California hospital system Sutter Health has been sued a second time this summer over the fees charged within its $3.7 billion 403(b) retirement plan.
The two class-action cases were brought by law firms that have become well-known in recent retirement plan litigation: Capozzi Adler and Shepherd Finkelman Miller & Shah. The former is behind many of the new retirement-plan lawsuits filed so far this year.
Both of the lawsuits point to allegedly excessive investment management fees, as the plan did not include the lowest-cost investment options available. The July case brought by Capozzi Adler calls out net fees in most of the plan’s investments that were higher than average costs for comparable mutual funds.
The more recent case from Shepherd Finkelman, however, focuses most of its attention on the actively managed Fidelity Freedom Target Date series, which accounts for about two-thirds of the plan’s assets, according to the complaint. The share class of that product used in the Sutter Health plan is as much as eight times more expensive than the lowest-fee share class of Fidelity’s passively managed Freedom Index series, the complaint notes.
But the case also takes aim at the use of active management in general, calling Fidelity’s allocation to certain asset classes risky and pointing to long-term underperformance in the series. The use of tactical rebalancing in the active series, which allows portfolio managers to move allocations by as much as 10 percentage points, further adds to risk, the plaintiffs in the lawsuit allege.
“In a departure from the accepted wisdom that target date funds should maintain pre-set allocations, Fidelity encouraged its portfolio managers to attempt to time market shifts in order to locate underpriced securities, which the firm dubs ‘active asset allocation,’” the complaint reads.
Despite that allegation, use of tactical rebalancing in target-date series has become a standard practice among fund sponsors.
The more recent case also points to several of the plan’s investment options lagging their benchmarks in recent years, including the Parnassus Core Equity, Dodge & Cox Stock and Lazard Emerging Markets Equity funds.
The case also cites higher-than-average record-keeping fees charged to plan participants, at a flat rate of $34 per year. Based on the level of assets in the plan, the sponsor could have negotiated a fee ranging from $14 to $21 per year for each participant, the complaint stated.
As of the end of 2018, there were more than 73,000 participants in the plan, according to the September complaint.
Sutter Health declined to comment on the lawsuit.
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