Novant “Cuts Their Losses” to the Tune of $32 Million

It’s become a familiar story in the retirement benefits industry—a company comes under fire for excessive fees charged to its retirement plan, and plan sponsors face class action lawsuits for failing to act in the interests of the plan’s participants.

More often than not, these stories don’t end well for the plan sponsors. Judges and juries tend to take harsh stands against any egregious behavior done to plan participants, and plan sponsors end up paying millions of dollars in fines and restitution.

One participant lawsuit was settled last month to the tune of $32 million. Novant Health, a nonprofit health care system based in North Carolina, was sued in 2014 by a group of employees and participants in the company’s retirement plan. The plaintiffs charged the defendants, both as administrative and retirement committee members and individually, with dereliction of their fiduciary duties. [Kruger v. Novant Health, Inc., 1:14-cv-208. (M.D.N.C. filed 3/12/14)]

Normally, these cases drag on for several years, so the early settlement is a cause for wonder. Because the case was settled before any arguments were made, it’s impossible to say with certainty that the plan sponsor violated any ERISA laws. I have to assume the plan participants who filed the lawsuit had a strong case on their hands, and the company did not want to fight a long drawn-out battle in a court of law or the court of public opinion.

It is possible that their motivation to settle was driven by a desire to avoid individual liability which would have caused them to pay out of their own pockets. ERISA Code Section 409(a) provides that “any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach.” In other words, the plan sponsors may have been focused, in part, on their wallets when they decided to settle out of court.

The allegations paint a dark picture of disregard for the ERISA statutes around fiduciary duties for plan sponsors, or ignorance around their responsibilities (which the Department of Labor has stated is not an excuse for violating the law.) At the heart of the complaint was an excessive increase in fees paid by the plan to its broker, rising from $800,000 to as much as $6 million over the course of a few years. In addition, the plaintiffs allege the investment options available in the plan were expensive share classes, especially for a large plan with over $1 billion in assets.

Then comes the charge from the plaintiffs of extensive outside business ties between Novant Health and the broker for the retirement plan, through companies that the broker either owned or maintained a controlling interest. This appears to be a violation of ERISA law pertaining to transactions with a party of interest. According to the letter of the law, “A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect furnishing of goods, services, or facilities between the plan and a party in interest.” [ERISA Section 406(a)(1)(C)]

I believe a good process of prudence can help plan sponsors stay compliant with the fiduciary standard under ERISA, no matter the size of the plan. Establishing a consistent process of prudence is relatively simple to implement. More importantly, adhering to a process of prudence can pay off for plan sponsors in the long run, by avoiding potential ERISA violations that can expose the company to legal ramifications from unhappy plan participants.