A lawsuit alleging excessive fees and imprudent investments with assets from a 401(k) plan has cleared the hurdle of achieving class action certification. Although the case’s outcome is still far from a resolution, one employment attorney says it can provide a teaching moment for due diligence in retirement investments by employers.
Judge Robert Blackburn, U.S. District Court Judge for the District of Colorado, granted class-action certification for elements of Troudt v. Oracle Corp. on Jan. 30. Oracle’s 401(k) plan participants filed the suit in 2016 in Colorado federal court under the Employee Retirement Income Security Act. The case has alleged Oracle incurred unreasonable expenses on its 401(k) plan by paying uncapped fees to plan trustee Fidelity Management Trust using a revenue-sharing model based on the plan’s assets, rather than a fixed-fee model tied to the number of participants.
According to the complaint, the plan’s assets increased from $3.6 billion to more than $11 billion between 2009 and 2014. That meant Fidelity’s revenue also increased significantly, despite no change in the services it provided, the complaint stated.
The case also alleges the defendants did not have a prudent process for choosing and keeping investment options.
According to the complaint, the defendants “breached their fiduciary duties of loyalty and prudence and engaged in transactions expressly prohibited by ERISA … by failing to act solely in the interest of plan participants and failing to adequately monitor the investment options in, and service providers to, the plan.”
Blackburn granted class certification for the plaintiffs’ excessive fee claims and two of the lawsuit’s claims of imprudent investments, but limited the class for the investments.
“I think we always look at these cases to see what could have been done a little bit better, and how we can find best practices,” said Kirsten Stewart, a labor and employment attorney with Sherman & Howard whose specialties include the Employee Retirement Income Security Act. She is not party to the case. “So it’s just another set of facts that can help support another case in the future.”
Among the case’s allegations, the complaint claims Oracle used Fidelity Management Trust since 1993 without ever fee-shopping for lower costs.
“That’s something that we always put in the back of our mind, another thing to put on a checklist of what to go over with clients,” Stewart said. “It would also, for plaintiffs’ attorneys, be another thing that they might look at.” But she added she doesn’t believe the case reaching class action certification is in itself surprising.
Plaintiffs’ attorney Jerome Schlichter of Schlichter Bogard & Denton has taken on a number of high-profile lawsuits in the past several years over 401(k) fees. In one case, he reached a $62 million settlement with Lockheed Martin in 2015.
“We’re pleased that the court granted class certification to the Oracle employees and retirees for their claims of excessive fees and imprudent investments,” Schlichter wrote in an email. “We’ll now move forward to a trial to restore the losses they have incurred.”
Attorneys from Brownstein Hyatt Farber Schreck and Morgan Lewis representing the defendants did not comment.
Stewart said companies use the flat-fee model for 401(k) plans more commonly than a model based on plan assets.
“The argument is that it costs as much to run a plan when it comes to 1,000 participants in some instances as it does if you have 20 participants,” she said. “But I think it’s just something that each plan fiduciary and committee has to walk through in determining what the best way of allocating those assets would be.” She explained revenue-sharing models have declined in popularity because the use of plan assets to offset costs of servicing them are not always clear to the participants.
Although Troudt v. Oracle Corp. may provide guidance in future cases filed under ERISA, it won’t amount to a silver bullet that provides a clear-cut resolution to all of them. Stewart said she believes lawsuits over 401(k) plans will likely continue.
“It can be pretty expensive to have a good retirement plan that has investments, that has a record keeper and an administrator who knows what they’re doing,” she said. “There’s more focus on people retiring and trying to have as much retirement savings as possible. And so I just don’t see these cases going away, really.”
Stewart added that recent worry over the stock market’s performance may be creating additional scrutiny on choices employers make about their 401(k) plans.
“With all these cases, you get better ideas of what best practices are,” she said. “With the stock market and concerns about the social security administration … I think it’s all another thing to focus on and be concerned about,” Stewart said. “It all depends upon the due diligence and the thought process that the company or the committee used to determine what they thought was the most reasonable and prudent way of sharing those fees.”