Just ahead of the Thanksgiving holiday, another 401(k) plan fiduciary was sued for excessive fees and an allegedly imprudent selection of target-date funds.
The plaintiffs here[1]—Cheyenne Jones and Sara J. Gast, former employees of independent bottler Coca-Cola Consolidated Inc. and current participants in the Coca-Cola Consolidated, Inc. 401(k) plan, charged that the defendants breached their fiduciary duties to the plan by:
1. failing to fully disclose the expenses and risk of the Plan’s investment options to participants;
2. allowing unreasonable expenses to be charged to participants; and
3. selecting, retaining, and/or otherwise ratifying “high-cost and poorly-performing investments, instead of offering more prudent alternative investments when such prudent investments were readily available at the time that they were chosen for inclusion within the Plan and throughout the Class Period.”
As of Dec. 31, 2019, the plan had 10,170 participants with account balances and assets totaling approximately $784 million.
Freedom ‘Press’
Most of the arguments in the 38-page suit focused on the fiduciaries’ choice of the Fidelity Freedom funds, which were an active management target-date fund family, rather the “substantially less costly and less risky Freedom Index funds,” which were passively managed. The plaintiffs argued that not only were the Freedom funds “dramatically more expensive”[2] and riskier (“in both its underlying holdings and its asset allocation strategy”[3]), but also fall short on performance grounds.
“A simple weighing of the benefits of the two suites indicates that the Index suite is and has been a far superior option, and consequently the more appropriate choice for the Plan. Had Defendants carried out their responsibilities in a single-minded manner with an eye focused solely on the interests of the participants, they would have come to this conclusion and acted upon it,” they claim. In fact, the suit notes that, “by December 31, 2019, approximately 58% of the Plan’s assets were invested in the Active suite.”
The plaintiffs claim that, “considering just the gap in expense ratios from the Plan’s investment in the Active suite to the Institutional Premium share class of the Index suite, in 2019 alone, the Plan could have saved approximately $2.74 million in costs.”
It’s worth noting that one of the law firms representing the plaintiffs, Shepherd Finkelman Miller & Shah LLP, has filed several other suits against plans involving the Fidelity Freedom Funds.
Other Funds
The suit also takes issue with other fund options on the plan menu: Carillon Eagle Small Cap Growth Fund Class R5 (“…replaced in mid-2020 as an investment in the Plan, but had been consistently and significantly underperforming its benchmark, the Russell 2000 Growth Index, on a rolling five-year annualized basis and should have been eliminated from the Plan’s investment menu long before it was ultimately removed)” and the T. Rowe Price Mid-Cap Value Fund, which they claim “has consistently and significantly underperformed its benchmark, the Russell MidCap Value Index, on a rolling five-year annualized basis.”
The plaintiffs point to what they claim is “a further indication of Defendants’ lack of a prudent investment evaluation process” the “failure to identify and select collective trusts where available.” Oh, and as if that weren’t sufficient, they continue that “compounding this issue is Defendants’ failure to monitor the Plan’s investment options to ensure that they were in the least expensive available share class.”
Not that the claims were restricted to fund choices. The plaintiffs here allege that, as recordkeeper for the plan, “Fidelity is heavily incentivized to promote its own investment products, specifically those that charge the highest fees, to each plan for which it recordkeeps, including the Plan.”
Recordkeeping ‘Review’
“Another obvious indicator of Defendants’ breach of their fiduciary duties,” the plaintiffs allege, “is the Plan’s excessive recordkeeping costs.” Citing the 401(k) Answer Book, the suit claims that “the average cost for recordkeeping and administration in 2017 for plans much smaller than the Plan (plans with 100 participants and $5 million in assets) was $35 per participant,” and that since, as of Dec. 31, 2019, the Plan had approximately $784.5 million in assets and 10,170 participants, and “as the cost of recordkeeping services is dependent almost entirely on the number of participant accounts, and given the Plan’s size, and resulting negotiating power, with prudent management and administration, the Plan would have unquestionably been able to obtain a per-participant cost significantly lower than $35 per participant.”
Instead, the plaintiffs claim that, “as of October 2020, the Plan contracted for per-participant annual recordkeeping fees of $59, a figure 69% higher than that cited above,” whereas they claim that (“given its size and negotiating power”) “the Plan should have been able to negotiate a recordkeeping fee alone of no more than the $14-$21 per-participant figure that Fidelity has itself admitted its recordkeeping services were worth.” That admission turns out to be related to the experience of a completely different plan in litigation (Moitoso v. FMR LLC).
“As such,” the suit continues, “it is clear that Defendants either engaged in virtually no examination, comparison, or benchmarking of the recordkeeping fees of the Plan to those of other similarly sized 401(k) plans, or were complicit in paying grossly excessive fees. Had Defendants conducted any examination, comparison, or benchmarking, Defendants would have known that the Plan was compensating Fidelity at an inappropriate level for its size. Plan participants bear this excessive fee burden and, accordingly, achieve considerably lower retirement savings, since the extra fees, particularly when compounded, have a damaging impact upon the returns attained by participant retirement savings.”
The suit concludes that “the fact that the Plan was paying just investment-related fees of 55%-68% higher than the average total cost for comparable plans confirms the plain fact that Defendants failed to ensure that the Plan was paying reasonable fees and committed an apparent and significant breach of their fiduciary duties by failing to ensure that the Plan offered a lineup that charged participants reasonable and appropriate expenses.”
Will the court be persuaded? We shall see.
NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.
Footnotes
[1] The suit (Jones v. Coca-Cola Consol. Inc., W.D.N.C., No. 3:20-cv-00654, 11/24/20), was filed in the U.S. District Court for the Western District of California on behalf of plaintiffs by Whitfield Bryson LLP, Shepherd Finkelman Miller & Shah LLP, and Capozzi Adler PC.
[2] “Eight times higher than what shareholders of the corresponding Index fund pay.”
[3] The suit notes that “across the glide path, the Active suite allocates approximately 1.5% more of its assets to riskier international equities than the Index suite. The Active suite also has higher exposure to classes like emerging markets and high yield bonds.”
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