Litigation over Juniper's fees could drive more lawsuits

A recent lawsuit chiding Juniper Networks Inc. for offering participants in its 401(k) plan a managed account that it alleges was too expensive could lead to a spate of similar suits, some legal experts believe.

"I think this may be the harbinger of more lawsuits being filed," said Carol Buckmann, a partner at law firm Cohen & Buckmann PC in New York, referring to the suit lodged against Juniper by a 401(k) participant.

The lawsuit, filed Aug. 11 in U.S. District Court in San Jose, Calif., takes aim at Juniper, its board of directors and investment committee for authorizing the plan to pay what it claims were unreasonably high fees for managed account services, arguing that the services were not materially different than what participants could get through much cheaper target-date funds. It also alleges additional fee offenses for other retirement plan services.

"Juniper Networks takes its obligations very seriously to prudently manage its 401(k) plan for employees. We intend to vigorously defend against the claims asserted," a Juniper spokeswoman said in an email.

The case, filed by law firms Walcheske & Luzi LLC and Creitz & Serebin LLP, tracks language in a parallel lawsuit filed against Nestle USA Inc. in October by the Walcheske firm. Walcheske has also made similar excessive managed account fee claims in other cases and has additional lawsuits in the works, said Paul Secunda, a partner at Walcheske in Brookfield, Wis.

The number of lawsuits targeting alleged high-fee managed accounts is not known because such claims are still relatively new, but lawyers agree that the number is growing.

Michael Hadley, a partner at Davis & Harman LLP in Washington, says he is "seeing more interest by class-action plaintiffs in the fees of managed account services. "The plaintiffs in many of these cases have essentially alleged that plan sponsors and sometimes record keepers are selecting managed account providers that are too expensive and the managed account fees are too high," he said.

Mr. Hadley identified at least a half-dozen managed account fee cases filed last year and says that the number since then has likely increased into the "double digits, maybe more."

David Levine, a principal at Groom Law Group, Washington, also has seen the number of cases citing managed account fees issues "coming up more and more often."

The uptick comes as record keepers look to managed accounts as a profitable new revenue source, a bright spot amid traditional record-keeping services struggling under heavy fee pressure. The emergence also comes as more plan sponsors offer managed accounts, a result of having more vendors in the market. The increased uptake is also due to plan sponsors wanting to give participants access to the purported personalization benefits of the products, industry experts say.

In 2019, 40.3% of sponsors offered a managed account, up from 33.7% in 2014, according to the Plan Sponsor Council of America's 63rd annual survey of profit-sharing and 401(k) plans.

Mr. Levine sees the new claims as the natural progression of an old story that has been playing out for years as plaintiffs moved beyond scrutinizing investment fund and record-keeping fees.

"Plaintiffs evolved from saying 'your funds aren't good' to 'your funds aren't good and you pay too much' to 'your record-keeping fees are too much' to 'managed accounts are too much,'" said Mr. Levine. "But underneath it all, it's just the plaintiffs challenging more and more pieces of the steps that are necessary to run a plan," he added.

Davis & Harman's Mr. Hadley echoed similar views, saying plaintiffs' lawyers are using the recent lawsuits to try different theories to see which ones can stick. "This complaint strikes me as another example of what we call a shotgun complaint — shoot a bunch of pellets and hope one hits," he said, referring to the Juniper lawsuit.

One notable allegation in the Juniper lawsuit that may stick if proven true is that the managed account service didn't provide the customization that people expected, Ms. Buckmann said. "They're basically saying 'you really haven't done anything different than a target-date fund,'" she said.

The complaint alleges that because "the asset allocations created by the managed account services were not materially different than the asset allocations provided by the age-appropriate target-date options" already available to participants, the reasonable fee for the plan's managed account service should be "zero or very close to zero."

"If this is a true description of the facts, I think a court could conclude that the participants are overpaying because they are paying more than they would in a target-date fund, but their extra fees aren't buying any additional services," Ms. Buckmann said.

The managed account, offered through Strategic Advisors Inc., a subsidiary of Juniper record-keeper Fidelity Investments Inc., costs participants 65 basis points annually, a fee the lawsuit claims was excessive and "not reasonable given the plan's massive size and negotiating power."

The plan had $1.4 billion in assets and 6,860 participants at the end of 2019, according to the company's most recent Form 5500.

The lawsuit claims that there were other managed account providers offering virtually identical services for significantly lower fees, citing Betterment LLC, The Vanguard Group Inc. and The Charles Schwab Corp., which the suit says charge 25 basis points to 30 basis points for plans much smaller than Juniper's.

The lawsuit also holds up the tiered pricing of a managed account offered through Strategic Advisors to participants in the $4 billion Kimberly-Clark Corp. 401(k) and profit sharing plan, Irving, Texas. The suit points out that the tiered pricing gives participants a much better deal than a flat fee on assets. Kimberly-Clark participants using the managed account are charged no fee for the first $5,000, 25 basis points up to $100,000, 15 basis points on the next $150,000, and 10 basis points on assets greater than $250,000, according to the lawsuit.

"They're basically saying the Kimberly participants are paying a lot less because they use their size to negotiate with the manager of the managed account," Ms. Buckmann said.

Lawyers generally agree that there will be more suits that include managed account fee claims, particularly as more participants start using the accounts. "Not that many people were using these before and all of sudden they're becoming popular," Ms. Buckmann said of managed accounts.

Some lawyers, though, are a bit more measured. While managed accounts appear to be gaining some traction, "it's difficult to predict litigation trends," said Jodi Epstein, a partner with Ivins, Phillips & Barker, a law firm in Washington.