By Daniel Aronowitz, Euclid Fiduciary
The Plaintiffs’ bar continues to file fiduciary malpractice lawsuits alleging excessive recordkeeping fees based on exaggerated fees. They are alleging purported excessive fees based on the total compensation paid to recordkeepers as recorded in the annual form 5500 filing. But this total compensation number includes significant transaction costs that do not constitute plan recordkeeping fees, as well as revenue sharing amounts that may be rebated to the plan. Plaintiff lawyers use these inflated numbers to mislead the court into believing the plan fiduciaries are somehow guilty of fiduciary malpractice. By doing so, they are breaching a lawyer’s professional duty of candor to inform the court that every participant has received the correct and accurate recordkeeping fees from a Department of Labor mandated participant fee disclosure four times a year. Plaintiff law firms and their clients have the correct numbers, but continue to file misleading lawsuits.
This time it is a case filed by the Capozzi Adler law firm on May 2, 2022 against O’Reilly Automotive, Inc. The lawsuit of former O’Reilly employees allege that the recordkeeping fee was $49.55 dollars per participant in the last year listed in the lawsuit. But that number is wrong. Plaintiffs ignored the truthful data from their participant fee disclosure that the actual recordkeeping fee was a very reasonable $31 per participant.
Why does this keep happening over and over? Because no court to date has required accurate pleading of plan fees based on DOL-mandated disclosures. There has been no ramification for this shameful business practice, and plaintiff firms like Capozzi Adler will keep doing it until the courts or the Department of Labor put an end to this nonsense.
We will try once again to show how prejudicial it is to allow inaccurate allegations based on Form 5500 data. Let’s start with a chart that shows the Form 5500 data used by the Capozzi law firm to file the case, compared to the respective fee disclosures sent to the plan and each participant who purports to file an excessive fee class action against the O’Reilly defined contribution plan:
O’Reilly Defined Contributions Recordkeeping Fees:
2020 Form 5500 Data versus DOL-Mandated Fee Disclosures
| Form 5500 Direct Recordkeeping Fees | Indirect Recordkeeping* | Per Participant recordkeeping fees using Form 5500 data | 408b2 plan fee disclosure aggregate recordkeeping amount | 408b2 plan fee disclosure recordkeeping amount per participant | 404a5 fee disclosure recordkeeping amount per participant |
| $2,609,734 | $48,714 in Capozzi Complaint, but $53,184 on the 408b2 plan fee disclosures and the total amount rebated [so the true indirect recordkeeping = $0] | $49.56 | $1,684,323 | $31.00 | $7.75 each quarter = $31.00 |
*Note that the indirect fees are not listed on the Form 5500, so they took it from the fee disclosures that were otherwise ignored to paint a distorted and inaccurate portrait of high fees.
The O’Reilly complaint alleges that the plan’s recordkeeping and administrative costs were excessive during the class period. The complaint does not state where is gets its numbers, but the amount of direct recordkeeping fees alleged for 2020 is $2,609,734, which is the exact number listed on the 2020 Form 5500 Schedule C reported by T. Rowe Price as the plan recordkeeper. The complaint also alleges that the plan fiduciaries were imprudent by allowing recordkeeping to be paid by uncapped revenue sharing, but fails to make clear that the amount of revenue sharing is de minimis for such a large plan. Plaintiffs assert $48,714 in revenue sharing, but the fee disclosure show a slightly higher number at $53,184 – either way, an immaterial amount. Plaintiffs then manually calculate the per-participant recordkeeping fee at $49.56 per participant in 2020. The complaint concludes by comparing the O’Reilly plan administration fees to seven other companies like Tesla and Dollar General with alleged fees between $18 and $33, all to allege that O’Reilly should have negotiated a $14 to $21 fee, “but certainly [not] more than $35 per participant at worst.”
$49 per participant is not an outrageous recordkeeping fee for a complex plan with 50,000+ participants working in hundreds of retail locations in many states, but it is not the accurate recordkeeping fee for O’Reilly participants in 2020. Every O’Reilly plan participant – including every purported plaintiff in this case – received a rule 404a5 participant fee disclosure from T. Rowe Price that clearly states the participant recordkeeping fee is $7.75 per quarter. After simple math, the accurate recordkeeping fee adds up to $31 per participant. This is confirmed by the rule 408b2 plan fee disclosure that gives the total recordkeeping fees of $1,684,323, which equals $31 per participant (using 54,333 participants – slightly higher than Capozzi used, but the number changes every month). To be clear, the recordkeeping fee in 2020 for the O’Reilly plan is $31, not the $49.56 number calculated from the Form 5500 and misrepresented in the fiduciary malpractice lawsuit.
