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

Humana’s Prudent Fiduciary Process is Vindicated at Summary Judgment, But the False Excess Fee Case Should Have Been Dismissed at the Initial Pleading Stage

Doctor speaking with patient

KEY POINTS:  (1) A Breach of Fiduciary Duty Case for Alleged Excessive Fees Was Pursued Even After Plaintiffs Had Evidence of Humana’s Best-in-Class Fiduciary Practices to Ensure Reasonable Plan Fees:  Humana’s fiduciary committee engaged in fiduciary best practices with competitive bidding every three to five years through requests for proposals, and worked with outside advisors to perform annual benchmarking of the plan’s recordkeeping fees to ensure they remained reasonable.  Plaintiffs knew this before they filed two amended complaints.  Nevertheless, the plan committee had to spend millions of dollars in over three years of litigation to vindicate its fiduciary process and validate that its recordkeeping fees were reasonable. 

(2) Why Did the Judicial System Allow a Meritless Excess Fee Case to Proceed for Over Three Years?  Because the Kentucky federal court, like many courts, allowed a false and misleading complaint to allege fiduciary malpractice based on a comparison to the unverified fees of four random plans.  The Humana case cries out for a more stringent pleading standard to weed out meritless excessive fee cases that are based on misleading and unreliable circumstantial evidence, instead of a reliable, national benchmark study of comparable fees.  Courts must stop ruling that unverified fee comparisons to a few random plans meets the plausibility pleading standard.

On May 23, 2024, the Western District of Kentucky court excluded plaintiff’s expert testimony and granted summary judgment for Humana in the excessive fee case filed by the Capozzi Adler firm.  That is the headline, but not the story.  The key storyline is that Humana was forced to defend its best-in-class fiduciary process, even though that evidence was available to plaintiffs’ lawyers at the very beginning of the case. 

The history of this case is worth studying, because Humana should never have been sued for excessive recordkeeping fees.  And when it was, the case should have been dismissed with prejudice after the initial filing, maybe even with sanctions when the prosecuting law firm filed an amended complaint despite evidence that Humana had followed best practices to ensure reasonable plan fees.  As the defense stated in their summary judgment motion, “[s]everal years of litigation and full discovery have given the lie to Plaintiffs’ allegations.”    

The entire case was indeed a lie, starting with an initial complaint that alleged inflated fee amounts.  Humana had a prudent fiduciary process to ensure the reasonableness of plan fees, including three requests-for-proposal that reduced recordkeeping fees and annual benchmarking.  The recordkeeping fees were lowered from $37 to $23 after the 2019 RFP – well below what comparable plans paid during the time period for comparable services.  But plaintiffs were not required to plead a reliable, national recordkeeping benchmark study that would have shown what comparable plans actually pay.  Instead, they were allowed to allege that just four plans – out of hundreds of jumbo plans in America – supposedly had lower fees.  We estimate that Humana had to pay at least seven to ten million dollars in lawyer and expert fees – more than their annual recordkeeping fees – to defend a meritless case.   

The Humana purported excessive fee case demonstrates why the current state of fiduciary liability law is unfair to plan sponsors, and why we need a stringent pleading standard to weed out meritless cases.  If we are going to allow the trial bar to serve as the primary fiduciary liability prosecutor in America, the Humana case demonstrates that we need guardrails to prevent frivolous cases.  Otherwise, the current fiduciary liability litigation system is allowing the trial bar to sue any plan in America for purported excessive fees without real evidence of fiduciary wrongdoing.

We would not allow federal prosecutors to sue companies without real evidence of wrongdoing.  Why then do we let the ERISA trial bar profit off of a pleading standard that credits misleading and inaccurate fee comparisons?

The History of the Excessive Recordkeeping Fee Lawsuit against Humana

Nearly half of the 161 excessive fee ERISA class action lawsuits filed against corporate America in 2020 and 2021, including Kena Moore v. Humana Inc. (Civil Action No. 3:21-cv-00232-RGJ-RSE D. Kentucky), were filed by just one law firm – the Capozzi Adler law firm in Pennsylvania.  These lawsuits alleged in cookie-cutter fashion that plan sponsors across the country had violated their ERISA fiduciary duties by allegedly permitting their sponsored plans to pay excessive recordkeeping fees.  It is a profitable business model for the Capozzi law firm, as they have netted huge fees when they extract settlements against their plan sponsor targets, including recent settlements against Mass General Brigham, Magna International, and Salesforce.

