Class Action Claims Nextep Imprudently Managed Multiple Employer Retirement Plan

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A proposed class action claims Nextep, Inc. and its board of directors and investment committee have “wasted” the assets of the company’s multiple employer retirement plan by failing to remove imprudent investment options and allowing the plan to be charged excessive administrative and recordkeeping fees.

The 33-page case claims the defendants have breached their duties as fiduciaries under the Employee Retirement Income Security Act, which requires plan administrators to act with “undivided loyalty” to beneficiaries and establish a prudent process for selecting and maintaining investments.

The lawsuit claims Nextep’s actions have cost plan participants millions of dollars in lost investment savings and “grossly excessive fees.”

Nextep is a professional employer organization that, as part of the benefits and human resources services it offers to businesses, allows clients and their employees to participate in its multiple employer plan (MEP), which remains one of the largest defined contribution plans in the U.S., the lawsuit says.

The suit alleges, however, that the defendants have breached their duties owed to the plan and its participants by failing to prudently monitor the plan’s funds. More specifically, the case says the defendants retained many funds as investment options even though they charged “grossly excessive fees” in comparison to “identical, comparable and/or superior alternatives.” Per the lawsuit, the defendant’s failure to change imprudent funds to less expensive share classes or lower cost structures for several years is “a clear indication that Defendants were not monitoring the Plan’s funds as they should have been.”

The case goes on to allege that in 2019, all 29 funds available in the plan were more expensive than comparable funds available to plans of a similar size. Further, 26 of the 29 funds, from 2015 to 2019, were not in the lowest share class, meaning the plan paid higher fees for funds that otherwise held “identical investments and have the same manager” as the lower-cost options, according to the suit.

“At all times during the Class Period, Defendants knew or should have known of the existence of cheaper share classes and therefore also should have immediately identified the prudence of transferring the Plan’s funds into these alternative investments,” the complaint alleges.

The case alleges there exists “no good-faith explanation” for maintaining high-cost share classes when lower-cost share classes are available for the “exact same investment.”

The suit further alleges the defendants allowed the plan to be charged excessive recordkeeping and administrative fees by using revenue sharing. According to the lawsuit, using revenue sharing as a means to pay recordkeeping fees, though not imprudent as a rule, resulted in a “worst-case scenario” for plan participants. While the plan paid as much as $175 per participant in administrative and recordkeeping costs by 2018, similarly sized plans paid just over $70 per participant during the same time frame, the lawsuit relays. Given the plan’s size and bargaining power, the defendants should have been able to obtain lower-cost recordkeeping services, according to the suit.

While some of the plan’s investment funds were converted in 2020 to lower class shares, or eliminated excessive fees, these changes, the complaint says, were “far too little and too late” given plan participants had already suffered damages for at least five years prior.

The lawsuit claims the defendants’ breach of their fiduciary duties caused plan participants to lose millions in retirement savings due to excessive costs and lower net investment returns. Had the defendants exercised their duties of prudence and loyalty, the plan, the case says, “would not have suffered these losses, and the Plan’s participants would have had more money available to them for their retirement.”

The lawsuit looks to represent participants and beneficiaries of the plan at any time between March 10, 2015 through the date of judgment.

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