Insights From Encore Fiduciary on Fiduciary Liability & Other Risk Exposures of Employee Benefit Plans


Insights From Encore Fiduciary on Fiduciary Liability & Other Risk Exposures of Employee Benefit Plans

Capital One Employees – What’s In Your Retirement Plan? Super Low-Cost BlackRock Index Funds with Low Recordkeeping Fees

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How Morgan Lewis Proved that the Capozzi Purported “Excessive” Fee Case Was Implausible – Another Example of How Many “Excessive” Fee Lawsuits Are Based on Misleading Investment and Inflated Recordkeeping Claims

By Daniel Aronowitz, Euclid Fiduciary

On December 31, 2021, the Capozzi law firm filed a purported excessive fee case alleging that the $7.8 billion asset defined contribution plan sponsored by Capital One had imprudent actively managed investments and excessive recordkeeping fees.  The complaint in Morales v Capital One Fin. Corp. (E.D. Va., No 1:21-cv-01454) asked the court to infer an imprudent fiduciary process based on only three investments that have been removed from the plan, but failed in their duty of candor to disclose that the plan’s primary investment option was the low-cost, high-performing gold-rated BlackRock Lifepath Index target-date funds.  And as the defense lawyers at Morgan Lewis proved in the dismissal motion, the sole plaintiff purporting to represent the 60,876 participants in the plan was never invested in the three allegedly imprudent investments, but rather was invested in the super low-cost BlackRock target-date funds at 4.9 to 11 basis points.[i]  Morgan Lewis further proved that the Capozzi customary “comparator” chart used in dozens of lawsuits to claim malpractice is flawed and fails to prove that any large plan has excessive recordkeeping fees.

Capozzi has fourteen days from the May 27 decision to find a more representative plaintiff to allege fiduciary malpractice and to provide better proof that the plan somehow has a history of excessive recordkeeping fees.  No doubt the law firm will attempt to file an amended complaint, but the following is a summary of the Morgan Lewis foolproof defense to show why the Capital One fiduciaries have fully complied with the best practices of fiduciary plan management.  As the participant fee disclosures attached to the motion to dismiss demonstrate, the original complaint’s use of the Form 5500 data is yet another example as to how the excessive fee plaintiffs’ bar attempts to prejudice federal courts by alleging excessive recordkeeping fees based on inflated numbers from the Form 5500.  The best evidence of a plan’s recordkeeping fees are the participant and plan fee disclosures from the plan recordkeeper – not the Form 5500 – and these disclosures prove conclusively that the Capital One plan has maintained low recordkeeping fees and that the plan was improperly sued for fiduciary malpractice.

The following are the lessons that can be learned from Morgan Lewis’s masterful dismissal motion.  These defense tactics apply to many of the illegitimate purported excessive fee lawsuits based on exaggerated and inaccurate data.

The Morgan Lewis Rebuttal to the Capital One Excessive Fee Case

Euclid has been demonstrating for some time that many of the purported excessive recordkeeping fee claims based on Form 5500 data are intentionally misleading.  Our recent whitepaper can be downloaded Here.  The exaggerated claims are designed to prejudice the factual record to survive a motion to dismiss and leverage an unfair settlement based on litigation uncertainty and an inflated damages model.  The evidence proffered by the expert Morgan Lewis defense team in the Capital One case demonstrates conclusively that our analysis is correct.

The complaint against Capital One alleges a “devasting effect of unchecked recordkeeping and administration fees . . . [because] the per participant charge ranged from a high of $81 per participant in 2015 to a low of $38 per participant in 2020.”  According to the complaint, “[a] more prudent fiduciary would have understood these fees to be excessive and taken corrective action by seeking lower cost administrative and recordkeeping alternatives.”  Many courts are fooled by this over-the-top hyperbole, but it is based on a fraudulent premise of inaccurate fees for the plan.  The following is a chart of the purported recordkeeping fees from the Form 5500 versus the actual recordkeeping fees disclosed in the participant disclosures that Morgan Lewis attached to its dismissal motion.

Year Form 5500 RK Per Participant Alleged in the Complaint Fidelity Fee Disclosure RK Fees
2015 $81.15 Not disclosed on Fidelity participant fee disclosure
2016 $64.08 Not disclosed on Fidelity participant disclosure
2017 $51.59 $33.00 per year
2018 $45.45 $33.00 per year
2019 $44.81 $33.00 per year
2020 $38.59 $30.00 per year


We do not know why the 2015 and 2016 Fidelity participant fee disclosures do not clearly identify the exact recordkeeping fee, but in our experience that usually means that the plan sponsor paid the fee on the participant’s behalf.  We cannot make any final conclusion about the 2015 and 2016 years, however, other than we know that the Capozzi-alleged amounts from the Form 5500 are inflated and incorrect because the Form 5500 includes transaction fees that are unrelated to recordkeeping [see more fully below].  But we have four years of accurate recordkeeping fees from the fee disclosures between $30.00 and $33.00 per participant from 2017 to 2020 to show that the Capozzi-alleged amounts based on the Form 5500 between $38.59 and $51.59 are incorrect.

