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Providence Health & Services Retirement Fund Breach of Fiduciary Duty ERISA Class Action

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According to the complaint for this class action, Providence Health & Services has breached its fiduciary duties in connection with the Providence Health & Services 403(b) Value Plan, in violation of the Employee Retirement Income Security Act (ERISA).

The class for this action includes all participants in the plan from November 28, 2011 to the date of judgment.

Providence has granted the plan’s recordkeeper, Fidelity, “excessive and unreasonable compensation”, the complaint says, via direct and indirect means, including “larding” the plan with overly expensive mutual funds while excluding alternatives that performed better.

The complaint alleges that Fidelity has earned fees in five ways:

  • Direct fees paid to it by the plan
  • Revenue-sharing payments distributed from the plan among various service providers
  • Revenue-sharing payments from mutual funds offered through the plan’s Brokerage Window from investment options that are not core investments of the plan
  • The inclusion in the plan of Fidelity-managed mutual funds
  • Other sources, such as float interest and the marketing of rollover materials to plan participants

The complaint says that although the direct fees paid directly to Fidelity seem modest, Fidelity made far more in revenue-sharing, “the big secret of the retirement industry.”

Revenue sharing is the transfer of asset-based compensation from investment management providers (such as mutual funds) to service providers (such as Fidelity) in connection with 401(k)s and other similar plans. For example, a plan that wants to invest assets in a mutual fund may negotiate an agreement that sets the cost (expense ratio) to include both the actual price for the fund’s services and the additional amount to be paid to other service providers (such as Fidelity).

To keep revenue-sharing profits high, plan fiduciaries may select funds willing to provide sufficient revenue sharing and reject funds with better performance.  They may sometimes choose between virtually identical share classes of the same funds by choosing the revenue sharing ones and rejecting the ones with lower costs for investors.

According to the complaint, that is true of the Providence plan, in which nearly all of the twenty-six actively-managed funds paid revenue sharing to Fidelity.

The complaint alleges that Providence kept mutual funds in the plan for the purpose of providing income to Fidelity, rather than seeking mutual funds with lower costs and better performance. It provides a table to compare certain plan funds with what it claims are identical but lower cost mutual funds and goes into detail about other plan choices and possibilities.

Plan fiduciaries are required by law to act prudently, and they are required to serve the best interests of the plan participants exclusively, rather than their own interests. The complaint alleges that Providence’s imprudence violates ERISA, (1) in connection with the chosen investments, and (b) in permitting high plan costs and recordkeeping fees. 

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