Employees take legal action against their company's 401(k)

A group of medical professionals claim their employer's retirement investments were unfairly expensive

By Darla Mercado

Mar 12, 2014 @ 3:13 pm EST

A group of medical professionals are suing their employer, health care provider Novant Health Inc., arguing that the company violated its fiduciary duty by offering excessively costly 401(k) investments and overpaying its providers.

Karolyn Kruger, a medical doctor, and a slate of fellow workers for Novant, filed suit against the company Wednesday in the U.S. District Court for the Middle District of North Carolina. Named defendants include Novant's administrative committee, retirement plan committee and a roster of 40 John Does.

“We have not been officially served with the lawsuit and cannot comment on active litigation," said Caryn Klebba, a company spokeswoman, in a statement. "Novant Health has a retirement plan committee, which is appointed by Novant Health's board of trustees, which carefully oversees the selection of the retirement plans' investment options and all associated fees."

Jerome Schlichter of Schlichter Bogard and Denton is representing Dr. Kruger and the group of plaintiffs. Mr. Schlichter has made headlines recently due to multiple cases he's filed against some sizable plan sponsors. Last June, he notched a $35 million settlement against Prudential Retirement Insurance Annuity Co. and Cigna Corp., representing a group of Cigna plan participants who alleged that the plan profited from self-dealing at the expense of its own workers.

Novant's retirement plan featured two components: a “tax-deferred savings plan” that held participants' contributions, and a “savings and supplemental retirement plan” that was designated for employer matching contributions, according to the lawsuit.

The plan had a sharp increase in assets in recent years, according to Dr. Kruger's complaint. In 2008, Novant's plan held about $612 million in assets, growing to $940 million in 2009. By 2012, the assets jumped to $1.42 billion.

Despite that sharp spike in assets, Novant allegedly stuck with its menu of retail-share-class mutual funds when participants would have saved money on cheaper options, according to the lawsuit.

In one example of an offering, The Thornburg International Value R3 fund (TGVRX) ran at a cost of 145 basis points, but the institutional share class (TGIRX) would have cost only 76 basis points. The BlackRock Inflation Protected Bond A (BPRAX) cost 86 basis points in the retail share class version, but only 43 basis points in the institutional share class version (BPRIX).

“Given the massive bargaining power of a plan at or near $1 billion in total plan assets, a 'large' plan in industry terms, prudent fiduciaries consider far-lower-cost investments that are accessible to institutional investors,” the plaintiffs noted in their complaint.

Great-West Life & Annuity Insurance Co. was the record keeper to Novant's plan, and though the insurer wasn't a named defendant in the suit, plaintiffs allege that the insurer received excessive payments for its services.

Great-West allegedly received $195,899 in direct pay from Novant's plan in 2009, and received about $2.4 million in pay from the plan the following year, “without providing additional services,” according to the complaint.

“Despite a reasonable per-capita fee for these services being no more than $35 for a plan of this size in terms of total participants,” the plaintiffs noted, “the plan paid almost $98, or 180% higher than a reasonable fee for these services.”

“For retirement plans with total plan participants from 15,000 to 25,000 participants like the plan for the services provided, a reasonable per-capita fee paid by retirement plan participants should not exceed $35,” the plaintiffs claimed.

The recordkeeping fee hit $3.7 million in 2011 and fell to $2.27 million in 2012, per the lawsuit.

Great-West allegedly also received revenue-sharing payments from the investment management firms it featured on its platform, according to the complaint. The defendants allegedly failed to request bids from competing record keepers, according to the suit.

“To the best of our knowledge, we're not a party to this lawsuit,” wrote Lisa Gigax, a spokeswoman with Great-West, in an e-mail. “Moreover, as a matter of policy we don't comment on pending litigation.”

The complaint also singled out the brokerage firm servicing the plan, D.L. Davis & Co., though the company was not a named defendant in the suit. D.L. Davis allegedly received commissions from the plan totaling $827,885 in 2009, $779,028 in 2010 and $1.99 million in 2011, without the services changing in any material way, according to the suit. “This substantial increase in payment, by over 155%, by the plan between 2010 and 2011 to Davis was a material change in circumstances of the plan and constitutes a grossly excessive payment,” plaintiffs alleged.

Commissions paid to Davis allegedly climbed as high as $5.99 million in 2012, according to the suit. The amount was adjusted to $3.7 million after Novant received a letter from Dr. Kruger, per the suit, but the “originally stated 2012 amount and the purported amended amount … are far in excess of a reasonable fee for these services.” Davis also received revenue sharing from the retirement plan, as well as additional compensation from Novant's employee benefit plans, including the company's vision, accidental life insurance and other types of insurance coverage, according to the suit.

The Novant defendants are all charged with disloyalty and imprudence with respect to the investment options available and the excessive payments to Great-West and D.L. Davis. They are also charged with failure to monitor fiduciaries and fiduciary breach.

Calls to D.L. Davis were not immediately returned.

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