Like most lawsuits filed by the Capozzi and Walcheske law firms alleging excessive recordkeeping fees, the Capital One complaint asks the court to infer that the plan’s fiduciary process was imprudent because the alleged recordkeeping fees were “excessive” compared to limited and inaccurate data from other large plans.  The plaintiff purports to make what Morgan Lewis calls an “inferential leap” by comparing the plan’s alleged fees to the alleged fees of seven other retirement plans from a single year.  It is important to review Morgan Lewis’s defense, because it is relevant in dozens of pending excessive fee lawsuits based on the same faulty and misleading claims and improper comparison to the same exact plans.

Rebuttal #1 – Evidence of Seven Other Plans that Paid Less is Not Evidence of Fiduciary Malpractice:  The first rebuttal point offered by the Capital One defense is the obvious point that it is not indicative of an imprudent process simply because a few other plans paid less.  Statistics show that there are approximately 750 jumbo plans with assets over $1 billion, and Capozzi and Walcheske repeatedly try to allege malpractice based on the fact that they found seven or so other large plans that allegedly paid less.  The comparison chart of seven plans is not even close to a legitimate average or median recordkeeping fee for large plans.  Again, obvious, but too many courts seem to be misled by this flimsy claim.  There is always some plan that paid less, and that cannot possibly be sufficient circumstantial evidence that fiduciaries committed malpractice.

I like to use the analogy of running.  I am an avid long-distance runner, and pretty fast for my old-man age group.  But I am always reminded that there is somebody faster than me.  That does not mean that I am a slow runner – it is just evidence that I am not the fastest aging man in the world.  The fact that seven plans out of the entire large-plan universe might have paid less than the Capital One plan is evidence of nothing other than they did not pay the lowest amount in the entire universe.  This should be obvious and not necessary to state, but many courts allow cases based on the misleading comparator chart to proceed to discovery.

Rebuttal #2 – Evidence of One Year of Form 5500 Data is Not Sufficient Evidence:  Second, Morgan Lewis next argues that the Complaint’s allegations are “especially faulty here because they hinge on fee comparisons from a single year (2019) across the six-year putative class period.”  The Complaint offers no evidence as to the fees that the alternate plans paid in any other year, or how they compared to the Capital One plan.  The defense lawyers prove this by showing that the purported comparison plans sponsored by Dow Chemical and Kaiser Permanente had increased recordkeeping fees in 2020 ($39 – up from $25 for Dow Chemical; and $39 – up from $33 for Kaiser) respectively if you use the Capozzi Form 5500 (faulty) rubric.  By Capozzi logic, the Dow Chemical and Kaiser plans would be imprudent because its fees were higher than the other purported comparator plans sponsored by Deseret, Rite Aid and WPP Group.  In most cases, defense counsel never attempt to dispute the Capozzi/Walcheske comparator charts, but even this rudimentary comparison to another year shows why the chart is misleading.

Rebuttal #3:  The Form 5500 is not a legitimate source to allege excessive recordkeeping fees because it includes revenue sharing that may be rebated and otherwise contains irrelevant transaction costs – the Morgan Lewis Car Down-Payment Analogy:  The third point is the most important rebuttal:  the comparison chart fails to prove malpractice because it does not consider the total fees paid by the comparator plans.  Morgan Lewis demonstrates that the complaint is comparing apples to oranges because the complaint is including Capital One’s direct and indirect recordkeeping fees, but comparing them to only the direct payments of the seven comparator plans when six out of the seven plans also reported indirect revenue sharing payments to their recordkeepers like Capital One.  In other words, the complaint is comparing the Capital One plan’s total recordkeeping fees [direct and indirect compensation] to only a portion of the recordkeeping fees paid by the alternative plans [direct-only compensation].  As Morgan Lewis cleverly describes, “[t]hat is like comparing car prices by just looking at the monthly payment, but not the down payment.  One cannot infer that a car that costs $200 per month for five years is cheaper than a car that costs $300 per month for five years without knowing the amount of each car’s required down payment.”

