Recently the Bell vs. ATH Holding Company, LLC (a subsidiary of Anthem, Inc.) lawsuit settled. This is frequently referred to as the “Anthem Settlement” (the “Settlement”). The Settlement received quite a bit of attention from both the industry and mainstream press for a number of reasons, not the least of which include the size of the 401(k) plan ($5.1 billion), the size of the monetary settlement ($23,650,000), as well as inclusion of somewhat unusual non-monetary terms.
The Anthem 401(k) is considered a “jumbo” plan with over $5.1 billion in plan assets. All but two of the plan’s investments were Vanguard mutual funds. Vanguard mutual funds have a reputation for being low-cost investment alternatives.
Plaintiffs made the following allegations:
- The plan’s fiduciaries breached their duties to the plan by using more expensive share classes of investments than was necessary. For example, the plan offered the Vanguard Institutional Index Fund with an expense ratio of 0.04%, but a lower share class was available at 0.02%.
- Less expensive vehicles should have been explored for the same investment strategies, for example utilization of collective investment trusts (CITs) or separate accounts (SAs).
- The plan should have offered a stable value investment instead of a low-yielding money market fund.
In discussing the Settlement it is important to remember that the case has not actually been adjudicated. In other words, no court has ruled on the merits of the allegations made against, nor the actions taken by, the plan’s fiduciaries. Also, it would be incorrect to state that any inferences can be made about the prudence, or lack thereof, of the fiduciaries’ actions or inactions in regards to any of the allegations. Rather, what may be gleaned from the Settlement are concepts that fiduciaries should understand to best protect themselves from similarly targeted lawsuits.
The following are monetary, and some of the more interesting non-monetary, settlement terms:
- $23,650,000 – split amongst two classes of participants. One class contains participants with account balances greater than $1,000 as of a certain date. The other class contains participants who would have experienced a reduction of their account at a rate of $35/year due to revenue sharing for a certain period of years.
- The plan’s committee will provide a targeted communication to participants invested in the money market that includes a fund fact sheet (or something similar that explains the risks of the money market fund), the historical returns of the money market over the past 10 years, and the benefits of diversification.
- The plan’s fiduciaries must conduct an RFP for recordkeeping services within 18 months of the Settlement period.
- The fiduciaries must engage an independent investment consultant, review said consultant’s recommendations, and make decisions based on those recommendations, taking into account the lowest-class share class available, whether or not revenue sharing rebates are available, and alternative investment vehicle (CIT or SA) availability.
Fiduciaries should take away the following concepts from the Settlement:
- Plaintiff’s counsel seems to have a preference for per participant fee structures. This is not legally required, and in fact may not always be the most cost efficient fee design. Plaintiff’s counsel’s actions are a sober reminder that fiduciaries should, at a minimum, educate themselves regarding available fee structures and choose prudently among them.
- Pushing for the lowest share class seems to be a recurring theme in lawsuits and settlements. Again, this is not a requirement under the law.
- The desire to see more plans use investment vehicles that may be less expensive than their mutual fund counterparts is increasing. CITs and SAs are designed for institutional use, such as qualified retirement plans. Fiduciaries need to be educated on their availability and when it may be prudent to offer them in their plans.
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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The services of an appropriate professional should be sought regarding your individual situation.