Anthem Settlement

Synopsis

• Anthem plan participants alleged that plan fiduciaries did not perform due diligence on funds being used in the plan
• Parties reached a settlement that includes more than $23 million awarded to participants in addition to certain plan enhancements including:
  • requirement to provide a participant communication on money market funds;
  • conduct a recordkeeper RFP within 18 months of the settlement; and
  • engage with an independent investment advisor.

Recently the Bell v. 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. This article provides some basic background regarding the underlying allegations, a description of the settlement, and what the terms of the settlement may mean from a practical perspective to plan fiduciaries.

Background

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.

The following are allegations made by plaintiffs:

• The plan’s fiduciaries breached their duties to the plan by using more expensive share classes of these 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.

Settlement Terms

The following are monetary, and some of the more interesting non-monetary, terms accompanied by opinion on each:

• $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. Thoughts: Though the settlement amount is large it is not an overly surprising figure given the overall scale of the plan. The division amongst classes of participants reflects the impact of investment costs over disparate time periods.
• 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. Thoughts: Although not explicitly required by ERISA or the Internal Revenue Code, this is not an uncommon step taken by fiduciaries concerned with participants who may not understand the benefits of diversification out of a low-yielding investment option like a money market, guaranteed fund or stable value fund.
• The plan’s fiduciaries must conduct an RFP for recordkeeping services within 18 months of the Settlement period.  The RFP must explicitly request a fee proposal based on total fixed fee and on a per participant basis. Additionally, within 30 days of making a decision as to a move-forward recordkeeper the fiduciaries must provide plaintiff’s counsel with a summary of finalist proposals, decisions made and reasons therefor. Thoughts: The requirement to conduct an RFP on the plan is not surprising, and it is in line with prudent fiduciary best practices. However, the requirement to solicit total fixed fee and per participant basis fee structures is a bit unique to these settlements. The potential issue is that there is not necessarily a guarantee that per participant pricing always equates to optimal pricing.  The assumption is that plan assets grow at a faster rate than participant count does.  In a slowing, or even negative market, for an expanding organization the per participant pricing structure might become more expensive. Ideally every plan considers their own plan’s individual fact patterns to best determine the most prudent fee structure. Even more interesting is the unusual requirement for oversight provided by plaintiff’s counsel. The Settlement requires that fiduciaries’ actions be overseen by plaintiff’s counsel for three years. It is yet to be understood what, if anything, plaintiff’s counsel role would be in the event they disagree with any recommendations or decisions made thereon.  And even moreso what power, if any, they possess to direct fiduciaries to take alternative action.
• 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.  The fiduciaries must provide plaintiff’s counsel with a written summary of the recommendations and their decisions. Thoughts: The engagement of an independent fiduciary consultant is fairly commonplace in such settlements.  But, as discussed above, the oversight element of the Settlement is rather unique.

Takeaways

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. It is important to remember, that not every fee structure fits every plan size and demographic. But 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 DOL stated that use of funds with revenue sharing is not a per se imprudent course of action. However fiduciaries who do not utilize the lowest share class should possess a prudent reason as to why they are utilizing higher share classes, and how they are accounting for any revenue sharing (offsetting recordkeeping and advisory fees, rebating back to participants, etc.) within their plans.
• 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. They are growing in number and availability. Fiduciaries need to be educated as to their availability and when it may be prudent to offer them in their plans.

Source: https://anthem401ksettlement.com/

ACR#321303 07/19