Lawsuit Against MEP Takes Issue With Share Classes, Revenue Sharing

A lawsuit has been filed against professional employer organization (PEO) Nextep Inc. and the board of directors and investment committee for the Nextep 401(k) Retirement Savings Plan, a multiple employer plan (MEP), alleging excessive investment and recordkeeping fees.

The complaint states that, “Prudent and impartial plan sponsors should be monitoring both the performance and cost of the investments selected for their 401(k) plans, as well as investigating alternatives in the marketplace to ensure that well-performing, low cost investment options are being made available to plan participants. As a large plan, the plan had substantial bargaining power regarding the fees and expenses that were charged against participants’ investments. Defendants, however, did not try to reduce the plan’s expenses or exercise appropriate judgment to scrutinize each investment option that was offered in the plan to ensure it was prudent.”

The plaintiffs say the defendants violated their Employee Retirement Income Security Act (ERISA) fiduciary duties by failing to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories; and failing to control the plan’s administrative and recordkeeping costs.

The lawsuit noted that some changes were made to certain plan investment options last year. The investments were either converted to lower class shares or eliminated unnecessary fees. However, the plaintiffs say the “changes were far too little and too late as the damages suffered by plan participants to that point had already been baked in.” They allege that the fiduciaries’ actions cost the plan and its participants millions of dollars.

According to the complaint, out of the 29 funds in the plan in 2019, 27 of them (or 93%) remained unchanged since 2015. The lawsuit alleges that the failure to remove or change imprudent funds to less expensive share classes or cheaper cost structures over the course of several years is a clear indication that the defendants were not monitoring the plan’s funds as they should have been.

Several funds used during the class period that was identified in the lawsuit were more expensive than comparable funds found in similarly sized plans, the complaint says. “In 2019, all 29 funds in the plan were more expensive than comparable funds found in similarly sized plans. The expense ratios for funds in the plan in some cases were up to 211% (in the case of MassMutual RetireSMART by JP Morgan 2035) and up to 180% (in the case of Mass Mutual Select Growth OPPs) above the median expense ratios in the same category,” it states.

In addition, the lawsuit says 26 of the 29 funds in the plan from 2015 to the end of 2019 were not in the lowest share class. In 2019, the total assets under management (AUM) for these funds was more than $259 million dollars, which the lawsuit says easily qualifies them for lower share classes.

The plaintiffs say using revenue sharing to pay for recordkeeping resulted in a worst-case scenario for the plan’s participants because it resulted in above-market recordkeeping fees. “For example, looking at the combined amount of direct and indirect compensation paid to Nextep, Massachusetts Mutual Life Insurance Co. and MML Investor Services as reported on the plan’s 2019 [Form] 5500 shows that the plan was paying at least $138 per participant in administrative and recordkeeping costs. In 2018, the per participant costs were even higher, being at least $175 per participant,” the complaint states. The lawsuit cites the NEPC 2019 Defined Contribution Progress Report to argue that plans with between 1,000 and 5,000 participants should pay no more than $78 per participant for recordkeeping.

The plaintiffs say the excessive recordkeeping fees confirm that the use of higher-cost share classes cannot be justified as a prudent means to pay recordkeeping and administrative costs. “Moreover, because a significant amount of the recordkeeping and administrative fees were paid for by forfeiture accounts, there was no need to use revenue sharing from the plan’s investments to pay for recordkeeping and administrative fees. But there is no indication that the plan’s fiduciaries returned the revenue sharing collected from the plan’s investments back to the plan’s participants as they should have,” the complaint further states.

The plaintiffs allege that the defendants acknowledged their imprudent conduct by switching some of the plan’s funds last year to funds that had no revenue sharing attached to them.

Nextep has not yet responded to a request for comment.