Recordkeeping Fee Structure Questioned in KeyCorp ERISA Lawsuit

A new Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit has been filed in the U.S. District Court for the Northern District of Ohio, naming KeyCorp as the primary defendant, along with the trust committee tasked with overseeing the company’s defined contribution (DC) retirement plan.

KeyCorp is the owner and operator of KeyBank, a regional bank headquartered in Cleveland, Ohio, with branches throughout the region. The plaintiffs accuse KeyCorp of causing plan participants to pay excessive recordkeeping and related administrative expenses during the class period. 

“Administrative services such as recordkeeping, trustee and custodial services are necessary for the operation of any defined contribution plan and are one of the plan’s largest expenses,” the complaint states. “Accordingly, it is important to plan fiduciaries to closely monitor these expenses to ensure that participants are not being overcharged.”

The complaint recites the fact that service providers charge for administrative services either on a per-participant fee basis or as an asset-based fee. Plaintiffs suggest asset-based fee arrangements are more common for smaller defined contribution plans, which have less leverage to negotiate how services are charged, noting that regardless of how these fees are charged, the cost of these services is typically borne by the plan participants. 

“Among larger plans, the market for administrative services is highly competitive, with many vendors equally capable of providing a high-level service,” the complaint states. “Accordingly, vendors vigorously compete for business by offering the best price. As a result of such competition, administrative fees have declined in defined contribution plans over time. Between 2006 and 2016, recordkeeping and related administrative costs in the marketplace have dropped by approximately 50% on a per-participant basis.”

The complaint alleges that KeyCorp has failed to take advantage of the recordkeeping market competition and associated drop in average fees, suggesting that this is a result of the company’s close ties with Alight, which has been the plan’s recordkeeper since at least 2009.

“KeyCorp has a close relationship with Alight,” the complaint states. “In addition to acting as the recordkeeper for the plan, Alight also administers KeyCorp’s pension plan, administers KeyCorp’s retiree medical plan and has also played an integral role in setting up and administering KeyBank’s online HR [human resources] portal through which all employee benefits are managed, among other things. Unlike the plan, where administrative expenses are paid by employees’ assets, the costs of providing these pension plan, medical plan and HR services are the responsibility of KeyCorp.”

According to the complaint, the plan’s fee disclosure provides that each eligible participant is charged $63 per year for administrative services.

“Based on plaintiffs’ investigation, a prudent and loyal fiduciary of a similarly sized plan could have obtained comparable administrative services of like quality for approximately $30 to $40 per participant,” the lawsuit states. “A prudent fiduciary would have closely monitored the plan’s administrative expenses and engaged in a rigorous benchmarking analysis, either on its own or by working with an independent consultant, and would have discovered that the plan was paying far too much for recordkeeping. Alternatively, the plan could have performed a request for proposals and discovered that other service providers would have provided the same services at lower cost.”

The complaint goes on to suggest that the defendants’ alleged failure to monitor or control the plan’s administrative expenses implies the occurrence of several fiduciary breaches while costing plan participants millions of dollars during the class period.

KeyCorp declined to comment about the lawsuit. The full text of the complaint is available here.