401(k) Plan Excessive Fee Lawsuit Filed, Settlement Reached

One day after the filing of an Employee Retirement Income Security Act (ERISA) excessive fee lawsuit, the parties have signed a settlement agreement.

In the complaint filed in the U.S. District Court for the Southern District of Illinois, participants of the Philips North America LLC 401(k) plan note that as of December 31, 2014, the plan offered 11 Vanguard mutual funds, Vanguard collective trust target-date funds, and three non-Vanguard mutual funds.

The first bone of contention the plaintiffs have is that the company offered the “microscopically low-yielding” Vanguard Prime Money Market Fund, rather than a stable value fund that would have provided better returns while preserving capital and liquidity without any greater increase in risk compared to money market investments. The complaint suggests most 401(k) plans offer stable value funds.

“Since February 2010 (if not earlier), Defendant has provided Plan participants as their sole capital-preservation, conservative investment option the Vanguard Prime Money Market Fund, initially in the higher-cost Investor class and as of October 1, 2013, in the lower-cost Institutional class. During that time, the Vanguard Prime Money Market Fund provided an annual return that was 0.33% at its highest and 0.02% at its lowest. That microscopically small return did not even beat the rate of inflation during that time period,” the complaint says.

The plaintiffs say that in light of stable value funds’ clear advantages and enhanced returns compared to other fixed income options, when deciding which fixed income investment option to include in a defined contribution plan, a prudent fiduciary would consider using a stable value fund, but Philips North America failed to adequately consider a stable value fund after selecting Vanguard as the plan’s recordkeeper and offering Vanguard investments, or to come to a reasoned decision by weighing the benefits of a stable value fund compared to a money market fund.

Using the Hueler Index as a benchmark, the plaintiffs claim that by providing participants the Vanguard Prime Money Market Fund instead of a stable value fund, the plan sponsor caused the plan, participants and retirees to lose more than $41 million in retirement savings from February 2010 through June 30, 2017. The say the participants continue to suffer such losses to the present because the plan continues to offer a Vanguard Money Market Fund instead of a stable value fund.

As for other funds offered in the plan, the complaint says that, rather than taking advantage of the plan’s economies of scale, as required by its investment policy statement (IPS), to reduce the investment expenses charged to plan participants, Philips North America selected and maintained high-priced share classes of mutual funds, instead of identical lower-cost share classes of those same mutual funds which were readily available to the plan.

According to the complaint, the plan sponsor also failed to adequately investigate and offer non-mutual fund alternatives, such as collective trusts and separately managed accounts, to further reduce the investment expenses charged to plan participants. “Each mutual fund in the Plan charged fees far in excess of the rates Defendant could have obtained for the Plan by using these comparable products,” the complaint states, adding that the lower-cost share classes of the identical mutual funds were available to the plan many years before Philips restructured the investment lineup in 2013.

The plaintiffs say Philips similarly offered more expensive shares of the Fidelity Growth Company Fund. “From February 2010 to the present, Defendant provided the retail share class of the Fidelity Growth Company Fund (FDGRX) as a Plan investment option. As of May 9, 2008, Fidelity provided the exact same investment in the K class shares (FGCKX), which charged 69–77 bps in annual fees, compared to 82–90 bps in annual fees for the retail class shares, which were the shares in the Plan,” the complaint states. It notes that even though Philips switched to the cheaper share class of the Plan’s Vanguard mutual funds on October 1, 2013, it failed to do the same with the Fidelity Growth Company Fund when cheaper share classes were available to the plan.

The plaintiffs allege that because the plan sponsor imprudently and disloyally provided participants the much more expensive versions of the plan’s same mutual fund options during these dates, plan participants lost more than $12 million of their retirement savings.

The settlement agreement

According to the proposed settlement agreement, after receiving the draft complaint, the parties agreed to informal discovery to supplement documents previously produced in December 2015. In August 2016, the parties entered into a confidentiality agreement. In August 2016, Philips produced plan-related materials, including investment policy statements, data regarding plan investment options and holdings, and committee materials (e.g., agendas, reports, minutes, etc.). Philips also produced emails, communications and other materials. The discovery process continued from approximately March 2016 through October 2017, a period of 19 months. They signed the settlement agreement on May 11, 2018.

The proposed agreement provides that Philips admits no wrongdoing or liability with respect to any of the allegations or claims in the complaint. Philips North America has agreed to pay a gross settlement amount of $17,000,000 to the Qualified Settlement Fund to pay the settlement class, plaintiffs and class counsel.

The plaintiffs in the suit have filed a motion for preliminary approval of the settlement.