The allegations outlined in the Complaint are similar to those in raised in many other ERISA breach of fiduciary duty lawsuits. Holmes v. Baptist Health South Florida, Inc. is different, however, in the sheer size of the potential plaintiff pool. Counsel for the plaintiffs has also apparently been careful to draft the Complaint to avoid the risk of dismissal that has plagued similar lawsuits. This may augur well for a quick settlement.
On the other hand, though, the allegations make clear the financial forensics that are necessary to demonstrate that the law has been violated. Many ERISA lawsuits are dismissed at an early stage because participants are unable to substantiate their claims or they run afoul of the statute of limitations while trying to develop evidence.
Follow the money
The Complaint alleges that Baptist Health, its Board of Directors, the Retirement Plan Committee and John Does 1-30, who were collectively responsible for managing the BHSF Plan, violated 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;
- maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories; and
- failing to control the plan’s recordkeeping costs.
The administrative and recordkeeping fees paid by the BHSF Plan were compared against plans of a similar size, using the NEPC 2019 Defined Contribution Progress Report and the 401(k) Averages Book. The lawsuit claims that the former found that no plan with more than 15,000 participants paid more than $50 per participant, as opposed $118 to $158 per participant for the BHSP Plan. The latter source noted that a plan with 2,000 participants and $200 million in assets ordinarily had an average recordkeeping and administration cost $5 per participant. The Complaint concluded that “reasonable rates for plans the size of the BHSP Plan typically average around $35 per participant.
In addition, the Complaint observes that the BHSF Plan had been contracted with the same recordkeeper since 2015, failing to request competitive proposals from other recordkeepers. It repeats a rule of thumb that a request for a proposal should happen at least every three to five years as a matter of course, and more frequently if plans experience an increase in recordkeeping costs or fee benchmarking reveals the recordkeeper’s compensation to exceed levels found in similar plans. The Complaint also takes aim at the BHSFS Plan’s investment management fees, noting that some expense ratios for the Plan’s funds were 343 percent above the median.
For good measure, Holmes also alleges that the Retirement Committee did not follow the requirements of its own investment policy statement, which requires the committee to evaluate fund performance and the appropriateness of the plan’s fees at least every quarter. This evaluation should have reviewed:
- the performance of each investment fund in terms of the performance compared to relevant market indices and peer groups; and
- the reasonableness of fees and costs associated with each investment fund.
ERISA fiduciary duty requirements
ERISA Section 404 requires that plan fiduciaries act solely in the interest of participants and beneficiaries and to pay the reasonable expenses of the plan. “Reasonable plan expenses” may include recordkeeping and investment management expenses. Nothing in the law prohibits this. The issue is “reasonableness.”
Whether or not an expense is reasonable is often evaluated in terms of process and statistical comparison. The emphasis in fiduciary breach ERISA lawsuits tends to be on whether there is evidence that fiduciaries actually had a systemic process for reviewing investment results and expenses and whether they followed it.