In the case against Humana, plaintiffs originally alleged that Charles Schwab, the recordkeeper for the sponsored defined contribution retirement plan, was paid between $59 and $67 per participant per year for recordkeeping services from 2015 to 2021, and that allegedly comparable plans paid “slightly over $40 per participant” over that same time period.  These fee amounts were false.  Each plaintiff in the case had received quarterly fee disclosures and monthly account statements revealing the true recordkeeping fees, but the initial complaint ignored the truth.  Plaintiffs knew the fees they alleged were false, but this is part of the normal tactics employed in excessive fee breach of fiduciary duty cases. 

After the lawsuit was filed, defense lawyers disclosed the Schwab service agreements to plaintiffs’ lawyers.  These contracts revealed a $37 recordkeeping fee in 2014; a $23 recordkeeping fee in 2019; and a $28 recordkeeping fee in 2021.  Not to belabor the obvious, but these fees were below the $40 fee that plaintiffs had suggested was reasonable in their original complaint.  Plaintiffs were also apprised that the plan had conducted three separate RFPs to validate the plan’s recordkeeping fees, including the 2019 RFP that dramatically reduced the recordkeeping fee from $37 to $23. 

Confronted with the truth, and according to Humana’s summary judgment motion, plaintiffs refused to dismiss their claim.  Instead, they moved the goalposts.  They incorporated the plan’s actual recordkeeping fees in two subsequent amended complaints, and cut their supposedly “reasonable” fee exactly in half, alleging that the plan “should have been able to negotiate a recordkeeping cost in the low $20 range.”  Plaintiffs further alleged that “the RFP was deficient because ‘the Plan could have negotiated a lower [recordkeeping] price.’”  The only evidence supporting these allegations, however, was not the industry average based on a credible, national benchmarking survey, but a chart of just four jumbo plans with fees plaintiffs calculated themselves from publicly filed form 5500s:  (1) Deseret 401(k) Plan [34,357 participants/$3.4B assets/$25 alleged recordkeeping fee]; (2) Danaher Corporation & Subsidies Savings Plan [35,357 participants/$4.6B assets/$28 alleged recordkeeping fee]; (3) Publicis Benefits Connection 401(k) Plan [42,316 participants/$2.5B assets/$28 alleged recordkeeping fee]; and (4) Kaiser Permanente Supplemental Savings Plan and Retirement Plan [47,358 participants/$3.1B assets/alleged $27 recordkeeping fee]. 

At the pleading stage, the Court accepted as true Plaintiffs’ allegations that the Humana fiduciary committee “could have negotiated a lower [recordkeeping] price” and did not employ a prudent process for monitoring plan fees because it allegedly failed to “remain informed about overall trends in the marketplace regarding the fees being paid by other plans, as well as the recordkeeping rates . . . available” in the market.  Based on the chart of just four plans, the court held that “[t]hese allegations are enough to survive a motion to dismiss because, if true, they could establish that the Committee failed to act as a prudent fiduciary.”  In denying a later motion for reconsideration, the Court similarly credited plaintiffs’ allegation that the Plan “failed to negotiate recordkeeping fees,” finding that allegation enough to sustain Plaintiffs’ claim at the early stage of the case. 

In sum, the Court allowed the case to proceed based on conclusory statements and a comparison of estimated fees from just four plans out of the entire universe of jumbo defined contribution plans in the country.  The Court did not require a reliable benchmark survey that would have placed all large plans into a proper context. 

The Humana Plan and the Fiduciary Committee’s Fiduciary Process

Humana contributed more than $1.6 billion to the plan from 2015 to 2021, the six years at issue in the lawsuit.  As of year-end 2022, the Plan had 58,735 participants and $6.4 billion in net assets, up from $3.5 billion during the same time period. 

