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DC participants sue Essentia Health over alleged excessive record-keeping fees

Essentia Health, Duluth, Minn., was sued by participants in its $1.1 billion 401(k) and $98.3 million 403(b) plans of charging excessive record-keeping fees.

The proposed class-action lawsuit, filed Dec. 29 in a U.S. District Court in Duluth, Minn., claims Essentia Health breached its fiduciary duties by “failing to prudently investigate and select a reasonable record-keeping arrangement,” and failing to monitor the record keepers' performance and control record-keeping fees.

Also listed as a defendant is St. Mary's Duluth Clinic Health System, a subsidiary of Essentia and sponsor of the 401(k) plan prior to 2012. The 401(k) plan's legacy defined contribution plan was established in 1965, and the 403(b) plan was established in 2009.

The 401(k) plan and 403(b) plan were combined under current record keeper Transamerica Retirement Solutions (then Diversified), in 2012, replacing BMO Retirement Services as the 401(k) record keeper and Lincoln Financial Group as the 403(b) record keeper. The lawsuit not only argues that the fees paid to BMO and Lincoln between 2009 and 2011 were excessive and defendants should have consolidated services, but that fees paid to Transamerica after consolidation have been unreasonably high.

According to the lawsuit, the defendants should have been able to obtain consolidated record-keeping services for $60 to $80 per participant between 2009 and 2011.

In reality, however, BMO was receiving $146 per participant in addition to revenue sharing by 2011. Lincoln's compensation, which was based entirely on revenue sharing, is unknown, but plaintiffs infer Lincoln's compensation was unreasonably high “based on defendants' disregard for BMO Harris' excessive compensation,” according to the lawsuit.

While consolidating record-keeping services to Diversified (later Transamerica) in 2012 should have lowered costs, the lawsuit argues that the fees collected by Diversified, and eventually Transamerica, were unreasonably high because of Diversified and Transamerica's ability to collect additional discretionary compensation from participants.

An Essentia spokeswoman declined to comment.