A new suit — with a plaintiff represented by a new (but suddenly active) law firm claims to be “another example of a large plan filling its 401(k) plan with (1) lower yielding, expensive investments when identical, cheaper classes were available at the time of selections/retentions, while (2) overpaying covered service providers…”
The suit (Partida v. Schenker, Inc., N.D. Cal., No. 3:22-cv-09192, complaint 12/30/22) — filed on behalf of participant-plaintiff Diego Partida by Tower Legal Group[1] against the fiduciaries of the $442 million Schenker Inc. 401(k) (as well as the board, the Committee, and individual delegates) for a variety of reasons, including:
- offering and maintaining higher cost share classes when identical lower-cost class shares were available and could have been offered to participants;
- overpaying an unnecessary advisory firm (Greenleaf Advisors LLC) by alienating trust assets, which exceeded trust direct and indirect costs incurred by plans of similar size with similar services; and
- failure to prudently choose and monitor covered service providers and other plan fiduciaries, as well as “other breaches of fiduciary duties.”
Advisor Impact
Not named as a defendant (yet) is Greenleaf Advisors LLC, though the suit notes that it might do so at a future date. The plaintiff did later note that “Schenker’s decision-making was aided by and under the recommendations of Greenleaf Advisors LLC who was compensated handsomely for poor recommendations in violation of ERISA and Restatement (Third) of Trusts.”
As for Greenleaf, the suit purports to find malfeasance here by comparing the firm’s “annual pay from every other client (using the same services agreement),” noting that it “was much less based on reviews of every client’s reporting at www.efast.dol.gov,” labelling the payment of these fees as “in violation of the Schenker plan document’s ‘Nonalienation of Benefits . . .’ section.” The suit alleges that their experts “… discovered that median pay to Greenleaf from every client (including Schenker, Inc.) was only $18,711 (and their median clients’ assets were less than 10% of Greenleaf had only one client that was close in size to Schenker, Inc. 401(k) Savings and Investment Plan” — and then asserted that “Ms. Cynthia DeGalleford, Director Benefits certified that no excessive compensation was paid to Greenleaf Advisors LLC by way of her answers of ‘NO’ to the government’s question on line 4d on Schedule H (Form 5500), plan year 2016-2021 (‘Were there any nonexempt transactions with any party-in-interest?’).”
That said, the clear focus here is the Schenker plaintiffs that the suit says “not only controls the participants’/beneficiaries’ investments (and related growth which adds two-thirds to retirement wealth; via an Investment Policy Statement (IPS) it failed to share upon written requests when required by ERISA (the Investment Policy Statement (IPS)”— and “also controls all relationships (broker, recordkeeper, custodian, auditor, etc.).” The suit notes that “Schenker alone has full discretion over compensation for the Plan’s chosen and retained providers. Schenker made few, if any, covered service provider changes over the past decade and very few mutual fund changes also.”
Unusual Inferences?
The suit — some 119 pages long, and quite “rambly” at times stakes out a couple of unusual inferences, such as:
- “Morningstar data (as of 6/30/2022 and earlier) indicates that the median portfolio manager tenure is eight (8) years. Thus, statistically speaking, fifty percent (50%) of the Defendants’ chosen funds’ managers are fired or quit every four years and so twenty-five percent leave every two years.”
- Which led them to note, “So when an untested, new fund manager takes over, as 50% will do every four years, a replacement fund should be considered. This was not done by the responsible plan fiduciaries running this Plan and Trust.”
- They assert without reference, “Three years is the common denominator for ensuring managers have experience in running a fund’s money.”
- By way of (apparently) further casting aspersions on the Schenker defendants, the suit also notes that “the average worker tenure in the USA is 4 years,” and that “the Schenker executives’ and fiduciaries’ goal of using the 401k to lure/retain workers is working. Participant tenure at Schenker runs at over two times the Bureau of Labor Statistics (BLS) level (almost ten years (9.6 yrs)).”
Revenue ‘Shearing?’