The Humana plan was managed by the Humana Retirement Plans Committee.  During the class period, the Committee met at least on a quarterly basis, with occasional additional special meetings as necessary.  The plan engaged in periodic RFPs for recordkeeping fees and annual benchmarking from expert consultants.

In 2014, the Committee engaged an outside consultant, Institutional Investment Consulting (IIC), to assist with an RFP for the plan’s recordkeeping services.  Using a tool covering 450 data points, Humana worked with IIC to identify a pool of 15 recordkeepers as candidates to receive the RFP and then conduct a detailed analysis to further narrow the group to five finalists who were invited to respond:  AonHewitt, BofA Merrill, Fidelity, Putnam and Schwab (which was the plan’s recordkeeper at the time).  As part of the RFP process, the candidates received a vendor evaluation score, which took into account the recordkeepers’ services, price, technology, implementation/conversion, financial stability, contracting, cultural fit, reputation and experience.  Schwab received the highest score at 80.3 points, followed by Aon Hewitt at 69.4, Fidelity at 67.4, and BofA at 62.9.  Schwab’s “Total Estimated PPPY fee” [PPPY = Per Participant, Per Year] was the lowest among all of the bidders at $37 PPPY, with the next lowest bid – from Fidelity – more than $7 higher, at $44.47 PPPY.  After analyzing the RFP responses – including both the fees and services offered by each bidder – the Committee decided to continue to retain Schwab as the Plan’s recordkeeper and entered into a contract charging $37 PPPY for recordkeeping fees.

In 2019, five years after the 2014 RFP, Humana and IIC conducted another RFP for Plan recordkeeping services.  As before, Humana and IIC implemented an exhaustive process to narrow the field of potential vendors down to those most qualified to serve the Plan.  Humana and IIC ultimately solicited bids from five finalists:  BofA, Merrill, Empower, Fidelity, Schwab, and Voya.  Each finalist answered at least 825 questions about the scope of prospective services offered.  On price, Schwab’s “Estimated Total Recordkeeping Fee” was lower than all other finalists’ bids.  After reviewing and discussing the materials submitted by each finalist – including, again, both the fees and services offered by each – the Committee recalled Schwab’s “excellent service levels and capabilities” and concluded that Schwab’s bid was “favorable compared to the other bids,” deciding to work with Schwab as the plan’s recordkeeper.  The RFP resulted in a fee reduction for the plan, from $37 PPPY to $23 PPPY. 

In late 2020, the Committee decided to transition from offering Schwab’s actively managed target-date funds in the plan to offering Schwab’s passively managed target-date funds, which charged lower investment-management fees.  Because the $23 PPPY recordkeeping fee the plan obtained through the 2019 RFP reflected a discount tied to the inclusion of the actively managed Schwab target-date funds in the plan’s investment lineup, the switch to the passively managed target-date funds caused the recordkeeping fee to increase from $23 to $28 PPPY in February 2021.  However, the change produced overall net savings for plan participants due to the passive target-date funds’ lower investment fees. 

In 2022, the Committee notified Schwab of its intent to commence another RFP process, and Schwab offered a fee concession, reducing the plan’s recordkeeping fees to $22 PPPY in October 2022.  The planned RFP was then conducted, and it was completed in July 2023.

In addition to performing competitive searches every three to five years, the Committee also worked with outside consultants – first Roland Criss and later IIC – to conduct annual benchmarking studies of the plan’s recordkeeping fees.  The benchmarking reports confirmed that the plan’s fees compared favorably to those of a sample of other large retirement plans, consistently falling at or significantly below the mean or median.

Motion to Strike Plaintiff’s Damages Expert Veronica Bray

Plaintiffs’ evidence that the plan’s recordkeeping fee was excessive was extremely weak, but it is very similar to what is used in other breach of fiduciary duty excessive fee cases.  For this reason, it is worth studying in detail.  Importantly, the trial bar uses the same purported expert witnesses to support their excessive fee claims.  Veronica Bray is used in many of these cases.  She is famous for having her testimony excluded in the Hy-Vee excess fee case.

