Nancy Mator and Robert Mator participate in the Wesco Distribution, Inc. Retirement Savings Plan. On behalf of themselves and a class of participants and beneficiaries, the Mators sued the Plan, its fiduciaries, and Wesco Distribution, Inc. (collectively, “Wesco”). The Mators allege Wesco violated fiduciary duties imposed by the Employee Retirement Income Security Act of 1974 (ERISA) because it paid excessive recordkeeping fees and failed to monitor the Plan.
Specifically, at the end of 2020, the Plan had about $837 million in assets and nearly 8,300 participants. Wells Fargo was the Plan’s recordkeeper. Wells Fargo provided participants with internet access to their accounts, transaction processing, quarterly statements, communications including disclosures and newsletters, retirement education, telephone support, and a “brokerage window” that allowed participants to invest in stocks that were not part of the Plan’s menu of options.
There were two sets of fees. First, direct fees were paid from a Plan’s assets: “the fiduciary contracts with the recordkeeper to obtain services in exchange for a flat annual fee based upon the number of participants.” Next, indirect fees were paid by participants as a result of revenue-sharing agreements between recordkeepers and plan investments, such as mutual funds. Indirect fees paid through revenue sharing were based on the amount of assets in participants’ mutual fund accounts.
Essentially, the Mators argued this plan “possesses tremendous economies of scale,” because “the marginal cost of adding an additional participant to a recordkeeping platform is relatively low” and recordkeeping services for any participant cost about the same regardless of the participant’s account balance. “Therefore, ... [a]s the number of participants in the plan increases, the cost per participant to deliver the recordkeeping and administrative services decreases.” As such, they claimed that Westco and the plan administrators failed to monitor and recognize the cost adjustments that were steadily increasing with the plan.
The Mators cited a survey that showed that large plans like Wesco’s generally paid Wells Fargo between $40 to $60 in fees per participant. In the Mator’s case, they were paying somewhere around $120 to $185 per participant in fees from 2015-2020. Direct fees were estimated at about $40-$82 per participant and indirect fees from $80-$103 per participant.
In 2020 Wesco switched to Fidelity as plan administrator and the cost of the fees was approximately $54 per participant. As a result, the Mators argued that the plan administrators could have make favorable changes earlier and failed to do so. Therefore, the Plan paid “four times the reasonable cost of recordkeeping,” which caused the participants to lose “millions of dollars in their retirement savings over the last six-plus years.”
Further, the Mators also alleged the Plan imprudently offered participants expensive classes of mutual fund shares. The Mators stated that for 19 of the mutual funds Wesco offered participants, it chose expensive share classes that were subject to revenue sharing and therefore “had higher operating expenses than other available classes of the same mutual funds.”
Finally, the Mators alleged that the administrators of the plan failed in their duty to monitor the fund and plan costs, by which it costs millions to the participants.
The trial court dismissed the case ruling that the case did not state an actionable claim.
On appeal, the 3rd Circuit Court of Appeals reinstated the case. First, the court stated that the Mators did provide enough information for the case to go forward on the fee issue. The court specifically cited to the Mator’s argument that “due to the nature and competitiveness of the market at the top levels [of] recordkeeping service for large plans, it would be reasonable to infer that similar services” were provided and that “any minor variations in the way that these essential services are delivered have no material impact on the fees charged Although the Mators’ calculation of the fees may not be exact, the court felt that it was something that defeated the claim. As a result, all other aspects of the claim were revived.
The takeaway for HR is that these claims are growing, and it is important to do an audit of costs and performance of the plans yearly. If the costs seem unreasonably high, even for a small plan, the plan administrators may be on the hook. This case is an illustration of areas for audit when reviewing plan information.
Source: Mator v. Wesco, No. 22-2552 (3rd Circuit Court of Appeals, April 18, 2024)