Pension & Benefits News Fee arrangement with recordkeeper did not breach fiduciary duties of prudence and loyalty
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Wednesday, July 10, 2019

Fee arrangement with recordkeeper did not breach fiduciary duties of prudence and loyalty

By Pension and Benefits Editorial Staff

Plan participants could not establish that plan fiduciaries breached their duties of prudence and loyalty by allowing for allegedly excessive fees, including revenue sharing, to be paid to a recordkeeper that maintained a business relationship with the plan sponsor, according to a federal trial court in Colorado. The participants, however, were allowed to continue pursuing claims that the fiduciaries improperly retained an underperforming investment option.

Fee arrangement with business partner of plan sponsor. Oracle Corporation maintains a 401(k) plan that covers over 65,000 participants and holds more than $12 billion in assets. The Oracle 401(k) Committee (comprised of Oracle executive employees) was responsible for the selection and monitoring of plan investments, as informed by an Investment Policy Statement.

Fidelity Management Trust Company (Fidelity) was retained as the designated recordkeeper and trustee for the plan. In addition, Oracle retained Mercer Investment Counseling (Mercer) to assist the Committee in monitoring and managing the plan’s investments and costs.

Plan participants brought suit individually and as a class, alleging that the Committee and other plan fiduciaries: (1) breached their duty of prudence under ERISA by failing to monitor the allegedly excessive fees (including revenue sharing) paid to Fidelity and/ or failing to request competitive bids for the plan’s recordkeeping services; and (2) breached their duty of loyalty by retaining Fidelity as the recordkeeper, despite its high fees, in order to advance Oracle’s other business relationships with Fidelity. In addition, the participants charged that the fiduciaries imprudently retained select investment options, even after they “consistently and dramatically” underperformed their benchmarks.

Oracle moved for summary judgment. The court granted summary judgment on the fee issue but allowed the participants to further advance their claims regarding the inclusion and retention of certain underperforming investment options.

Failure to monitor or negotiate fees. The participants argued that the fiduciaries’ failure to monitor the recordkeeping fees paid to Fidelity resulted in excess fees, primarily received through revenue sharing. While revenue sharing is an accepted practice, the participants charged that allowing Fidelity to receive recordkeeping fees based on a percentage of the plan’s assets, rather than as a fixed participant amount, resulted in an unwarranted and excessive increase in Fidelity’s compensation as the plan grew in size, without a corresponding increase in the services rendered.

Mercer produced quarterly reports for the Committee that disclosed the expense ratio for each investment fund in the plan and the administrative fees paid, both in total and on a per-participant basis. Fidelity also provided benchmarking data indicating the per-participant recordkeeping fees paid to Fidelity, as well as how the total administrative fees the plan paid compared to those paid by comparable Fidelity clients. The participants claimed, however, that the Committee failed to specifically consider the fees paid to Fidelity on a per-participant basis or to request that Mercer perform an analysis of the reasonableness of Fidelity’s recordkeeping fees on a per-participant basis.

The court, by contrast, found that, while the minutes of the Committee’s meetings did not reflect discussion of such information, testimony indicated that the issues were actually discussed and reviewed at every quarterly meeting. According to the court, it was “abundantly clear that the Committee did regularly consider information regarding the plan’s recordkeeping costs as a percentage of total costs and took steps which actually reduced overall plan costs during the class period. Thus, the court concluded, “no reasonably jury” would find the Committee’s decision-making process to be other than exceptionally careful and well informed.

The court similarly determined that the participants’ assertion that the Committee failed to “negotiate” Fidelity’s fee was without merit. The participant relied on the failure of one Committee member to recall whether the Committee, at any time, negotiated a fixed-rate per-participant fee with Fidelity. However, the court found abundant evidence indicating that the plan received “significant concessions” during the class period (e.g., annual expense reimbursement credits, revenue credits, and fee waivers).

Significantly, however, the court further noted that the failure to negotiate or obtain cost concessions would not have been determinative of fiduciary liability unless Fidelity’s fees were unreasonable compared to what was available in the market and thereby, resulted in compensable losses. The participants attempted to establish the purported unreasonableness of Fidelity’s recordkeeping fees through expert testimony. However, the court struck the expert’s testimony because he failed to discuss the methodology by which he developed a table that purported to establish more reasonable fees. Absent evidence that the fiduciaries’ alleged lack of prudence caused losses to the plan, the participants’ claim could not survive summary judgment.

Failure to bid out recordkeeping services. The participants next charged that the fiduciaries breached their duty of prudence by not soliciting a “Request for Proposal” (RFP) for the administrative services provided by Fidelity. Initially explaining that ERISA requires fiduciaries to consider factors other than cost, the court noted that the participants proffered no evidence that the plan could have paid less for the recordkeeping services and, therefore, had suffered compensable losses from the payments to Fidelity. Absent evidence of such damages, the claim could not survive summary judgment.

Conflict of interest did not breach duty of loyalty. The participants next argued that the fiduciaries breached their duty of loyalty by allowing the plan to pay the allegedly excessive recordkeeping fees in order to maintain a favorable business relationship with Fidelity, which was a customer of Oracle. ERISA does not prohibit a trustee for holding positions of dual loyalty. However, the participants charged that the fiduciaries engaged in “disloyal conduct” by failing to secure lower recordkeeping fees for the plan.

The court dismissed the claim, noting that the participants’ evidence indicated only that Oracle sales and management employees, who were not fiduciaries to the plan, had internal discussions as to how to increase Oracle’s business relationship with Fidelity. Dismissing the actions of the non-fiduciaries as irrelevant, the court found no evidence of directives from the Oracle sales employees to the plan that would suggest anything other than a general awareness by the Committee of Oracle’s business relationship with Fidelity.

Imprudent investment options. In determining whether the fiduciaries failed to engage a prudent process for selecting and retaining 3 of the plan’s 32 investment options, the court noted that the Committee made investment decisions pursuant to the plan Investment Policy Statement, which set forth qualitative and quantitative performance standards and procedures, pursuant to which funds would be placed on a “watchlist.” The Committee further relied on assistance and advice from Mercer in monitoring and managing plan investments.

Despite the prudent procedures, the court found that genuine issues of material fact remained with respect to the retention the fund that stemmed from events occurring after the limitations accrual date. However, the court dismissed as time-barred challenges to the initial inclusion of one of the funds in the plan

SOURCE: Troudt v. Oracle Corp (DC CO).

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