A hospital company accused of using participant funds to pay “excessive fees” for retirement plan administration services agreed to a $32 million class-action settlement and extensive adjustments in the way it selects and reviews the plan’s portfolio.
As more participant suits are filed accusing defined contribution plans of overpaying for investment and administration services, it’s a timely reminder to benchmark, scrutinize revenue-sharing agreements and seek “reasonable” fee schedules to avoid being sued or having to pay out a multimillion-dollar settlement.
Novant Health Inc. of Winston-Salem, N.C. said in a settlement response it submitted in Kruger v. Novant Health Inc., No. 1:14-cv-2018 (M.D.N.C., Nov. 9, 2015) that, while it disagrees with the claims asserted against it in the case, it benefits from resolving litigation that “could otherwise continue for many years at great cost and distraction.”
Background of the Case
The company and its retirement plan were accused of breaching ERISA by misusing revenue sharing to pay for retail investment funds in the plan, which the plaintiffs claimed were more expensive to administer than institutional funds. It also was alleged to have paid too-high fees to service providers Great-West Life & Annuity Insurance Co. and D.L. Davis & Co.. Both providers were accused through detailed financial evidence of profiteering without increasing services over a number of years, and the head of Davis was said by plaintiffs’ attorneys to have had several conflicts of interest with his role as an adviser to Novant.
The suit filed in March 2014 alleged the plan’s broker received a $6 million commission payment in 2012 for “limited” services. It alleged several conflicts of interest for the plan’s broker. Derrick L. Davis, a principal at brokerage firm D.L. Davis was said in the court filing to have received payments from other Novant Health qualified benefits plans besides its 401(k), and to have been compensated from the hospital system’s defined benefit plan.
The settlement makes immediate payment into the Novant 401(k) plans of class members who are active participants and retirees, although a range for the amounts due to individuals was not provided in the settlement response from Novant. Those eligible for a settlement but no longer active plan participants will receive direct payments that are possible roll over on a tax-deferred basis into another qualified retirement account.
In addition, the settlement will require Novant to select a new plan recordkeeper and investment adviser for the plan through a request for proposals process. It also gives the company a “detailed structure” to follow to conduct a complete future review of the plan’s investment options, with periodic reviews later. This structure further requires Novant to:
- ensure that plans’ administrative service providers are not reimbursed for their services based on a percentage-of-plan-assets basis;
- adopt a new investment policy statement;
- provide accurate communications to participants;
- use an independent consultant to review the investment option selection process and provide recommendations as needed; and
- remove Davis and related entitles from involvement with Novant plans or any new real estate or business relationships.
“All defendants in lawsuits deserve their day in court, but the severity of the allegations by the plaintiffs may have had a strong influence on the early settlement” of the Novant case, ERISA attorney Thomas E. Clark Jr. wrote on his Fiduciary Matters blog.
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