The suit, based on inferences from the “Schedules of Assets certified to the U.S. Departments of Treasury and Labor,” claims that “Schenker instead spent a great deal of time and made great efforts to focus on receiving revenue sharing credits.” They went on “based on information and belief” to assert that Schenker CEO Cynthia Degalleford certified annually that there were no violations “even though the services under their services agreement for Greenleaf Advisors LLC, remained precisely the same each year,” while continuing to assert that “Greenleaf’s services violated ERISA (since Greenleaf’s services were ‘not necessary for operation’ of the Schenker, Inc. 401(k) Savings and Investment Plan).” The suit goes on to cite what it labeled “Greenleaf’s ‘detrimental investment recommendations’ of identical higher cost share classes, when a cheaper identical one was readily available, harmed the trust and participants/beneficiaries repeatedly over and over again for many years.”
Oh — on the subject of revenue-sharing, “Plaintiffs believe that if one Schenker fiduciary had asked workers many years ago a straightforward question about how they would prefer to pay their 401k provider costs (i.e., revenue sharing classes of mutual funds or a flat $10/quarter) they would have preferred the transparent $10/quarter fee since it is more fair because everyone receives the same service level.”
Interestingly enough, the suit claims that “the Defendants pursued revenue sharing or ‘nonpecuniary benefits’ called revenue sharing. Responsible plan fiduciaries must evaluate the investment alternatives based solely on pecuniary factors. Schenker often subordinated the interests of the trust and participants to unrelated objectives—they sought more costly, less beneficial classes and sacrificed yields and investment returns. The Defendants also cause participants harm by taking on additional investment risk to promote non-pecuniary objectives.”
Revenue-sharing as a practice was referred to as “opaque” and “mathematically harmful” to longtime workers, the suit asserts — and compares it to that of a tax attorney “charging for income tax work based not on the complexity or hours worked for someone’s tax situation but instead based on how much gross income they show on their balance sheet.”
They make an interesting comparison on that impact, claiming that “Greenleaf’s actions/flawed processes repeatedly harmed the Plan and Trust and their pay amounts from the trust/participants’/beneficiaries’ accounts paid came from every single one of the Schenker, Inc. workers (at a rate of almost eight times the pay of a full-time Schenker worker ($17.47 per hour ($34,940/yr) for Van Driver to $21.66 per hour ($43,320/yr) for Truck Driver; www.indeed.com)).”
They also note that, “But for Schenker, Inc. and Greenleaf’s actions, former workers’ cash-out final payments would have been higher (if Defendants’ processes were to buy higher-yielding, lower-cost share classes of the same funds). Former workers’ prior accounts’ distributions since at least 2009 were never ‘restored to the position they would have been had the Defendants’ repeated breaches not occurred’ as required by ERISA § 409 and common trust law.”
Fund ‘Fare’
And then, as most of these excessive fee suits do, the suit focuses on several fund selections with comparable arguments, such as “the Defendants committed two grievous errors here like many other funds observed by Plaintiffs — but in the interest of simplicity and brevity, their similar harmful assertions are being withheld for the moment. First, the Defendants opted for the more expensive share class (‘Admin’) over two cheaper identical versions using the same manager and holding the exact same 96 stocks. The Defendants held this same fund since 2011 so monitoring failures had occurred for many plan years. Second, since the managers could not beat their benchmarks, the Defendants’ selection and monitoring processes should have removed this fund from consideration initially or removed this fund (and its managers (i.e., all share classes)) shortly afterward. Putting $20M of trust dollars and demanding the participants’ menu hold this core Large Cap Growth holding exposed participants to risks and underperformance. The Defendants’ initial selection and, later, related monitoring periods of this same manager failed miserably.”
Oh, and lest it serve as a basis for dismissal, the plaintiff here states that their allegations “do not suggest Defendants should have scoured the market to find the cheapest funds available.” But then, they throw shade on the decisions, commenting that “there was no need to ‘scour’ the market because the facts are overwhelming that the same higher cost funds selected/retained by the Defendants (1) appear on the same pages of their respective prospectuses at the SEC’s website and (2) a cheaper class was always available at the time of the Defendants’ conduct.”
Will the court be persuaded?
Stay tuned.
Footnote
[1] The firm recently filed suit against Ventura Foods, also with a focus on alleged overpayments to service providers — and in August 2021 against SeaWorld Parks & Entertainment.