Morgan Lewis does not make this further point, but the primary reason that the Form 5500 is not a legitimate basis upon which to allege fiduciary malpractice is that it includes, in most instances, significant transaction costs that are not related to the core recordkeeping duties of the plan recordkeeper.  Morgan Lewis focuses on revenue sharing, and that is a legitimate distinction, but the revenue sharing or indirect compensation to the recordkeeper is either kept by the recordkeeper, or rebated back to participants.  The fee disclosure is the more accurate source of the true recordkeeping fee because the 408b2 plan fee disclosure indicates what revenue sharing has been rebated.  It is important to distinguish rebated amounts, because they are not the final amount paid to the recordkeeper.  The Form 5500 will have inflated amounts of recordkeeping fees to the extent that revenue sharing is rebated to participant accounts.  But – and this crucial – the Form 5500 recordkeeping fees are also inflated to the extent they include transaction costs that must be deducted before arriving at the actual recordkeeping amount.

As Euclid has stated many times, the Form 5500 cannot be used as a legitimate source to allege excessive recordkeeping fees or compare to any other company’s plan, because it is inflated with fees that do not constitute the accurate and actual recordkeeping fee charged to participants – whether rebated revenue sharing or unrelated transaction costs.  The only true source of the actual recordkeeping fees is the DOL-mandated fee disclosures.  Morgan Lewis proved this in their Capital One motion to dismiss by attaching the participant fee disclosures.  Courts must not allow complaints based on misleading Form 5500 data to proceed when DOL-mandated fee disclosures provide the correct recordkeeping fees.

Rebuttal #4 – Excessive Fee Claims Fail to Compare the Scope and Quality of Recordkeeping Services:  The final rebuttal is that the complaint fixates on the purported cost of the plan’s fees without offering any allegation as to the scope or caliber of the services being provided in exchange for those fees.  What Morgan Lewis labels as a “narrowminded” fixation on cost fails to allege any facts about the breadth and level of services that Fidelity provided to the Plan’s participants for the challenged fee amounts.  Like nearly every purported excessive recordkeeping lawsuit, the Complaint fails to allege any facts about the breadth and level of services that Fidelity provided to the Plan’s participants for the challenged fee amounts.  The simple assertion that “the Plan was paying higher recordkeeping fees than its peers is insufficient” because “there are always differences in the packages and levels of services that plans negotiate with their recordkeepers, based on individual considerations relevant to a particular plan and its participants.”  If you want more on this issue, the Simpson Thatcher motion to dismiss in the USI Insurance Services excessive recordkeeping case explains more in-depth the differences in recordkeeping services available to large plans.  Our Euclid Fid Guru Blog – Insights From the First Twenty-Five Excessive Fee and Investment Imprudence Cases of 2022 can be found Here.


The Low-Cost Index Investments in the Capital One PlanThe complaint was dismissed because the single plaintiff was not invested in the three allegedly imprudent investments.  But we do not want to lose track of the key point with respect to the investment claims.  This complaint is part of a disturbing trend in which the Capozzi law firm, and more often the Walcheske & Luzi firm in other cases, have started to sue super-low cost plans by alleging malpractice based solely on the alleged imprudence of a few isolated investments in the plan.  These complaints ask the court to infer an imprudent investment process based on just a few investments, but give no context as to the total investment options available to participants.  Many of these recent cases – like the 2022 cases against Milliman, Davita, Dartmouth-Hitchcock Clinic, and Clean Harbors – fail to inform the court properly that the plan has many low-cost index funds and otherwise has a low, all-in fee profile.  In the Capital One case, the complaint alleges that the Northern Small Cap Value, Fidelity Capital Appreciation, T. Rowe Price Institutional Large Cap Value funds are imprudent investment choices, but fails to disclose that there are twenty investment options in the plan, not including Capital One company stock, and that most of the investment choices are BlackRock target-date index funds at the low current fee of only 4.5 bps.  Moreover, now that the three actively managed funds have been removed from the plan – which the complaint also fails to disclose – the plan only offers low-cost index and fixed income funds, including the Fidelity Global ex U.S. Index Fund and the State Street S&P 500 Index Fund and nine IGT fixed income and bond funds.

The Capital One investment menu is a state-of-the art plan with high-quality, low-cost investments.  It is one of the best low-fee plans available to retirement participants in the country.  To accuse the fiduciaries of the Capital One plan of malpractice is a misuse of the judicial system.  Sanctions are rarely used in the federal courts today, but this case screams for rule 11 sanctions because any case against a plan with an all-in fee under fifteen basis points is frivolous.  [*Euclid note:  we do not have access to the rule 408b2 plan fee disclosure in which Fidelity discloses the all-in plan fees, but given that the recordkeeping fee is less than 2 bps, and the QDIA investments is at 4.9 bps, the plan’s all-in fees must be well below 15 bps – and likely under 10-12 bps, making it one of the lowest cost plans in the entire plan universe (notwithstanding that it might not have the lowest recordkeeping fee in the entire plan universe).  The complaint does not give the all-in plan fee – the only fair starting point for a case that alleges excessive fees – but that is because the total plan fees are super low and would invalidate the premise of the entire excessive fee lawsuit].


