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

Questions to Challenge the Plausibility of the Northshore University HealthSystem “Excessive” Fee Case

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Another Walcheske Lawsuit Alleging Fiduciary Malpractice Against a Plan with Low-Cost, High-Performing Vanguard Index Target-Date Funds and Exaggerated Recordkeeping Fees

By Daniel Aronowitz

The Department of Labor is designated as the regulator of employee benefit plans in the United States.  They audit plan sponsors all of the time, but rarely, if ever, raise issues with plan recordkeeping and investment expenses in large defined contribution plans.  That is because the vast majority of large plans in the country have low recordkeeping and investment expenses – much lower than small plans.  Instead, the regulators have stood by and allowed plaintiff law firms to file fiduciary malpractice lawsuits against many of the large defined contribution plans.  These plaintiff firms are serving as the de facto retirement plan regulators in the United States.  The only system of checks or balances on these lawsuits is the federal judicial system.  But by allowing many implausible and illegitimate cases to proceed, the system is not working.  Plaintiff law firms continue to file lawsuits alleging fiduciary malpractice based on superficial and misleading complaints.

One of the latest examples is the May 16, 2022 filing by the prolific Walcheske & Luzi, LLC law firm in Jamison Remied v. Northshore University HealthSystem in the Northern District of Illinois.  Like other Walcheske lawsuits, the complaint is misleading because:  (1) it alleges excessive recordkeeping fees by using form 5500 fee disclosures that include transaction costs and/or revenue sharing that might be rebated, and thus overstates the actual recordkeeping fees of the plan; and (2) the lawsuit complains about five actively managed investment options without properly disclosing that the plan’s qualified default investment option is the low-cost, high-performing Vanguard index target-date funds, and that the plan also offers other low-cost Vanguard index funds.

We believe the complaint is intentionally misleading and designed to confuse and prejudice a judicial court system that is not proficient in understanding fiduciary best practices.  Given that this law firm has filed so many cases – way more than they can legitimately litigate – the only conclusion is that their goal is to sue a large corporation with insurance coverage and leverage the litigation uncertainty to drive a lucrative settlement.  Given the lack of candor to the court in this and other lawsuits, this law firm is not qualified to serve as a legitimate regulator of the fiduciary management of large defined contribution plans.  But they continue to second-guess the fiduciary judgment of America’s large corporations, and will continue to do so until someone stops it.

To level the playing field, the following are the questions – and Euclid answers – that the judge assigned to the Northshore case needs to ask.

  • In an excessive fee case, what is the best starting point to judge whether plan fiduciaries have imprudently allowed excessive fees? The starting point for any plan is the all-in fees of the plan.  This is the total fees for the plan, including plan recordkeeping and investment fees.  The Northshore complaint does not give the all-in fees.  This is an immediate tip-off that the overall plan fees are likely low.  In complaints against plans with higher than average fees, the plaintiffs often include the all-in fees of the plan as the threshold basis to allege imprudence.  If the plan all-in fees are average or below-average, then you know right away that the plan fiduciaries have likely done an effective job in managing their fiduciary duties to plan participants.  The fact that the Northshore complaint does not give the all-in plan fees is a red flag that the complaint is implausible.  [BTW:  You can find the total or all-in plan fees on the recordkeeper’s quarterly rule 408b2 fee disclosure mandated by the DOL – no need for any mystery, as it is fully disclosed to the plan and available on information requests to plaintiff lawyers seeking to sue for fiduciary malpractice].


  • The Complaint alleges that the average recordkeeping fee was $92 for this plan over six years, using the recordkeeping fee number from Voya in the annual Form 5500s. Do the Form 5500 filings provide reliable evidence of the total recordkeeping fees?    The Form 5500 provides the total amount of money received by the recordkeeper, but it includes revenue sharing amounts that might be rebated to plan participants, and it almost always includes significant transaction costs that do not constitute plan recordkeeping.  Every participant fee disclosure lists the numerous transaction fees that recordkeepers charge to administer the plan.  For example:  distribution/withdrawal fees (usually $75); qualified domestic relations orders (QDRO) (usually $250-300); self-directed brokerage account fees ($250); loan origination fees ($100); and loan maintenance fees ($75).  The amount of revenue sharing that is rebated can equal $500,000 or more, but would still be listed on the Form 5500 as recordkeeping fees.  Simply taking the Form 5500 and dividing by the number of active account participants, which is what the complaint purports to do, is not the true and correct recordkeeping fee.  Plaintiff firms know this, but no one has demanded accountability for this misleading tactic.


  • Is there better evidence of the plan’s recordkeeping fees? Yes! The Department of Labor mandates under rule 408b2 that the plan recordkeeper provide the plan with a fee disclosure four times a year, and under rule 404a5 to plan participants four times a year.  The fee disclosures from Voya as the plan recordkeeper is the best evidence of the quarterly recordkeeping fee for the plan, not the Form 5500.  There is no reason to allow “estimation” of the recordkeeping fees from the Form 5500 when the DOL has established an entire disclosure regulatory regime.


Ask yourself:  what are plaintiff firms hiding?  If they are so confident that many of America’s plan sponsors have committed malpractice, don’t they want the true and accurate record of plan fees and investments alleged in the complaint?  Of course they don’t.  Here’s an idea:  attach the DOL-mandated disclosures to the complaint, and then let’s have an honest review of the plan fees and investments.  If we filed a lawsuit for legal malpractice, would you allow us to hide more than half of the evidence or mislead the court on the services provided?  Of course not.  The standard for professional malpractice should be the same against lawyers, doctors, and retirement plan fiduciaries.


  • So the $92 alleged average recordkeeping fee is incorrect? That is right – it cannot possibly be the correct number that Voya charges.  We do not know the actual recordkeeping fee for this plan, but we will bet a large amount of money that the real amount is not $92 per participant once you take out transaction fees.  We will also double down our bet against the Walcheske lawyers, because the single plaintiff they found to file the case – Jamison Remied – received a fee disclosure from Voya four times a year.  That fee disclosure contains the correct recordkeeping fee.  We guarantee that the fee disclosure has the correct recordkeeping number, and it is not $92.  We ask the court to require disclosure of the DOL-mandated disclosure, and let’s save everyone time and money on this claim.


We can look at this another way from Voya’s perspective:  If the recordkeeping fee charged by Voya for a $1.8 billion plan was $1,004,976 in 2020 as Walcheske alleges for $92 per participant, then we agree that $92 is too high.  Voya should be embarrassed if they charged a jumbo plan such a high fee.  We agree with Walcheske that the fee should be lower than $92 – but not their purported $34 benchmark based on misleading comparison plans.  Based on Euclid benchmarks of reviewing hundreds of large plans, we think the average per participant fee for a $1.5b+ plan with 10,000 participants should be between $35 and $55, depending on the services provided, the number of locations in which the plan sponsor has employees, and the complexity of the payroll systems [and if there have been mergers of disparate payroll systems].  If the recordkeeping fee is below $55 for this plan, then Voya should be complaining that its fees have been misrepresented.  We think the allegations establish a position in which Voya – a highly regarded recordkeeper – would have been taking advantage of a large plan to charge such a high purported fee.  Voya should be complaining that this complaint is defamation of its reputation as a quality professional recordkeeper.  Why would any large retirement plan sponsor want to do business with Voya if they take advantage of plan fiduciaries and over-charge their clients?  The answer to all of these questions is that Voya did not over-charge a $92 per participant fee to this plan – we are taking bets from any takers on this point.


  • Is the chart of the recordkeeping fees of “comparable” plans in the complaint a fair comparison of the fees to the Northshore plan? Absolutely not.  We have reviewed the public disclosures of many of the plans on the chart, and the recordkeeping fees for those companies, like The Boston Consulting Group, Sutter Health Retirement Income Plan, and Fortive Retirement Savings Plan are correct representations in most instances of the recordkeeping fees disclosed on the public Form 5500.  We have found some disparities, but it is mostly correct.  But these companies have recordkeeping disclosures in the Form 5500 that appear to have deducted out the transaction costs, so they are true recordkeeping fees – unlike the Form 5500 fee disclosure from Voya for the Northshore plan.  The point is that the complaint is comparing X + Y to X.  If X is the recordkeeping fees and Y is the transaction costs, the allegedly imprudent Northshore $92 fee is X + Y, but it is being compared to X (without the Y).  So the chart is not a legitimate or fair comparison.  The complaint is comparing Northshore’s recordkeeping + administrative transaction costs to a series of companies with just recordkeeping fees listed (without transaction costs).  We do not know why the DOL allows this type of inconsistency in reporting recordkeeping fees, and the DOL should take action to require uniform consistency.  But the best we can decipher is that plaintiff law firms like Walcheske here and Capozzi Adler in many cases have found a few companies that have filed Form 5500s without including transaction fees, and have made millions of dollars alleging malpractice based on this statistical inconsistency.  That does not make it right, but hopefully someone in charge reads this and demands accountability.  It is certainly not a plausible basis to accuse innocent fiduciaries of malpractice.


  • Are you comparing apples to apples to when comparing Northshore to the plans on the comparator chart? No – of course out.  Different factors lead to pricing of plans.  Recordkeeping is not a once-size-fits-all commodity.  The fees will vary based on the level of service and the complexity of the plan, including the number of payrolls systems and office locations.  Like most cases, plaintiffs make no effort to compare the Voya recordkeeping services to the purported comparison plans on the chart in the complaint.  Several recent courts have found this problematic and dismissed the complaints for failing to demonstrate that the recordkeeping services were comparable.  See, e.g., Cunningham v. USI Ins. Servs., LLC, 2022 WL 889164, at *4 (S.D.N.Y. Mar. 25, 2022) (rejecting allegations where “none of the[] ten purportedly ‘comparable’ plans offer[ed] participants the pension consulting or valuation services [offered to the USI plan participants]”).  But too many courts let this slide and allow the case to proceed.


  • Is all recordkeeping a commodity in which every company has the same services? As indicated in the prior point, recordkeeping services are highly customizable based on needs of each plan sponsor and myriad service levels, including core operational services, participant communication, participant education, brokerage windows, loan processing and compliance services.  The key differentiator is the level of participant communication and education, which can be very expensive.


  • The Complaint complains about five investments. Is this the entire plan lineup, and if not, why doesn’t the complaint list all of the plan investments?  No – there are nineteen plan options, and most of them are super-low cost index funds.  The complaint alleges that the plan invested in “high-cost funds.”  They back up this bald claim by complaining about five investments.  But the plan has nineteen total investments, if you count the QDIA target-date suite as one investment choice.  The following chart is part of the 2020 financials attached to the plan’s Form 5500 that the plaintiff uses to allege malpractice.  We have highlighted the low-cost index options that dominate the plan in yellow, and the five allegedly imprudent investments in red.


    Voya Stable Value Option Pooled Separate $  305,800,872
Vanguard Funds Vanguard Institutl Index (Inst) Mutual Fund 177,776,807
Dodge and Cox Dodge Cox Income Fund Mutual Fund 128,301,377
Vanguard Funds Vangrd Mid-Cap Index Fund InsP Mutual Fund 128,428,270
T. Rowe Price Funds TRwPr Blue Chip Growth Fnd I Mutual Fund 138,336,029
Harbor Capital Harbor Capital Apprec Fnd Ret Mutual Fund 137,162,082
Neuberger Berman Funds Neuberg Berm Genesis Fund R6 Mutual Fund 83,021,473
LSV LSV Value Equity Fun Mutual Fund 47,095,046
Dodge and Cox Dodge and Cox Int’I Stock Fd Mutual Fund 49,197,012
Vanguard Funds Vangrd Instit Tgt Ret 2025 Ins Mutual Fund 62,264,451
T. Rowe Price Funds TRwPr Value Fund I Mutual Fund 44,362,233
Vanguard Funds Vangrd Instit Tgt Ret 2030 Ins Mutual Fund 54,545,774
Vanguard Funds Vangrd lnstit Tgt Ret 2020 Ins Mutual Fund 40,198,930
Vanguard Funds Vangrd lnstit Tgt Ret 2035 Ins Mutual Fund 58,150,828
Vanguard Funds Vangrd lnstit Tgt Ret 2045 Ins Mutual Fund 54,068,411
Vanguard Funds Vangrd lnstit Tgt Ret 2040 Ins Mutual Fund 48,979,698
ClearBridge ClrBrg SmCp Grw Fd IS Mutual Fund 40,204,117
Voya Voya Small Company Fund R6 Mutual Fund 27,257,404
Oppenheimer Oppenhmr Intl Growth Fnd I Mutual Fund 32,380,728
Vanguard Funds Vangrd lnstit Tgt Ret 2050 Ins Mutual Fund 35,924,126
Vanguard Funds Vangrd Instit Tgt Ret 2015 Ins Mutual Fund 20,143,315
Harding Loevner Harding Loevner Fds s Ins Em Mt Pt I Mutual Fund 13,116,630
Vanguard Funds Vangrd Instit Tgt Ret 2055 Ins Mutual Fund 20,950,782
Vanguard Funds Vangrd lnstit Tgt Ret Inc Ins Mutual Fund 8,352,022
Vanguard Funds Vangrd Dev Mkts Inde Ins Plus Mutual Fund 7,492,707
Vanguard Funds Vangrd Instit Tgt Ret 2060 Ins Mutual Fund 5,506,344
Vanguard Funds Vangrd Instit Tgt Ret 2065 Ins Mutual Fund 1,561,699
Vanguard Funds Vangrd FTSE Soc Indx Fund Ins Mutual Fund 4,164,231
Wells Fargo WllFrg Spec SmCP IV Fund R6 Mutual Fund 6,843,187
Voya Voya Govt Money Market Fund A• Money Market     160,349
*  Participants Participant loans (rates 4.25% to 6.50%) Loans    11,572,637

The complaint cherry-picks the five active investment funds as allegedly imprudent, but fails to allege the overall all-investment fees to allow a fact-finder to properly analyze whether the plan fiduciaries have been imprudent.  And they intentionally fail to disclose that the plan offers the low-cost Vanguard index target-date funds with over $450m invested, as well as $177m in the Vanguard institutional index fund, and other Vanguard low-cost index funds.


The complaints alleges that the plan fiduciaries did not act “in the best interests of the Plan’s Participants by engaging in objectively reasonable investigation process when selecting its investments” by not choosing “lower-cost investments.”  But while you would not know it from the complaint, the plan fiduciaries did offer substantial choices of low-cost index funds, and the participants chose to put half of their collective money in those investments, as well as 15% ($305m) in the conservative stable value fund.  The plan fiduciaries offered low-cost investments, as well as the choice to participants of some actively managed investments by quality companies.  It is the best of both worlds and the sign of fiduciary best practice.


  • How much is invested in the allegedly imprudent investments? The Voya Governmental Money Market fund has only $161,349 invested in it – hardly worth complaining about.  The T. Rowe Price Blue Chip Growth Fund I has $138m; the Neuberger Berman Genesis Fund R6 has $83.1m; and the LSV Value Equity Fund has $47.0m.  The allegedly imprudent funds represent approximately 15% of the plan.  By contrast, the low-cost index and stable value funds are the predominate investments in the plan.


  • Are these challenged investments high-performing? According to Morningstar, three of the four active funds represent high-performing funds that are excellent choices for any retirement plan.  Only one of the investments has any concerns by Morningstar.  Not surprisingly, plaintiff offers no reliable third-party benchmark to nakedly allege that the five active investments are imprudent.  They are not.  Even a quick review of Morningstar research reveals that these investments are high-quality and prudent.  Only the Voya Small Cap Fund has a negative rating, but still offers an objective basis upon which to include it as one of nineteen options in the plan.
  • Neuberger Berman Genesis Fund R6: Silver rated by Morningstar.  According to Morningstar, “[t]he strategy offers an appealing risk/reward profile over the long term.”  From August 1997 start through October 2021, the U.S.-based no-load share class’s 11.5% annualized return “comfortably outpaced its typical small-growth category rival’s 9.4% gain as well as the Russell 2000 Growth Index’s 7.9%.” The fund’s Sharpe and Sortino ratios (two measures of risk-adjusted returns) also came in ahead of the average peer and benchmark.  “The fund has offered reliable downside protection in turbulent markets.”
  • LSV Value Equity: Silver rated by Morningstar. “A Deep Value Stalwart”:  “The strategy’s long-term returns are impressive. Since the U.S. mutual fund’s March 1999 inception, the Institutional share class’s 8.5% annualized gain through March 2022 beat the Russell 1000 Value Index and large-value category norm by 1.0 and 1.8 percentage points, respectively.”
  • Harding Loevner Emerging Markets I: Silver rated.  “Still an appealing source of emerging-markets exposure.  This strategy has posted subpar results during the past two calendar years . . . . Those results are disappointing, of course, but this strategy delivered relatively strong returns during seven of the 10 calendar years prior to 2020, and it earned competitive results in another calendar year.  As a result, the strategy has earned solid total and risk-adjusted returns over the trailing 10- and 15-year periods through December 2021 despite its recent underperformance.”  Not a perfect report, but still a legitimate choice for emerging markets exposure.
  • Voya Small Company Fund R6: Negative Rating:  “This strategy’s Retirement share class, with returns reported in US Dollar, has had a mixed track record, with mixed returns compared with peers but challenged when adjusted for risk.”  The only investment options that can be legitimately criticized, but certainly not enough to allege malpractice to have one negative-rated investment option in the short run.


  • Can you judge fiduciary imprudence by looking at a few investments in isolation – don’t you evaluate whether an investment is imprudent by considering it in the context of the entire, diversified investment options? There is nothing in ERISA that disallows offering a base of index funds with a few actively managed funds for a diversified choice.  This is a first-rate plan.  This complaint represents another illegitimate attack on a plan with a combination of index and active funds.  No court should allow a plaintiff law firm to second-guess the investment choices of quality plan fiduciaries just because a plan has four or five active funds in a diversified menu that is based on Vanguard index funds.  Nevertheless, Northshore will have to spend millions of dollars to defend a plan with a legitimate and prudent investment lineup – only because courts allow plaintiff law firms to second-guess discretionary fiduciary decisions.


The Supreme Court has said that plan fiduciaries have an obligation to monitor plan investments, and to remove imprudent investments.  No one is disputing that mandate.  The Supreme Court also said that offering low-cost index funds does not make an imprudent investment acceptable.  But the question is how to judge whether an investment is imprudent.  The Walcheske law firm continues to file cases alleging that four or five investments are imprudent.  But they intentionally take the few active investments out of context.  The only way to evaluate whether an individual investment is imprudent is in the context of the diversified plan investment menu.  If the plan only offered four active funds, then that may be imprudent.  But in the context of an index target-date QDIA and other available index funds, offering a few active funds is prudent and fully consistent with industry practice.


In a fair judicial system, this would be obvious.  But in case after case, we have seen very few signs that the judicial system is fair, as most courts are allowing misleading complaints to second-guess the discretionary decisions of plan fiduciaries.


The Euclid PerspectiveThe Northshore purported excessive fee lawsuit shows why plaintiff law firms are not qualified to serve as the regulators of the fiduciary prudence standard of care in America.  The Northshore plan has a base of low-cost index funds and a smattering of high-quality active funds to provide a diversified investment portfolio for plan participants.  We do not know the actual recordkeeping fee, but believe it has been exaggerated.  If Voya has overcharged the plan at the amount alleged, which we do not believe is plausible, then Voya should return any amount that the court deems excessive, as long as the assessment is based on reliable, third-party benchmarks – not plaintiff-contrived comparator plans.  But otherwise, this case is another example of a strike lawsuit attempting to legislate that it is somehow imprudent to include a few actively managed investment options in a diversified portfolio of high-performing, low-cost Vanguard index funds.

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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