Compliance September 24, 2020

Excessive Fee Lawsuit Filed Against Duke Energy

The drumbeat of Employee Retirement Income Security Act (ERISA) excessive fee lawsuits rolls on.

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A new Employee Retirement Income Security Act (ERISA) lawsuit has been filed in the U.S. District Court for the Western District of North Carolina, Charlotte Division, naming as defendants the Duke Energy Corp. and its benefits committee.

“Defendants have a fiduciary duty—the highest obligations under the law—to engage in prudent practices to monitor the plan’s expenses and ensure they are minimized,” the lawsuit states. “Defendants have failed to do this with respect to the plan’s recordkeeping and managed account services. They have allowed the plan to pay roughly twice as much for the same services than other plans pay.”

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The plaintiffs suggest the plan, its participants and beneficiaries have suffered “significant losses totaling millions of dollars.”

“Given the exorbitant excess fees defendants have allowed the plan to pay, it is reasonable to infer defendants have failed to follow these prudent practices and have thus failed to uphold their fiduciary duties,” the lawsuit states.

According to the lawsuit, from the beginning of 2014 through the end of 2018, the plan had between 33,000 and 39,000 participants, and between $6.7 and $8.6 billion in assets. The plaintiffs say plans of this size are often referred to as “jumbo” or “mega” plans and have “significant bargaining power to extract extraordinarily low fees for services,” including for recordkeeping and managed account services.

Responding to a request for comment, Duke Energy provided the following statement: “Duke Energy’s retirement savings plan has been carefully designed and administered as a retirement savings tool for the company’s 29,000 employees. Duke Energy and its fiduciaries take seriously their responsibilities under the federal Employee Retirement Income Security Act of 1974, and work diligently to fully discharge their duties under the law. The company will vigorously defend against this lawsuit.”

Plaintiffs state that Fidelity has been the plan’s recordkeeper since at least 2009, and that the plan’s Form 5500s for 2014 through 2018 show that Fidelity’s direct compensation for recordkeeping services to the plan has been between $58 and $67 per participant during the class period.

“Based on [our] investigation and publicly available filings, a prudent and loyal fiduciary of a similarly sized plan could have obtained comparable administrative services of like quality for approximately $25 to $30 per participant near the beginning of the statutory period, in 2014, and between $20 and $25 per participant toward the end of the class period,” the lawsuit states. “Not only have Duke Energy’s recordkeeping fees been two to three times higher than competitive marketplace rates, but the Form 5500s also demonstrate that Duke Energy has used the same recordkeeper for at least the past decade, and that the recordkeeping rates paid by participants stayed roughly the same between 2014 and 2018, while marketplace rates were dropping. This gives rise to an inference that defendants failed to monitor recordkeeping compensation during [the class period].”

The complaint suggests the plan’s recordkeeping expenses demonstrate that defendants failed to engage in prudent monitoring and engage in prudent practices to keep those costs at competitive levels.

The text of the lawsuit goes on to state that the managed account option in the plan is operated by Financial Engines Advisors, an independent investment advice and management services provider. Though not named as a defendant in any of the cases, Financial Engines Advisors is involved in other ongoing pieces of ERISA excessive fee litigation.

“For this service, defendants have allowed participants to pay an annual fee—0.5% of their average account balance for the year—regardless of the size of their account,” the complaint alleges. “In doing so, defendants have caused the plan to pay significantly more for managed account services than other plans pay for identical services. Defendants also failed to capture tiered pricing for participants with larger account balances, which is industry standard for managed account services.”

The full text of the complaint is available here.

Compliance September 24, 2020

Long-Running Church Plan Case Reaches $25M Settlement

The 7th U.S. Circuit Court of Appeals last year overturned a lower court’s decision to summarily dismiss the lawsuit, which argued OSF Healthcare System’s retirement plan should be subject to ERISA protections.

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Details of a settlement agreement have emerged in the Employee Retirement Income Security Act (ERISA) lawsuit known as Smith v. OSF Healthcare System.

The plaintiffs in the case are a class of former employees and participants of one OSF’s pension plans. Their lawsuit argued that OSF was inappropriately relying on the “church plan exemption” included in ERISA, which provides that retirement plans run by “principal-purpose” religious organizations do not have to meet certain participant protection standards and funding requirements demanded of corporations and most other employers sponsoring tax-qualified pensions.

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Specifically, the plaintiffs alleged that OSF, in violation of ERISA, relied on the exemption to allow its plans to become severely underfunded. They alleged that the OSF pension plan’s holding assets are only sufficient to fund roughly 56% of accrued benefits.

In the settlement agreement, OSF admits no wrongdoing, but the hospital system agrees to pay a sum of $25 million to better fund the plan, to be paid in equal annual installments over the next five years. The agreement permits a maximum attorneys fee of $1.75 million for the class counsel.

The settlement agreement also provides certain non-monetary relief. For example, beginning 60 days after the effective date of settlement, the administrator for the OSF pension plans will put in place “certain new arrangements concerning the OSF plans’ administration, notices and procedures.” These include regular pension benefit statements to be sent to each participant in the plan, providing the “latest available information regarding his or her accrued benefits and information regarding which of his or her benefits are non-forfeitable benefits, if any, or stating the earliest date on which the benefits become non-forfeitable.”

Additionally, any participant in the OSF pension plan who has terminated service during a plan year and who is entitled to a deferred benefit under the plan will be provided with “a statement, upon request, regarding the nature, amount and form of such terminated plan participant’s non-forfeitable benefit.”

This conclusion to the church plan lawsuit comes only after multiple rulings in district and appellate courts. Most recently, the 7th U.S. Circuit Court of Appeals overturned a lower court’s decision to summarily dismiss the lawsuit while discovery was still ongoing. The ruling stated that the true underlying issue in the case is whether ERISA applies at all to the pension plans offered by OSF, a religious nonprofit organization that operates 11 hospitals in Illinois and Michigan.

The appeals court also noted that ERISA defines church plans in a specific way, as follows: “A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.”

The full text of the settlement is available here.

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