Lawsuit Claims Providence Health & Services Paid Excessive Compensation to 403(b) Plan Manager

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Providence Health & Services and its Human Resources Committee are the defendants in a proposed class action filed in Washington in which the plaintiff claims the entities breached their fiduciary duty to the former’s 403(b) value plan participants. The plaintiff behind the 55-page lawsuit alleges the defendants violated federal law in allowing the plan’s recordkeeper, Fidelity, a non-party to this suit, to receive “excessive and unreasonable compensation” through, among other forms of payment:

• Direct “hard dollar” fees paid by plan participants;
• Indirect “soft dollar” fees paid by non-Fidelity-managed mutual funds added into the plan to make money for Fidelity;
• Fees collected directly by Fidelity from mutual funds it does manage that were added to the plan;
• Float interest, i.e. a non-fixed, variable interest rate applied to the life of, say, a loan or debt; and
• Freedom to market rollover materials to plan participants.

“In order to provide for these revenue streams,” the case reads, “[the defendants] larded the Plan with excessively expensive mutual funds—to the exclusion of superior alternatives—which in turn paid Fidelity out of the excessive fees they collected from Plan investments.” 

Moreover, the complaint, citing possible violations of the Employee Retirement Income Security Act of 1974 (ERISA), asserts the suspect mutual funds underperformed when compared with superior alternatives for a number of reasons, including that they charged lower fees since additional payments to Fidelity were removed. 

Despite the defendants, after moving certain plan assets into reportedly less expensive investment alternatives in 2016, finally capturing some of the aforementioned excessive fees to the benefit of plan participants, the lawsuit charges Fidelity’s compensation “remains double the market rate” for the services it provides.