |
The California District Court twice dismissed the Saleforce.com excessive fee case. The court dismissed all three claims without any analysis of the actual fees. You would not even know the fees at issue from the opinion. The court held that the lawsuit was based on inappropriate comparisons among investment options and allegations of minor underperformance over a short-time frame. Also, the court held that participants cannot maintain an imprudence case under ERISA by comparing a plan’s actively managed funds with funds that have a passive management style. The court also rejected allegations that the plan failed to offer the cheapest available share classes of certain investments because these additional fees were used to pay for the plan’s administrative services, which is a valid practice under ERISA. The two Salesforce dismissal opinions have been cited in most motions to dismiss in the last two years.
Alas, the Ninth Circuit Court of Appeals overturned the dismissal and revived most of the case in an unpublished opinion issue on April 8, 2022. The appellate court ruled that plaintiffs had stated a plausible claim that defendants imprudently failed to select lower-cost share classes or collective investment trusts with substantially identical underlying assets. Plan fiduciaries had argued that they had chosen a higher-fee share class because it included revenue sharing that reduced the plan’s administration costs, and the court held that this was an “obvious alternative explanation” for why they did not choose the lowest-fee share class. But the court held that this “plausible” explanation was not sufficient at the pleadings stage to render plaintiffs’ “facially plausible allegations inadequate.” In a footnote, the court did agree with the district court that plaintiffs had not plausibly alleged that defendants breached the duty of prudence by failing to adequately consider passively managed mutual fund alternatives to the actively managed funds offered by the plan. But if you read the opinion, you still would not know the actual fees at issue were actively managed target date funds with fees ranging from .61 to .72%.
The contrast between the two purported excessive fee cases is stark. The Salesforce case is based on actively managed target-date funds with fees between 61 and 72 basis points with uncapped revenue sharing. By contrast, the Clean Harbors plan offered low-cost 9 basis points index target-date funds and the only offense is that the plan offered eight active funds that did not use the revenue share classes.
Both cases cannot be valid excessive fee cases. Draw your own conclusions, but defense lawyers took the position that the Salesforce case had no merit and should be dismissed at the pleadings stage. Now the case, after significant defense costs, is back to square one. From our perspective, the use of revenue sharing is legitimate, but there may have been some merit to the Salesforce excess fee claims based on the overall high investment fees, although not the damages model [and the court should take into consideration and context that the plan switched to all index funds for 2019]. A motion to dismiss was probably the wrong defense tactic in a case with high fees. By contrast, the Clean Harbors case has no merit. The plan is filled with low-cost funds, and there is no merit to adding revenue sharing to complicate the plan and add inappropriate fees – precisely what the Salesforce appellate court held constitutes a factual issue that must be litigated. It is the type of case in which a motion to dismiss should be the appropriate defense tactic because the fees are low. The plan fiduciaries should not be forced to spend millions of dollars to defend their discretionary decisions, because the plan is premised on low-cost index target-date funds and a diverse offering of index and actively managed funds.
Finally, with perspective and a detailed analysis of actual plan fees, it is easier to judge prudence. It is the only way for courts to vet the credibility and plausible of an excessive fee claim. This is not taking place in most excessive fee cases, and it is leading to inconsistent decisions that make little sense in the broader scheme. This is not helpful to plan sponsors who are tasked with fiduciary responsibility and are now subjected to second-guessing and serious claims of malpractice based on limited and misleading allegations. The full investment options and corresponding fees of the Clean Harbors plan demonstrates conclusively that it is an implausible “excessive” fee case that should not be allowed to proceed to discovery. The solution is for courts to require plaintiffs to disclose the entire plan lineup and fees in the complaint in order to allege fiduciary malpractice. And we continue to advise defense lawyers to use the motion to dismiss only in cases like Clean Harbors that have low fees and have been misrepresented to the court as a plan with excessive fees.
