A former employee of John Muir Health has sued the operator of hospitals and a physicians’ network alleging ERISA violations because its 403(b) plan charged high record-keeping fees, contained too many investment options and had too many record keepers.
In addition, the lawsuit filed in a U.S. District Court in Oakland, Calif., on March 15 accused the company of using forfeited employer contributions to reduce employer contributions to the plan rather than reduce overall plan costs.
“Defendants should have substantially lowered” record-keeping and administrative fees “by soliciting bids from competing providers and using its massive size and correspondent bargaining power to negotiate for fee rebates, but it did not do so, or did so ineffectively,” said the complaint in the case of Nado vs. John Muir Health et al., which is seeking class-action status.
The market for record-keeping and administrative services is “highly fungible” and “highly competitive,” and it is “filled with equally capable record keepers similar to Fidelity and Lincoln,” who can provide comparable, cheaper services, the lawsuit said. Fidelity Investments and Lincoln Financial Group aren’t defendants.
“Prudent fiduciaries of similarly sized defined contribution plans use a single record keeper rather than hiring multiple record keepers and custodians or trustees,” the lawsuit said. “This leverages plan assets to provide economies of scale and ensures that plan participants pay only reasonable record-keeping fees, while also simplifying personnel and payroll data feeds, reducing electronic fund transfers, and avoiding duplication of services when more than one record keeper is used.”
Offering 115 investments causes confusion among participants and causes duplication among options, the lawsuit said. “Plan participants are not likely to have the investment expertise and sophistication to build an appropriate asset allocation from the hundreds of available investment choices,” the lawsuit said.
The plaintiff also accused the defendants of self-dealing by retaining forfeited company contributions to the retirement plan if a participant leaves before becoming fully vested. In the John Muir case, a participant is fully vested for company contributions after five years. The participant’s contributions aren’t affected by this policy.
Even though the IRS allows a company to use forfeited funds to reduce company contributions or reduce plan expenses, the plaintiff criticized the forfeiture practice as violating ERISA’s duty of loyalty, which says fiduciaries must put participants’ interests ahead of company interests.
“The claims in this lawsuit are baseless,” a John Muir Health spokesman wrote in an email.
“John Muir Health routinely reviews operation of its 403(b) retirement plan specifically to ensure that administrative costs are minimized,” he wrote. “These efforts are well documented and will enable us to defeat this lawsuit in court. It is regrettable, however, that we must divert funds from clinical operations to defend this meritless litigation.”
The John Muir Health 403B Plan, Walnut Creek, Calif., had assets of $1.05 billion as of Dec. 31, 2022, according to the latest Form 5500.
