Compliance November 24, 2020

DeMoulas Super Markets Agrees to $17.5M Settlement

Plaintiffs accused the profit sharing plan sponsor of investing too conservatively and applying an inappropriate one-size-fits-all default investment allocation for participants.

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A settlement agreement has been filed in an Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit filed against DeMoulas Super Markets and several of its top executives.

Among other nonmonetary elements, the settlement calls for a payment of $17.5 million to be made to the plan and its participants, the dispersal of which will be tasked to an independent fiduciary.

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This development comes a little more than seven months after a federal district court judge denied the defense’s motion to dismiss the suit, in which the plaintiffs alleged the profit-sharing plan sponsor invested assets of the plan too conservatively for its employee base and failed to prudently manage the plan’s investments. DeMoulas Super Markets and its executives admit no wrongdoing in the settlement, which bars future related claims by settlement class members.

According to court documents, the DeMoulas (Restated) Profit Sharing Plan and Trust had approximately 11,000 to 13,000 participants during the proposed class period, “with a wide range of retirement needs and objectives.” The plan had between $580 million and $756 million in assets between 2013 and 2017, according to the documents, and it contained one investment into which participants were automatically enrolled. According to the plaintiffs, the plan’s investment policy statement (IPS) called for 70% of participants’ assets to be automatically allocated into domestic fixed income options and 30% to be put into equities.

The plaintiffs alleged that the plan’s “one-size-fits-all” default target allocations were inappropriate even for participants nearing retirement, but were especially inappropriate for participants who are decades away from retiring.

The newly filed settlement agreement states that, during the course of the action, the settling parties engaged in substantial discovery, including the production of more than 35,000 pages of documents by defendants. As is often the case in complex and sizable ERISA fiduciary breach disputes reaching such an outcome, several rounds of mediation preceded the settlement agreement. One unique feature in this case is that the plan in question is 100% funded by the employer, showing that fiduciary liability can arise even when employee dollars aren’t at stake. Par for the course, the settlement agreement stipulates that up to a third of the gross settlement amount can be used to pay the plaintiffs’ attorney fees—in this case up to $5,833,333.

Among the nonmonetary provisions in the settlement is a requirement that the defendants “shall not keep more than 10% of plan assets, measured quarterly, in cash or cash equivalents,” and they “shall modify the plan’s investment policy statement to increase the plan’s annual return target by 100 basis points [bps].”

The full text of the settlement agreement is available here.

Compliance November 24, 2020

Excessive 401(k) Fee Suit Filed Against Parent Company of Victoria’s Secret

The lawsuit accuses plan fiduciaries of failing to benchmark recordkeeping fees and failing to monitor investment fees, among other things.

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A former participant in the L Brands 401(k) Savings and Retirement Plan is suing the plan sponsor, its retirement plan committee and unnamed individual fiduciaries for breaching their duties under the Employee Retirement Income Security Act (ERISA) by allowing excessive fees for recordkeeping and investments.

The complaint notes that the 401(k) Averages Book shows the average cost for recordkeeping and administration in 2017 for plans that were much smaller than L Brands’ plan was $35 per participant. It says participants in the L Brands plan were paying $56 per participant throughout the period covered by the lawsuit.

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“Given its size and negotiating power, the plan should have been able to negotiate a total recordkeeping and administrative fee significantly lower than $35 per head,” the complaint states. “As of December 31, 2019, the plan had approximately $1.6 billion in assets and 33,761 participants.” L Brands is the parent company of Victoria’s Secret and Bath and Body Works.

The lawsuit alleges that “it is clear that defendants either engaged in virtually no examination, comparison or benchmarking of the recordkeeping/administrative fees of the plan to those of other similarly sized defined contribution [DC] plans, or were complicit in paying grossly excessive fees.”

The defendants are also accused of failing to “monitor the average expense ratios charged to similarly sized plans for investment management fees, which together with the plan’s high recordkeeping and administrative costs renders the plan’s total plan cost (TPC) significantly above the market average for similarly sized and situated defined contribution plans.” The lawsuit says that from 2014 through 2019, the plan paid out investment management fees of 0.38% to 0.46% of its total assets, higher than the average TPC of 0.28% for plans with more than $1 billion in assets, according to a Brightscope/ICI study published in August. According to the complaint, the L Brands plan’s TPC during the period covered by the lawsuit ranged between 0.51% and 0.62% of net assets.

The lawsuit also accuses plan fiduciaries of failing to use the least expensive share classes for mutual funds on the 401(k) plan’s investment menu.

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