Her testimony against Humana was equally deficient.  She claimed that Humana fiduciaries should have achieved a lower recordkeeping fee in the range of $12-20.  But instead of presenting a credible, national benchmarking study of what large plans pay for recordkeeping services, Ms. Bray instead based her entire opinion to a comparison of six other plans and her overall “experience.”  The Court noted that “she herself admits these plans were not comparable to the Humana Plan,” and Humana argued that she did not analyze the services provided to the Humana plan compared to the six plans to determine if they were comparable. 

The six plans are not comparable at all.  She cited the following plans and purported recordkeeping fees:  (1) Federal Express Corporation Pilots’ Retirement Savings Plan [$4.7B in assets/5,918 participants/alleged Recordkeeping fee of $20.81; (2) Clifton Larson Allen, LLC 401(K) Retirement Plan [$1.2B/9,043/$13.71 alleged recordkeeping fee]; (3) BlackRock Retirement Savings Plan [$3.8B/12,996, and pays its own recordkeeping and trustee fees, including an administration fee of $2.50; (4) The Vanguard Retirement and Savings Plan ($8.2B/22,485; alleged $12.05 recordkeeping fee; and (5) The Cargill Partnership Plan [$7.7B/44,511/alleged $15.11 recordkeeping fee].  For the sixth plan Bray merely notes that “[i]n 2020, Fidelity quoted a $14 to $21 recordkeeping fee in a lawsuit.” 

The Fidelity citation from a discovery stipulation is misleading, as it is not the recordkeeping fee of the Fidelity plan.  Bray’s credibility is strained to cite it.  But comparing the Humana plan with over 50,000 participants to plans sponsored by major recordkeepers like Fidelity and Vanguard, and an investment advisor like BlackRock is ludicrous.  The question should be why Fidelity and Vanguard charge their own employees for their core recordkeeping services, not how these plans could compare to a non-financial company like Humana. 

After you remove plans sponsored by financial service providers, Bray’s entire testimony is based on three plans sponsored by Federal Express, Clifton Larsen Allen, and Cargill.  We know based on our sources that at least the Clifton Larsen plan has a recordkeeping fee way higher than the $13 fee that Ms. Bray alleged.  Her testimony is false.  If she is wrong about the fee for the Clifton Larsen Allen plan, then you can assume that all of her testimony is false or unreliable at best.  None of these fees are verified or validated in any way.  That is the problem in all of these cases.  Unless you see the plan fee disclosure from the recordkeeper or the actual recordkeeping contract, do not believe any of the fees alleged by the trial bar or its so-called experts.  Time and time again, we have seen fee disclosures that contradict what these cases are alleging.  It is a fraud on the court system to allege false fees, particularly when purporting to serve as an expert on excessive fees.

Here is the bottom line.  Plaintiffs in this lawsuit based its claims of excessive fees – serious breach of fiduciary duty malpractice claims – based on flimsy comparisons to three random plans in the entire universe of defined contribution plans, and the fees alleged are not even correct. 

The Court did not know that Ms. Bray’s fee information is false, but it did exclude her testimony in finding that “Bray’s opinion applies no reliable methodology.”  The Court held that Bray’s method – essentially, reasoning by inference that, because six smaller plans were able to achieve a fee in the $12–$20 range, it follows that Humana should have also been able to negotiate for fees in that range – is not a reliable basis for concluding the fees were unreasonably high.”  Of course not, but why did this basic logic not apply to the plausibility of the initial complaint, which was based on four completely different random plans with unverified fee amounts.   

The Court summed it up:  “Because Bray provides no reasonable explanation for her selection of the six plans and herself acknowledges they are not comparable to the Humana Plan, the Court will exclude her testimony.”  This is obviously the right result, but the key point is that Humana was forced to spend millions of dollars based on a trumped up claim that was (1) alleged in the first instance with unreliable evidence and then (2) backed up with even more unreliable evidence.

The Court Grants Humana’s Motion for Summary Judgment

In order to prevail on their excessive fee claims, plaintiffs needed to show that Humana fiduciaries breached their fiduciary duty of prudence and that recordkeeping fees were ultimately unreasonable.  Plaintiffs did not dispute that Humana engaged in RFPs and annual benchmarking.  Instead, they contended this was not enough, because plan fiduciaries should have negotiated lower recordkeeping fees during the four-year interim between RFPs because of the plan’s growth from 2015 to 2019 – from $3.5B to $6.5B in plan assets.  Plaintiffs also argued that Humana failed to have a fee policy statement, which the court quickly rejected.