The key difference is that Capozzi uses the total compensation number of $2,609,734 from the Form 5500 instead of the more accurate recordkeeping number of $1,684,323 from the rule 408b2 plan fee disclosure. The $925,000 difference represents transaction costs, likely QDRO qualification fees, loan fees, and other transaction fees that do not constitute plan recordkeeping fees. Capozzi has the rule 408b2 plan fee disclosures in order to disclose the minor amount of revenue sharing, but blatantly chooses to allege the inaccurate and inflated amount from the Form 5500. Why? Because no court has required accurate fees in order to allege a purported excessive fee case. Nor has the Department of Labor weighed in, despite allowing hundreds of cases to be filed with misleading data. Another reason is that the ERISA defense bar has failed to make this critical point in their motions to dismiss.
The simple fact remains that the Form 5500 “recordkeeping” fee number is a total compensation amount that includes transaction costs which are not related to the cost to perform recordkeeping services. It is total fees to the recordkeeper, and not the total recordkeeping costs. That is why the Department of Labor requires separate rule 404a5 participant fee disclosures and rule 408b2 plan fee disclosures. The quarterly fee disclosures give the accurate recordkeeping fees, but are not used in the fiduciary malpractice lawsuits.
This is not an isolated occurrence. We will prove it with another example. The Capozzi law firm filed another lawsuit against an auto parts company on December 8, 2021 in Safi M. Riaz v. Advance Stores Company, Inc., Case No. 7:21cv00619 (W.D. Va.). For the 2020 final year of purported excessive recordkeeping fees in the complaint, the complaint alleges that the cost per participant for recordkeeping fees is $74.58 [Direct $1,069,833 + $575,805 indirect = $1,645,638]. This number is incorrect. The rule 408b2 plan fee disclosure from Fidelity lists the recordkeeping fees at $1,002,545, for a total per participant fee of $43.00. The recordkeeping fees are $43.00 – not $74.58 as alleged.
Advance Recordkeeping Fees
Comparing the Form 5500 Total Compensation to the 408b2 Fee Disclosure
| Form 5500 Direct Recordkeeping Fees | Indirect Recordkeeping | Per Participant recordkeeping fees using Form 5500 data | 408b2 plan fee disclosure aggregate recordkeeping amount | 408b2 plan fee disclosure recordkeeping amount per participant | 404a5 fee disclosure recordkeeping amount per participant |
| $1,069,833 | $575,805 | Total = $1,645,638/$74.58 per participant | $1,002,545 | $43.00 | $43.00 |
This is a more complicated fee arrangement, because the 408b2 plan fee disclosure details $403,357 in billable recordkeeping + $207,057 transaction fees related to investments + $528,005 “other billable” [revenue sharing from investments] minus $130,000 [revenue sharing credit rebated to plan]. The total of these amounts is $1,002,545. We admit this is super complicated, but the difference between the Form 5500 total Fidelity compensation numbers used by Capozzi of $1,645,638 and the accurate recordkeeping amount from the 408b2 fee disclosure of $1,002,545 is $643,093. Capozzi is alleging an inflated $74.58 per participant recordkeeping fee by using $643,093 in inflated fees that do not constitute recordkeeping. This is prejudicial to the plan fiduciaries who are being accused of fiduciary malpractice when they have done nothing wrong.
The Euclid Perspective
We have tried to make this point many times, and hope the use of concrete examples demonstrates more clearly how courts are allowing cases to proceed to discovery that are based on inaccurate and inflated fees. Importantly, we are not here to claim that every lawsuit alleging excessive fees is illegitimate. We have more credibility than that. But what we are asserting is that many of the claims alleging fiduciary malpractice lack credibility because they are based on false numbers and misleading benchmarks. What we are asking for is honesty and integrity when pleading the serious offense of fiduciary malpractice. If you want to claim fiduciary malpractice, then use the correct numbers.
The simple fact is that the O’Reilly “excessive” fee lawsuit lacks honesty and integrity in attempting to claim fiduciary malpractice because it is based on incorrect recordkeeping fees. And this is not an isolated case: every case that uses Form 5500 total compensation data is alleging excessive fees based on inflated and incorrect fee amounts. Courts must start requiring the pleading of accurate data from the DOL-mandated fee disclosures sent every quarter to the plan and every plan participant. Otherwise, we are giving plaintiff law firms the license to sue every plan in America.
