In the second settlement agreement filed in less than a week by the law firm of Schlichter, Bogard, & Denton, the parties in Kruger v. Novant Health have agreed to settle the case and have sought approval from the court in the Middle District of North Carolina. Defendants have agreed to pay $32 million and have agreed to very significant affirmative relief. Counsel for the plaintiff’s will seek no more than $10,666,666 in attorney’s fees and $95,000 in costs.

Novant Health, Inc. is a non-profit hospital system based in North Carolina. We broke the story on this case in March of 2014 when the plaintiffs filed their federal lawsuit accusing the fiduciaries of the multiple plans run by Novant of breaching their fiduciary duties by (1) allowing excessive fees to be paid to the plans’ broker, D.L. Davis & Company, