KEY POINTS: The Second Circuit held that comparisons to a fee disparity of a few random plans without the context of plan services and service quality does not satisfy the plausibility pleading standard for fiduciary imprudence claims.
The Second Circuit injected a needed dose of sanity into excessive fee cases by requiring actual and meaningful proof of excessive fees. But the key value of the Deloitte decision is how the Second Circuit distinguished the Seventh Circuit’s Hughes v. Northwestern and the Third Circuit’s Mator v. Wesco decisions. Why those excessive fee complaints met the plausibility standard, whereas the Deloitte case did not, will be decisive for the pending appeal in the Montefiore excess recordkeeping fee case and future cases.
We examine how to distinguish the recent Third and Fifth Circuit adverse appellate decisions compared to the pending Montefiore case. For future cases, we believe that defense lawyers need to admit that the Wesco and United Surgical cases had radically different plan fees with revenue sharing, and cannot be compared to low-fee plans sponsored by Deloitte and Montefiore. In addition, plaintiffs in both the Deloitte and Montefiore cases alleged false and inflated fees, and we must continue to insist that federal courts require accurate fees from fee disclosures and participant account statements as part of the pleading standard in an excessive fee case.
In Singh v. Deloitte LLP, the Capozzi Adler law firm followed the typical formula for an excessive fee lawsuit: (1) allege false recordkeeping fees from Form 5500 disclosures that are inflated by non-recordkeeping transactions fees; (2) compare those inflated fees to purportedly lower fees paid by a handful of random large plans; and (3) and then assert that the court must infer fiduciary malpractice for allowing excessive fees to plan participants because all large-plan recordkeeping fees and services are commoditized and fungible. Many courts fall for this misleading and prejudicial plaintiff-bar playbook, but the Second Circuit in the Deloitte case held that these conclusory and sparse circumstantial claims failed to meet the plausibility pleading bar in federal courts.
The Deloitte court held that the plausibility pleading standard requires participants to offer more than just the purported lower fees of a few random plans to infer fiduciary imprudence. It counters recent decisions that allow excess fee claims based on the conclusory assertion that all large-plan recordkeeping fees and services are commoditized. The Second Circuit held that comparisons to a few random plans without the context of plan services and service quality does not satisfy the plausibility pleading standard for fiduciary imprudence claims. The court applied a common-sense approach: claims of excessive fees require actual pleading of excessive fees compared to services and quality of services – not mere conjecture and deceptive comparisons to the lowest-fee plans that plaintiffs can find.
That is the headline – and a critical one it is – but it is not whole story. The key to the Deloitte case is how to distinguish this case from the recent adverse decisions in the Third (Mator v. Wesco) and Fifth Circuit (Perkins v. United Surgical Partners International, Inc.). There is another excessive fee appeal pending in the Second Circuit against Montefiore Hospital (Boyette v. Montefiore Medical Center). The oral arguments in the Montefiore appeal centered as to how the Deloitte case compares to the Montefiore case, and more critically, how to distinguish the Deloitte and Montefiore cases from the recent Wesco and United Surgical cases.
Defense lawyers – and even the Deloitte court – suggest that the Wesco complaint survived a motion to dismiss because plaintiffs somehow pled more comparators plans, i.e, they somehow drafted a better or more complete excessive fee imprudence complaint. That is trap. If number of comparator plans is all that distinguishes whether an excessive fee case is plausible, then plaintiffs in the next case will offer a chart with ten, or even 15 plans. [Note that plaintiffs in the Deloitte got creative and offered an expert report with the complaint, but the court held that an expert opinion cannot “rescue” a deficient pleading]. A chart of random plans – even if the chart is longer – is still not a statistically meaningful comparison with sufficient credibility as to what jumbo plans actually pay for recordkeeping fees.
By contrast, the key to distinguishing the Wesco and United Surgical cases is to compare the actual fees in those plans by relative plan size. When you do that, you quickly learn that Wesco and United Surgical plans had concerning plan fees – with target date funds at 90+ bps and significant revenue sharing. Those plans offered investments with much higher fees, and may actually have been legitimate and plausible excessive fee cases. We do not assume any fiduciary malpractice, especially given that both plans were smaller than the jumbo Deloitte plan, but those cases have different fee and investment structures. The cases are distinguishable because of higher plan fees – up to nine times higher than the Deloitte plan – not because the plaintiff law firm somehow did a better job adding comparator plans to the complaint.
Until defense lawyers stop trying to argue that every single case should be dismissed, then we will continue to risk creating bad law like we did in Wesco and United Surgical. The way to create a comprehensive, uniform, and useful pleading standard is for plan sponsors and their defense lawyers to admit when an occasional excess fee case may actually meet the pleading standard [and not file a motion to dismiss in every case]. That is the only credible way to compare the Deloitte and Montefiore cases to the Wesco and United Surgical cases. The Deloitte and Montefiore plans had low fees, and it is absurd and unfair to allow an excessive fee fiduciary malpractice case against plans with super-low fees. By contrast, Wesco and United Surgical plans had higher fees. We will demonstrate that below. We hope America’s defense lawyers are listening, because that is not clear from the uninspiring answers defense lawyers gave to questions in the Second Circuit oral arguments. [You can listen for yourself on the Second Circuit website].
Finally, we also must demand accurate fees to plead excessive fee cases. We think the Second Circuit got the pleading standard right in the Deloitte case by rejecting comparisons to out-of-context, random plans. But they still assumed the truth of plaintiffs’ inflated recordkeeping fee amounts, even though the participant fee disclosures showed significantly lower fees. Why federal courts allow plaintiff lawyers to lie about plan fees remains a mystery.
The Deloitte Excess Recordkeeping Fee Case
The prolific Capozzi Adler law firm filed the initial excessive fee case against Deloitte in October 2021. Plaintiffs alleged that Deloitte sponsored two plans with $7.3 billion in assets and 89,027 participants in 2019 in which Vanguard was the recordkeeper. The complaint alleged that the plan fiduciaries “saddled” the plans’ participants with above-market administrative and recordkeeping fees. Specifically, the complaint alleged the recordkeeping fees at $59.58 to $70.31 for the 401k plan; and from $221.29 to $331.01 for the smaller profit-sharing plan (with 7,388 participants).
Plaintiffs alleged that these recordkeeping fees were “astronomical when benchmarked against similar plans.” The complaint used a chart of seven plans sponsored by large companies with recordkeeping fees that were supposedly between $21 and $34 [example, Publicis: 48,353/$3.2B at $21; and Danaher: 33,116/$5.2B at $34]. To keep track, alleged fees of $50.59 to $70.31 were compared to $21 to $34. [As we will discuss below, participant fee disclosures showed fees that went from $40 to $21 over the same time period].
The Southern District of New York dismissed the initial complaint on the grounds that plaintiffs were “disingenuous” by comparing the Plan’s combined direct and indirect cost for recordkeeping with only the direct costs of the comparator plans. The court held that the excessive fee complaint did not employ an apples-to-apples comparison from which to infer imprudence.
Capozzi Adler got back to work with a proposed First Amended Complaint, which also alleged “outrageous” recordkeeping fees. The only change we can find in the updated comparator chart is that plaintiffs took out one of the seven plans from the previous chart, with the comparison to Sutter Health’s plan deleted. Plaintiffs did not address the court’s concern that they were comparing direct and indirect fees that Deloitte participants paid the recordkeeper to seven plans with just direct recordkeeping fees. Plaintiffs kept the same claim that Deloitte participants were paying $59.58 to $70.31 in recordkeeping fees. The fees for the profit-sharing plan, however, were lowered to a purported range of $87.10 to $207.57.
The new wrinkle in the Amended Complaint was a declaration from purported industry expert Francis Vitagliano that the plan charged excessive recordkeeping and administrative fees. Mr. Vitagliano’s declaration asserted that based on his 35 years of experience, Deloitte Plans should have been able to obtain RK fees of $23 to $26.
The complaint also added many assertions that the costs for recordkeeping services vary little for plans with a substantial number of participants; and that recordkeepers offer the “same range of services and can provide the services at very little cost.” The amended complaint also alleged “there is no indication that defendants conducted RFPs at reasonable intervals.”
Finally, the complaint asserted the well-worn claim that Fidelity admitted in the excessive fee case involving its own sponsored plan that its recordkeeping services are only worth $14 to $21 per participant. And then it offered the 2020 NEPC market survey that found that plans with over 15,000 participants paid “slightly over $40 per participant in RK fees,” with the worst performing plans paid no more than $60 per participant. The amended complaint does not seem to notice that the NEPC survey had higher recordkeeping amounts than all six plans on the comparator chart. [But most importantly, keep the NEPC survey results in mind for the end of this blogpost, when we show you the fee disclosure amounts that reveal that the Deloitte plan had actual fees that started at $40 in 2015 and were reduced to $21 by 2021. The “outrageous” excessive fees of $59 to $70 were exaggerated and just plain wrong.]
Upon review of plaintiff’s proposed amended complaint, the district court denied Plaintiff’s motion to amend on futility grounds, concluding that plaintiffs had not cured the pleading deficiencies in their original complaint. As to the comparison of the plan’s direct costs for recordkeeping with the direct costs of comparator plans, the district noted that this comparison shed limited light on the plausibility of plaintiffs’ allegation that the Plan’s total recordkeeping costs were excessive given that “plaintiffs’ allegations highlight that a plan’s indirect costs may range widely from year-to-year.” [ENCORE NOTE: We are not sure that courts understand the concept of “indirect costs.” The industry use of the term “indirect cost” relates to revenue sharing, which does not appear to apply here. We think courts, and maybe even defense lawyers, are using the term “indirect costs” to refer to transaction fees paid by individual participants for plan transactions, like QDRO or loans fees. Transaction fees paid to recordkeepers are what inflate the fees recorded in Form 5500s. Transaction fees are not recordkeeping fees, but that appears to be confused in this case.]
More generally, the district court concluded that the proposed amended complaint still lacked sufficient factual allegations regarding the type and quality of recordkeeping services provided by the Plan and its allegedly less-expensive comparators: “Without allegations comparing specifically the quality of services rendered, or the number of services provided, between the Plan and its comparators, the conclusory allegations that ‘[n]early all recordkeepers in the marketplace offer the same range of services’ and ‘[n]umerous recordkeepers in the marketplace are capable of providing a high level of service,’” failed to state a plausible claim.” The district court also concluded that plaintiff’s reliance on the expert declaration of Francis Vitagliano at the motion to dismiss stage was improper, because it “is simply a conclusory statement of the plaintiff’s argument and . . . does not move the allegations rom possible to plausible.”
The Second Circuit’s Decision in the Deloitte Appeal
The Second Circuit started its decision by agreeing with the district court that the First Amended Complaint (FAC) fails “to do more than allege conclusorily that the Plan’s recordkeeping fees exceeded those of a select handful among the many other plans available on the market. The Second Circuit test from prior case law is that “plaintiffs need plausibly to allege that challenged fees were excessive relative to the services rendered, or to provide allegations concerning other factors relevant to determining whether a fee is excessive under the circumstances.” The court noted that it is “simply common sense” for plaintiffs to provide “that the fees were excessive relative to the services rendered.” Complaints need to give the “kind of context that . . . move the recordkeeping claim from possibility to plausibility.” Citing other circuits, “[a] court cannot reasonably draw an inference simply from the allegation that a cost disparity exists, rather, the complaint must state facts to show the funds or services being compared are, indeed, comparable.”
In the Deloitte FAC, the court held that plaintiffs alleged “next to nothing” about the recordkeeping services provided by the Plan or by the six other large plans that the FAC cited as allegedly lower-priced comparators. Plaintiffs failed to provide allegations as to “other factors” relevant to determining whether a fee is excessive under the circumstances. The FAC asserted that all RKs are able to provide a high-level of service, but was “silent” on the number of services actually provided by either the Plan or its alleged comparators, and did not allege “what level of service the Plan provided.”
Plaintiffs countered that the services chosen by a large plan do not affect the amount charged for “basic and fungible services,” but the court noted that the FAC’s own “sparse” allegations “show a range of recordkeeping fees even among the six large comparator plans, belying the implication that the allegation of cost disparity alone, without some consideration of the surrounding context, categorically suggests imprudence.” The court reiterated that plaintiffs must allege a “meaningful benchmark.”
In the final section of the court’s decision, the Second Circuit distinguishes the Hughes v. Northwestern and Mator v. Wesco decisions in which appellate courts held that the excessive fee complaints met the plausibility standard. The court held that the Hughes complaint presented a “a different picture” than the Deloitte complaint, because plaintiffs in that case “made multiple allegations relevant to concluding that the fee was excessive”: they contended that “the quality or type of recordkeeping services provided . . . [was] comparable to that provided by Fidelity and TIAA”; plaintiffs also pleaded that Northwestern was imprudent to maintain a second recordkeeper while other plans consolidated to a single recordkeeper for the same services; and they provided concrete examples of other university plans “that successfully reduced recordkeeping fees by soliciting competitive bids, consolidating to a single recordkeeper, and negotiating rebates.” The court held that the Deloitte plaintiffs’ “sparse allegations are simply not comparable.”
Next, plaintiffs argued that their complaint was similar to the excess fee case before the Third Circuit in Mator v. Wesco Distribution, Inc., 102 F.4th 172 (3d Cir. 2024). The court disagreed, finding that the complaint in Mator pled with specificity the recordkeeping services provided by the Wells Fargo plan, as well as the similarity of the services to those provided by lower-priced comparators. For instance, the Mator plaintiffs specifically alleged that the price per person of total recordkeeping costs for Wells Fargo was three to four times that of five other plans serviced by Wells Fargo itself, even though these other plans received the “same services” and the same level and quality of service.” The Mator complaint also compared the Wesco plan’s fees to those of 11 other plans serviced by several of the “top recordkeepers by number of plans for plans with assets in excess of $200 million,” which “all provided identical or similar services of the same quality” to those provided by Wells Fargo to the plan.
The court also noted that the Mator plaintiffs provided a comparison of estimated total fees, as opposed to direct fees alone, and also specifically alleged “that either the Plan’s ‘direct fees alone’ or its ‘indirect fees alone’ were ‘unreasonable compared to the total fees . . . that other similar plans paid.’” Moreover, the Wesco plaintiffs alleged that the plan at issue there switched recordkeepers in 2020, and paid a much lower flat fee per participant for the same services and at the same level of quality. Specifically, the complaint alleged that the plan switched to Fidelity for recordkeeping services which lowered the fee from $154 to $54 per participant at the same service level.
KEY POINT #1: The low-fee Deloitte plan is different from the higher-fee plans in the Third Circuit Wesco and Fifth Circuit United Surgical cases. Defense lawyers must distinguish these cases based on comparisons to the plan fees and investments: Deloitte was a low-fee plan with a fixed participant recordkeeping fee and super low-cost Vanguard index investment options; by contrast, the Wesco and United Surgical plans paid recordkeeping through revenue-sharing of higher-cost active investments, with most fees above 90 bps. In sum, a single investment option in the Wesco plan was nine times higher than the all-in fee paid by participants in the Deloitte plan.
The Deloitte case was one of two excessive recordkeeping fee cases pending in the Second Circuit. A second excessive recordkeeping fee case remains pending against Montefiore Medical Center. In both cases, the Capozzi law firms premised their arguments before the Second Circuit on the pitch that (1) plaintiffs need a low threshold to plead fiduciary breaches for excessive fees, because plaintiffs lack sufficient information at the initial stages; and (2) that there should be no requirement to benchmark the alleged excessive fees, because all recordkeeping fees are fungible and priced based on participant size regardless of the services rendered. The premise of these claims is that plaintiff lawyers want an unfettered right to sue plan sponsors for excessive fees with no gatekeeping threshold by federal judges. As we saw, the Second Circuit rejected this approach in the Deloitte case.
The questions in the oral arguments of both the Deloitte and Montefiore appeals focused on how to distinguish the two cases, and how the two cases compare to the recent decisions in the Third and Fifth Circuits in which the courts both held that plaintiffs had met the plausibility pleading burden in excessive fee cases. The answers by the defense lawyers in both appellate arguments were less than persuasive. They seem to suggest that the complaints in the Wesco and United Surgical cases were somehow more robust. That is not true. The initial complaint in United Surgical offered no comparator plans with purportedly lower fees. The only benchmark in the United Surgical case [with a $455m asset plan and 16,605 participants) was the 2019 NEPC recordkeeping survey in which NEPC found that “no plan with over 15,000 participants paid more than $69 per participant in recordkeeping and administrative fees.” When the complaint was amended, it included the same chart of purported comparator plans used in nearly every excessive fee case.
The Wesco complaint, as described by the Deloitte court, compared the Wesco plan to five other plans that used Wells Fargo as the recordkeeper, including the 401k plan sponsored by Red Lobster, and ten plans that used other recordkeepers. Just for the record, Red Lobster just went bankrupt when they did not charge enough for all-you-can-eat shrimp platters. It is not a statistically relevant comparator from which to infer fiduciary malpractice. The Deloitte court failed to note that the ten purported comparator plans ranged in size from $231m to $1.3b, and participant size from 4950 to 13,502 [note that the Wesco plan was 8,562 and $670m] – again, not statistically relevant.
You cannot compare excessive fee complaints without comparing the fees and investments of the plans. You can learn the fees of the Deloitte, Montefiore, Wesco and United Surgical plans by studying the attachments to the motion to dismiss in each case. Defense lawyers attached participant fee disclosures in two of the cases. The plan financials give clues of plan fees for the other two plans. The results are revealing, and instruct defense lawyers how to demonstrate why Montefiore should win its appeal, and why Wesco and United Surgical lost their appeals. In excessive fee cases, it is all about the plan fees.
- (1) Deloitte: The 2021 fee disclosure attached to the motion to dismiss briefing reveals that the Deloitte plan in 2021 had a $29 fixed per-participant recordkeeping fee from Fidelity [down from $40 per participant six years earlier], and a diverse offering of low-fee Vanguard investment options: the QDIA was Vanguard target-date funds at .0425%; seven domestic equity index mutual funds offered by Vanguard, including the super-low fee Institutional 500 Index Trust at .011%, Small Cap Index Fund at .03%, and Value Index Fund at .04%. The appellate court’s opinion indicates that the 2022 recordkeeping fee went down to $22 per participants. This is a super-low fee plan with all-in plan fees under 10 bps. It is one of the lowest fee plans in the country.
- (2) Montefiore: We do not have complete information about the 403(b) plan sponsored by Montefiore Medical Center with $3.8B in assets and 22,942 participants in 2023, but we have enough from plan financials to demonstrate that the excessive fee lawsuit filed by Capozzi Adler was intentionally misleading with respect to the plan fees and investments. The initial complaint alleged recordkeeping fees that ranged from $136.51 in 2017 to $230.25 in 2020, but the appellate court brief filed by McDermott Will & Emery lawyers states that the amount paid to the recordkeeper divided by the number of plan participants’ varied from $34 to $63 between 2016 and 2022. The average recordkeeping fee was $41 per participant – not the fabricated $230 alleged in the initial complaint. In fact the third amended complaint lowered the alleged excessive fees from $230 to $41 without any mention of the discrepancy. The initial complaint alleged a .127% asset-based fee, but the truth was that the fee was .073% — reduced to .037% – and reduced further to .029%. The plan renegotiated for lower recordkeeping fees twice, and even changed recordkeepers to reduce fees. The revenue sharing on active funds were credited back to participants on active funds with higher share classes. Importantly, the four excessive fee complaints leave out the QDIA in the plan is low-cost BlackRock LifePath target-date funds; the largest investment in the plan with $402m invested is low-cost Vanguard Institutional Index; and the next largest investment is $242.3m invested in Vanguard Extended Market Index. If you include the amounts invested in the BlackRock LifePath funds, the vast majority of the plan investments were in low-cost index funds without revenue sharing. It is a low-cost plan.
- (3) Wesco: The Wells Fargo participant fee disclosure for 2016 discloses that the plan offered a QDIA of “target maturity” funds offered by Manning & Napier. The 2015 glide path had gross fees of 2.0000% and net percentage fees of .8600%. We see only one index fund in the plan, and it is a Wells Fargo/BlackRock S&P 500 Index CIT at .2420%. This is ten to twenty-five times higher than most competitor S&P 500 index funds, even eight years ago. Other investment options include the Baron Small Cap Instl fund at 1.0400%; and the JPMorgan Mid Cap Value Instl at .9400%. We see no specific reference on the participant fee disclosure to recordkeeping fees – just plan transaction fees are listed. This likely means that the recordkeeping fees are paid through revenue sharing. This is confirmed in the appellate court decision in which it is noted that the plan paid Wells Fargo direct asset-based fees of $50 to $82, for an average of $66. Wells Fargo was also paid indirect fees (revenue sharing payments from plan investments) of between $80 and $103 – on average, $91. Thus the total per-participant fees (direct plus indirect) ranged from $110 to $185 – on average $153-$154. In July 2020, the plan switched to Fidelity for a flat fee of $54. The complaint also alleges that the plan was invested in higher-cost retail share classes. This is a high-fee plan with all sorts of potential issues. The switch to a $54 fixed fee should be a subsequential remedial measure that is inadmissible to prove fiduciary imprudence, but it cannot be compared to the Deloitte low-cost plan.
- (4) United Surgical: This is a smaller $450m plan than the other three cases, but the plan has a lot of participants (16,605 in 2018). The investment fees for the T. Rowe Price Retirement target date funds are some of the highest we have seen. The Complaint alleges fees of .90-.96% in the ADV share class when I share class were offered at .49-.51%. That is still higher than what TRP offers to most plans. We do not have the participant fee disclosures for the United Surgical case, so we need to rely on plan financials attached to the Form 5500. The complaint alleges minimal direct recordkeeping fees [ex: $328,716 in 2018], with most of the fees paid through indirect revenue sharing [$1.3m in 2018]. The alleged recordkeeping fees ranged from $76.09 to $98.35. We assume that includes transaction fees that are not revenue sharing, but the complaint lists all the revenue sharing percentages for every investment from the plan financials attached to Form 5500, which ranged .10% to .35% [example .35% Principal Midcap R5/JP Morgan Small Cap Growth – Class SE]. As noted, the plan QDIA was T. Rowe Price target-date funds at .83% to .96. The plan offers no index investment options. The plan offers ten investment options (other than the TRP target-date funds). The lowest fee is the .56% Invesco Comstock Y fund at .56%, with other options at high fees [example: Fidelity Blue Chip Growth at .80%; and JP Morgan Small Cap Growth I at .99%]. This is a high-fee plan.
The Second Circuit asked the defense lawyers how the Deloitte and Montefiore cases compare. The Deloitte plan is a best-in-class plan with low recordkeeping fees and low investment fees. Any lawsuit alleging excessive fees against this low-fee plan should have been laughed out of court. Any plaintiff lawyer suing this plan for excessive fees should be sanctioned. It is even more concerning that the lawyer suing this low-fee plan for excessive fees misrepresented the fees of the plan, even though the lawyer had participant account statements showing low recordkeeping fees that went down from $40 to $22 over six years. Again, the purported fiduciary malpractice complaint in federal court against the Deloitte plan alleged “outrageous” recordkeeping fees. It is a fraud on the federal court system.
Most plans will compare unfavorably to the Deloitte plan. The Deloitte fees are rock bottom low. But the Montefiore plan is still a credible plan in which all inferences should be of good fiduciary cost management – not fiduciary malpractice. You need to start the analysis with the BlackRock LifePath low-cost index target-date funds, and the two largest investments are low-cost Vanguard index funds. The plan is grounded in low-cost index investments. The recordkeeping fee is percentage-of-asset based, which allows participants to pay different fees, but this is entirely appropriate in plans with many participants with low account balances. The average recordkeeping fee of $41 is reasonable. More importantly, the plan showed a history of fee reductions, and all revenue sharing on active investments is rebated. In sum, this is not the rock-bottom fees of the Deloitte plan, but the Montefiore fiduciaries were unfairly sued for alleged fiduciary imprudence. They showed a pattern of fee reductions in a plan grounded in low-cost index funds.
The next question is how to distinguish the Deloitte and Montefiore plans from the Wesco and United Surgical cases which the Third and Fifth Circuits respectively held met the plausibility pleading standard. We are very concerned that the Deloitte court found that the Wesco excessive fee complaint adequately pled excessive fees with sufficient specificity. We believe that the Wesco complaint is no different than other excessive fee complaints, and that the references to the same plan services and service quality are pure conjecture. There is no proof that the five comparator plans with the same Wells Fargo recordkeeper offered the same recordkeeping services and service level. The Deloitte court rejected two Vanguard comparators in the Deloitte complaint as conjecture, so we do not understand why a bald statement that service quality is the same is enough. But the real difference in the Wesco complaint is that there was an allegation that the plan switched recordkeepers to Fidelity and achieved a fee reduction from $154 to $54 per participant. In addition, the fees were four to five times higher than the comparator plans – a much more significant disparity. These two reasons – (1) a change to a fee that was three times lower and (2) comparators that are five times lower – likely is why the Wesco complaint satisfied the requirement that services and quality were comparable.
We still find the plan comparators in the Wesco case troubling, as the Deloitte decision opens the door to plaintiffs filing complaints with more comparators and cursory assertions that the services and quality standards are identical without any proof. The real difference between the Deloitte and Wesco cases was not the number of comparators in the respective complaints, or that the Wesco complaint was clearer in alleging comparable service quality in the comparator plans. Instead, the real difference is that the Deloitte plan had all-in fees of less than 10 bps [plan recordkeeping at less than 3 bps at $29 fixed, and a 4.5 bps QDIA], whereas the QDIA in Wesco was 90 bps – nine time higher than the Deloitte plan. The fees in Deloitte are fixed, on a per-participant basis, and rock bottom, whereas the Wesco plan had high-cost target-date funds. The same is true of the United Surgical case.
District and appellate courts may not understand the differences between the plans. But defense lawyers need to do a better job of comparing and contrasting these cases. They are radically different. The difference is not the quality of the complaints alleging excessive fees. The complaints have the same basic formula: (1) fees that are inflated from the Form 5500; and then (2) compared to misleading comparator plans. The complaints are similar, but the fee and investment structures are completely different. Deloitte had fixed recordkeeping fees and low-cost index funds. Wesco and United Surgical had variable revenue sharing models for recordkeeping and high-cost target-date funds that might not be in the lowest available share classes for institutional investors. We cannot infer fiduciary imprudence, but we can see the stark differences in the plans.
Defense lawyers must stop treating all cases the same. They are not. Wesco was a high-fee case. The fee disclosure attached to the motion to dismiss shows that defense lawyers should never have filed a motion to dismiss. The plan offered a QDIA of the Manning & Napier Target Date Funds with alarming fees: the 2045 vintage were 2.090% reduced to .88% after revenue sharing. The 2035 fees were 1.40% reduced to .88%. Wesco may be a legitimate excessive fee case. When the appellate in the Second Circuit asks the defense lawyers how the Montefiore and Deloitte cases are the different, the defense lawyers need to learn the cases. They are different. Deloitte offered Vanguard index TDFs at .0425%, no revenue sharing, and a $29 fixed RK fee that was reduced over 50% in six years. The cases are radically different. But by filing motions to dismiss in every case, they created bad case law. The least we can do is to compare and contrast the cases to ensure that illegitimate excessive fee cases are dismissed. Wesco is a legitimate excessive fee case – unlike 95+% of all other cases. But by not being able to distinguish the sheep from the goats, we harm all other plan sponsors by inviting bad case law.
KEY POINT #2: We must not allow plaintiff lawyers to misrepresent plan fees in excessive fee cases. The fees alleged must match participant account statements and fee disclosures, and not accepted as “true” when they are false.
One key issue remains relating to false fees alleged in excessive fee cases. Plaintiffs alleged that Deloitte allowed “outrageous” recordkeeping fees in its plan. They alleged that Deloitte allowed fees that ranged from $46.23 to $65.24. They asked for an inference of fiduciary malpractice based on the circumstantial evidence of the fees they alleged compared to a few random plans. We already told you the fees from the participant account statements issued to the participants who sued Deloitte. The fees for 2021 were fixed at $29 per participant, and lowered to $22 per participant the next year. The appellate court noted in footnote 11 stated that the 404(a)5 disclosures reveal that “annual per-participant recordkeeping and administrative fees for the Plan declined or stayed stagnant each year from 2015 ($40) to 2022 ($22), and were lower than the FAC’s fee calculations.” The court accepted as “true” the FAC’s allegations as to the Plan’s direct recordkeeping costs, “but note[d] that this discrepancy goes unremarked in the FAC.”
Why do federal court accept as “true” fake fee allegations in cases about those exact fees, when they are directly contradicted by regulator-required filings from reputable third-party recordkeepers? The fees alleged at $65.24 were false – they were never above $40, and went down to $22. The actual fees met the contrived benchmarks and comparator plans in the excessive fee complaint.
Why do federal courts allow plaintiff law firms to lie about the very key fact of the case: the fees? There is no issue of fact as to the fees charged. They are in the fee disclosures and account statements. Period. End of story. But the story is not over, because Deloitte and its fiduciary insurance companies paid millions of dollars to Morgan Lewis defense lawyers to defend a bogus and fake excessive fee case.
The same is true in the Montefiore “excessive” fee case, although the false fees alleged are more dramatic. In the Montefiore case, plaintiffs alleged in the initial complaint that the recordkeeping fees were $230. The fourth complaint finally admitted the truth that the fees were actually $41. $230 compared to $41. Soak that in and remember this disparity the next time a plaintiff asks a federal court to assume their excessive fee complaint allegations are somehow “true.”
Federal courts must stop the false fee misrepresentations. They must stop assuming any fees are “true” when contradicted by participant-account statements and DOL-mandated fee disclosures. When plaintiff lawyers allege false fees to allege fiduciary malpractice for excessive fees, it is litigation abuse. It will not stop until lawyers are sanctioned and required to meet the bare-minimum ethical requirements of the legal profession. Doctors need to do no harm. Lawyers should tell the truth.
