Land O' Lakes Lawsuit Questions Recordkeeper, Advice Provider Fee Arrangement

Law firm Capozzi Adler has struck again—this time with a lawsuit against fiduciaries of the Land O’Lakes Employee Savings & Supplemental Retirement Plan.

As with the other complaints filed by the firm on behalf of retirement plan participants and beneficiaries, it alleges that plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) 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 and by maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories.

The lawsuit also says the defendants failed to utilize the lowest-cost share class for many of the mutual funds within the plan and failed to consider lower-cost collective trusts that were available to the plan as alternatives to certain mutual funds in the plan.

In a statement to PLANADVISER, Land O’ Lakes said: “Land O’Lakes has become aware of the new lawsuit and will be reviewing the allegations. The Company is pleased to offer valuable benefits to its employees, including retirement programs. We take our commitment to employees and obligations to those plans very seriously. We are confident that the court will find that we have managed these programs appropriately.”

The plaintiffs allege that during the class period stated in the lawsuit—which begins on May 26, 2014, and runs through the date of judgement— the plan lost millions of dollars by offering investment options that had similar or identical characteristics to other lower-priced investment options.

“The majority of funds in the plan stayed relatively unchanged during the class period. In 2018, a majority of the funds in the plan, at least 18 out of the plan’s 26 funds (69%), not including the separately managed account and short-term investment funds, were much more expensive than comparable funds found in similarly-sized plans (plans having over a billion dollars in assets). The expense ratios for funds in the plan in some cases were up to 157% (in the case of the T. Rowe Price Small-Cap Value) and 354% (in the case of the Wells Fargo Money Market) above the median expense ratios in the same category,” the complaint states. A chart was used to show comparisons.

However, the plaintiffs contend that the comparisons understate the excessiveness of fees in the plan because the Investment Company Institute (ICI) median fee used in the comparisons is based on a study conducted in 2016, when expense ratios would have been higher than today given the downward trend of expense ratios the last few years.

The plaintiffs also say prudent retirement plan fiduciaries will search for and select the lowest-priced share class available, but allege that in several instances during the class period, the defendants failed to prudently monitor the plan to determine whether it was invested in the lowest-cost share class available for the plan’s mutual funds. The complaint again includes a chart using 2018 expense ratios to attempt to demonstrate how much more expensive the funds were than their identical counterparts. “During the class period, defendants knew or should have known of the existence of cheaper share classes and therefore also should have immediately identified the prudence of transferring the plan’s funds into these alternative investments,” it alleges.

The complaint states that some of the best investment vehicles to ensure fiduciaries do not unduly risk plan participants’ savings and do not charge unreasonable fees are collective trusts, which pool plan participants’ investments further and provide lower fee alternatives to institutional and 401(k) plan specific shares of mutual funds. It says the defendants knew this, or at least should have known this, because at least one of the plan’s funds is a collective trust.

Citing an article in The Washington Post, the complaint says that while higher-cost mutual funds may outperform a less expensive option, such as a passively managed index fund, over the short term, they rarely do so over a longer term. The plaintiffs allege that during the class period, the defendants failed to consider materially similar but cheaper alternatives to the plan’s investment options. Again, a chart is used to attempt to demonstrate that the expense ratios of the plan’s investment options were more expensive than comparable passively managed and actively managed alternative funds in the same investment style. The complaint says the alternative funds had better performance and lower risk/return profiles that the plan’s funds.

In addition, the complaint says there is objective evidence that selection of actively managed funds over passively managed ones with materially similar characteristics was unjustified. Comparing the five-year returns of some of the plan’s actively managed funds with those of comparable index funds with lower fees, the plaintiffs say it demonstrates that, accounting for fees paid, the actively managed funds lagged in performance. A chart is used to show the return needed by each actively managed fund to match the returns of the passively managed fund.

The lawsuit also alleges the defendants failed to prudently manage and control the plan’s recordkeeping and administrative costs by failing to: pay close attention to the recordkeeping fees being paid by the plan; identify all fees, including direct compensation and revenue sharing being paid to the plan’s recordkeeper; and conduct a request for proposals (RFP) process at reasonable intervals.

The Land O’ Lakes lawsuit also questions a fee arrangement between the plan’s recordkeepers and an advice provider. “According to the 2018 Form 5500, Financial Engines collected more than $1.5 million in ‘advice fees’ and ‘professional management fees’ from plan participants, 55% of which it then paid to Alight. Overall, between 2014 and 2018, Financial Engines received at least $5.1 million in compensation from plan participants, of which more than half was remitted to the plan’s recordkeepers, Hewitt Associates and Alight. It is also noteworthy that during the class period, Financial Engines, as noted above, paid additional millions of dollars to Hewitt Associates and Alight from money received from plan participants. However, according to [the firm’s website], Financial Engines provides no services relative to plan administration or recordkeeping. Thus, there are no apparent services provided by Financial Engines that would justify paying so much of their compensation to the recordkeeper,” the complaint states.