Best Practices for Plan Sponsors #8

Best Practices: Lessons Learned from Litigation #1—the Anthem Case

I am writing two series of articles that together are called “The Bests.” One is about Best Practices for Plan Sponsors, while the other is about the Best Interest Standard of Care for Advisors. Each series is numbered separately to make it easier to identify the articles that are most relevant to you.

This is the eighth of the series about Best Practices for Plan Sponsors.

Plan sponsors should be aware of the latest trends in fiduciary litigation in order to develop practices to manage the risk of being sued and, if sued, of being liable. The recent settlement of the Anthem case is a good example of the importance of using appropriate share classes and of other practices in selecting investments and monitoring service providers. This article discusses the complaint, the settlement and risk management for plan sponsors and their fiduciary committees.

To start at the beginning, Anthem and its fiduciary plan committee were sued based on allegations that they selected overly expensive share classes (considering what was available to a multi-billion dollar plan); that they overpaid the recordkeeper; and that they offered a money market fund rather than a stable value fund.


The case was recently settled for $23,650,000 and for certain non-monetary conditions (discussed below).

The complaint is notable in several regards. First, most of the investments—all but two—were in Vanguard mutual funds, which are generally considered to be low priced. However, the plaintiffs’ class action attorneys—the Schlichter law firm—alleged that the committee should have selected less expensive class shares. To give you a sense of the plaintiffs’ arguments, the plan was using a Vanguard Institutional Index Fund with a 4 basis point fee, but a 2 basis point fee was available in a lower-cost share class. Another example is the Vanguard Extended Market Index Fund, which charged 24 basis points, while there was a 6 basis point share class allegedly available.

But, the arguments didn’t end there. The plaintiff’s class action attorneys went on to assert that collective trusts and separately managed accounts were available that were even cheaper . . . and that those less expensive, but virtually identical, investments should have been used.

The “best practice” of this part of the story is that plan committees should be aware of the lowest-cost share classes that are available to their plan and then, if the plan has access to reasonably similar collective trusts or separately managed accounts, to consider those as well. In other words, the litigation trend is moving beyond retail and institutional share classes and on to collective trusts and separately managed accounts. The drum beat of low costs continues and is evolving beyond mutual funds.

The complaint also alleged that the plan paid excessive administrative fees to the recordkeeper:

“Because recordkeeping costs are not affected by account size, prudent fiduciaries of defined contribution plans negotiate recordkeeping fees on the basis of a fixed dollar amount for each participant in the plan rather than as a percentage of plan assets. Otherwise, as plan assets increase through participant contributions or investment gains, the recordkeeping compensation increases without change in the recordkeeping and administrative services, leading to excessive fees.”

The “best practice” of this part of the story is that recordkeeping fees, and the fees of other service providers, need to be monitored regularly. (Note, though, that there isn’t any rule that says a per-participant fee is the only prudent choice.)

The complaint goes on to allege “ . . . prudent fiduciaries of large defined contribution plans put the plan’s recordkeeping and administrative services out for competitive bidding at regular intervals of approximately three years, and monitor recordkeeping costs regularly within that period.” While the plaintiffs appear to be arguing that there is a “three-year rule,” there is not.  The law is that the monitoring of costs must occur at reasonable intervals. Having said that, though, three years is not a bad rule-of-thumb. Also, there is not a legal requirement to use the RFP process; instead, fiduciaries can engage in a prudent process to evaluate fees and costs by using competent benchmarking services that provide the relevant peer group data.

Finally, the complaint alleges that it was imprudent to have the money market fund in the line-up when stable value funds that paid much higher interest rates were available. While the interest rate argument does favor stable value funds, there are also arguments against them. For example, if a plan switches providers at a time when interest rates are going up, and the new provider won’t recordkeep the particular stable value fund, that could result in a market value adjustment and losses to the participants. Alternatively, and in most cases, the assets in stable value funds can be transferred one year after notice is given without a market value adjustment, but that creates administrative issues for timely transfers to a new recordkeeper.

The “best practice” for this part of the story is that plan committees should compare and contrast money market funds with stable value funds and make a decision that is prudent and in the best interest of the participants. There are a number of factors to be considered in making that decision. The key is that the committees engage in a process, with help from their advisor, to make a thoughtful decision.

What about the settlement?

As mentioned above, the monetary settlement was quite large, over $23,000,000. But, let’s move beyond the dollar amount and look at the “Non-Monetary Terms” in the settlement agreement. The requirements imposed by the settlement agreement include:

  • The committee must engage an independent investment consultant, who is experienced with investment options in defined contribution plans. The consultant will review the plan’s line-up of investments and make recommendations to the plan committee. One of those recommendations will be whether to include a stable value option in the plan.
  • The committee must then meet and review the investment consultant’s report and evaluate whether and to what extent to implement the consultant’s recommendations.
  • The committee must “consider, with the assistance of the Investment Consultant, among other factors: (1) the lowest-cost share class available in the Plan any mutual fund considered for inclusion in the Plan as well as other criteria applicable to different share classes; (2) the availability of revenue sharing rebates on any share class available to the Plan for any mutual fund considered for inclusion in the Plan; and (3) the availability of collective trusts and/or separately managed accounts, to the extent such investments. . . otherwise have similar risks and features to a mutual fund . . . .
  • After the committee’s consideration of the consultant’s recommendations, the committee will provide the plaintiffs’ class action attorneys a written summary of the consultant’s recommendations and the decisions of the committee. This is fairly unusual. It contemplates that the plaintiff’s class action attorneys will oversee the implementation of the settlement agreement for a period of time (which, in this case, is three years).
  • The committee must issue a request for proposal (RFP) for recordkeeping services for the plan. The responses from the recordkeepers must include a fee proposal “based on a total fixed fee and on a per-participant basis.” The committee must make a decision about engaging a new recordkeeper or retaining the plan’s current recordkeeper and, within 30 days after making that decision, the committee must provide the plaintiffs’ class action attorneys with “a summary of the finalist proposals received, the decision made, and the reasons therefor. This summary shall include the final agreed-upon fee for basic recordkeeper services.”
What do the conditions in the settlement add to the story for risk management for plan committees?

First, there is a preference by the Schlichter firm, for recordkeeping fees to be calculated on a per-participant basis. The belief is that it produces a fee that more accurately reflects the costs for the services rendered to the plan (and the fee does not automatically grow with increases in the value of assets or with new contributions). And, while not entirely clear, it appears that the plaintiffs’ attorneys would prefer that plans either avoid investments with revenue sharing or that they offset the revenue sharing against the costs of the investments that generate those payments or credits. In any event, the objective is transparency and scrutiny of revenue sharing and its allocation by plan committees.

As mentioned earlier, there is also an emphasis on low-cost share classes, collective trusts, and separately managed accounts. The availability of these investment options is highly dependent upon the size of the plans. As a result, smaller plans will not have access to all of the lower-cost investments.  However, we are seeing a movement away from mutual funds and into collective trusts for mid-sized and even smaller plans. In fact, that’s how stable value funds are typically offered to small plans.

One last thought. It is difficult for plan committees to be aware of all of the alternatives, to gather the information and to make decisions without professional advice. When selecting professional advisors, plan committees are well served by insisting that their advisors or consultants be fiduciaries and by working with advisors who work with other plans of similar size in assets and participants, and by checking references at those other similar plans. The availability of investments, and a number of other considerations, change with the size of plans, measured by assets and number of participants. As a result, committees should work with advisors to have experience with plans similar to theirs.

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The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.

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