An ERISA class action suit recently filed in the United States District Court for the District of Arizona maintains the plan administrator breached its fiduciary duties by allowing participants to be charged unreasonable recordkeeping fees for years. Hagins et al v. Knight-Swift Transportation Holdings, Inc., 2022 CV 01835-MTM, October 26, 2022.  The case demonstrates how plan fiduciaries have a duty to continually monitor the fees that plan participants pay whether directly or indirectly and as the plan gets bigger, the fiduciaries have a duty to monitor such fees to ensure they are not unreasonably high.  The complaint provides a blueprint of actions plan fiduciaries should take to be able to defend their actions relating to plan costs.

The case was brought on behalf of all participants and alleges that  Knight-Swift allowed the recordkeeper to be paid unreasonable compensation for its recordkeeping services.  The case alleges that the plan paid too much in both direct and indirect compensation to the recordkeeper.  The plan’s Form 5500 filing for 2021 showed the recordkeeper was paid $1,209,053 in direct compensation.  This amounted to $83.81 per participant.  The complaint alleges that plans of similar size only paid $25-$30 per participant, making the fees paid excessive.

Additionally, the recordkeeper was paid indirect compensation in the form or revenue sharing and the float on investments.  The complaint alleges that the percentage of revenue sharing fees that the recordkeeper received never changed from the beginning of the plan even though the plan assets increased dramatically (by more than $240,000,000) over the past 6 years .  The total amount of both direct and indirect compensation paid to the recordkeeper amounted to $200 per participant.  It alleges that a prudent fiduciary would undertake three processes to prudently manage and control plan costs: 1) closely monitor the fees being paid by participants; 2) identify all direct and indirect compensation being paid by the participants; and 3) keeping up with trends by performing a Request For Proposal every 3-5 years to see what other recordkeepers would charge for the same services.

The complaint also alleges that the Sponsor breached its fiduciary duty of prudence to defray plan costs by failing to select low-cost institutional class mutual funds for the participant investment menu.  By not choosing institutional class shares for the plan, participants were required to pay higher expense ratios that were about double that of the institutional class shares.

While this case was just recently filed and has not been decided yet, it does demonstrate what plaintiff’s attorneys will look for in bringing a case against a plan sponsor and what steps a sponsor can undertake to avoid such arguments.  It also demonstrates the perils of plan sponsors who just “set it and forget it” when establishing a plan.  Sponsors should always monitor the fees that participants must pay and look to re-negotiate fees as the assets of the plan increase.  Reduced fees can also be negotiated upfront as the assets reach certain threshold levels.  However, these too should be monitored to ensure that they remain reasonable at the time the threshold is reached.