The key issue as to whether Humana had a prudent fiduciary process, therefore, was plaintiffs’ argument that Humana fiduciaries had a duty to continuously renegotiate lower fees.  In other words, plaintiffs argued that a fiduciary must continuously engage in competitive bidding.  The court noted that courts have rejected this notion in at least three prior cases against Northrop Grumman Corp, Chevron Corp, and Oshkosh Corp.  The court confirmed that a prudent process does not require “continuous negotiations with a recordkeeper for lower fees throughout a contract period.” 

On the second issue of whether the fees were reasonable, the Court had already excluded plaintiffs’ expert testimony.  Instead, the Court granted the summary judgment motion because Humana had shown that Schwab’s recordkeeping fees produced the lowest cost to the plan of any candidates solicited via the RFPs competitive bidding, and the annual benchmarking revealed the plan’s fees were still reasonable. 

The Court easily dispatched with the case.  It was not even close.  But that is the point we are making here:  why was this case allowed to proceed for years when the initial complaint was based on a lie, and it had no legal or factual support?  The Court reached the right result, but not until Humana had to prove what was obvious from the start – that it followed all best fiduciary practices.  This case should have been dismissed at the pleading stage, because it was not plausible.  It was based on comparisons to four plans out of the entire universe of plans, which is not proof of fiduciary malpractice.  It should not take until summary judgment and nearly four years of litigation to arrive at this basic conclusion.

The Encore Perspective:  Plausible excess fee complaints must require a comparison to a reliable benchmark study of fees paid by comparable plans, and not comparisons to a few random plans.

The Humana case demonstrates everything wrong with the current state of ERISA fiduciary liability law.  Too many courts have watered down the plausibility pleading standard to allow breach of fiduciary duty excessive fee cases based on dubious, unreliable, and often false allegations.  If we are going to allow the trial bar to file breach of fiduciary duty cases, the court system must impose guardrails to weed out dishonest and false cases of excessive fees like what happened in the Humana case. 

More specifically, the key problem is that courts like the Kentucky district court in the Humana case are crediting excessive fee claims that are backed up by only a chart of a few random plans.  Even if the fee evidence of those random plans is correct – and usually it is just plain wrong – this is not evidence of what a reasonable fee would be.  The only way to understand in proper context what other comparably sized plans pay for similar services is a national benchmark study. 

This is where we believe the ERISA defense bar has gone wrong.  They have emphasized that a comparison or meaningful benchmark must compare plans with similar services.  We do not disagree with that, and some courts have agreed.  But the focus on services has missed a more foundational point.  Before you can compare services to services, you have to get a context of what the average or median plan is paying.  The focus on services-to-services comparisons has allowed courts to allow comparisons to a few random plans.  But a few random plans – even if the services are exactly comparable [and some courts have found that with matching Form 5500 service codes] – should not be enough to allege malpractice.  Evidence from four to six plans out of hundreds of jumbo plans should not be plausible proof of malpractice.  A context-specific comparator would require a benchmark study showing what the universe of plans are paying, not just the lowest fee plans that the trial bar can find. 

Why is the trial bar afraid of a national, reliable benchmark study?  Why do they rely on a chart of a few random plans?  The reason is that any reliable benchmark study would show that 90+% of excessive fee laws lawsuits are meritless.  The Encore Fiduciary Benchmark study proves that.  So does the annual NEPC study, but it is based on fewer plans.  Most plans – even jumbo ones – do not pay below $20, or $25, or ever $30 per participant.  A requirement of a national benchmark study from a credible provider like Fiduciary Decisions would negate nearly every excessive fee case.  Plaintiffs can commission a study for a low fee, but they don’t do it because it would immediately debunk their excessive fee cases.   

We must  demand that the plausibility pleading standard include a comparison to a national, reliable benchmark survey – not a few random plans.  That is where the war needs to be waged – not just a comparison to plan services.  That is the lesson of the fake excess fee case filed against Humana. 

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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