The Euclid Perspective

We will be the first to admit if a plaintiff law firm sues a plan that legitimately has fees that are excessive and outside the range of reasonable fiduciary judgments.  But too many of the recent purported “excessive” fee cases are being filed against plans with high-quality, low-cost investments and low recordkeeping fees.  The Capital One case is an example of an illegitimate case based on misleading and incorrect claims.

First, the complaint chooses three investments out of the entire plan lineup to infer fiduciary malpractice without candidly and properly informing the court that the QDIA is the super low-cost, highly rated BlackRock LifePath index funds at 4.9bps, and that the all-in fees for the plan are super low.  This is misleading.  It is even more frivolous when the sole plaintiff did not even own the purportedly imprudent investments and the three actively managed funds have been removed from the plan.  But the larger point is that it is not imprudent to offer a few actively managed funds in a plan dominated by low-cost index funds.  Courts must not allow plaintiff law firms to second-guess legitimate fiduciary decisions to offer a rational mix of active and passive investment options.  This type of menu is well within the “range of reasonable judgments” allowed by the Supreme Court in the Northwestern decision.  If you allow a plaintiff law firm to sue this plan, then every retirement plan in America can be sued for fiduciary malpractice and liable for millions of dollars.  It is litigation abuse.

Second, the complaint alleges high recordkeeping fees based on inflated Form 5500 data, and compares the inflated fees to the unreliable Form 5500 data of other purported comparable plans.  But the plaintiff purporting to represent the employees of an entire Fortune 500 company received a regulator-mandated fee disclosure on a quarterly basis stating that the recordkeeping fees are a fraction of what his lawyer is alleging in the complaint.  The plaintiff law firm knows that it has alleged inflated recordkeeping fees that do not match the lower and correct fees on the fee disclosure.  The difference is revenue sharing that is likely rebated and transaction costs that do not constitute recordkeeping fees that are negotiated by plan fiduciaries.

We continue to ask:  why are plaintiff law firms allowed to file deceptive claims over and over in federal court?  The only potentially legitimate excessive recordkeeping claim is if it is based on the rule 408b2 or 404a5 fee disclosures, and compared to the accurate fee disclosures of other companies with similar recordkeeping services.  But the vast majority of lawsuits use deceptive Form 5500 inflated data.

It is time for defense law firms to seek rule 11 sanctions for any plaintiff law firm that continues to file strike lawsuits alleging fraudulent excessive recordkeeping fee claims based on inaccurate Form 5500 data.  Euclid has been showing how this practice is inaccurate, and Morgan Lewis proved it in the Capital One record.  Federal Rule of Civil Procedure 11 provides that a district court may sanction attorneys or parties who submit pleadings for an improper purpose or that contain frivolous arguments with no evidentiary support.  The choice should be simple:  use the DOL-mandated fee disclosures in order to allege excessive recordkeeping fees, or get sanctioned.


[i] This is at least the second time in recent months that the Morgan Lewis law firm has achieved a dismissal of a case filed by the Capozzi law firm in which they attempted to assert imprudence claims with participants who were not invested in the allegedly imprudence investment options.  The court in the Mitre case dismissed the case because the plaintiff did not own any of the alleged imprudent investments, but rather was invested in a single fund that was in the lowest share class that paid no revenue sharing.  The defense had also shown that the named plaintiff had paid only $5 in plan fees.  We find it ironic that a law firm that so boldly and freely alleges serious claims of malpractice against plan fiduciaries based on purported lack of fiduciary due diligence often fails in rudimentary legal due diligence in its own lawsuits.

Disclaimer:  The Fid Guru Blog is intended to provide fiduciary thought leadership and advocacy for the plan sponsor community in areas of complex fiduciary litigation.   The views expressed on The Fid Guru Blog are exclusively those of the author, and all of the content has been created solely in the author’s individual capacity.  It is not affiliated with any other company, and is not intended to represent the views or positions of any policyholder of Encore Fiduciary, or any insurance company to which Encore Fiduciary is affiliated.  Quotations from this site should credit The Fid Guru Blog.  However, this site may not be quoted in any legal brief or any other document to be filed with any Court unless the author has given his written consent in advance.  This blog does not intend to provide legal advice.  You should consult your own attorney in connection with matters affecting your legal interests.

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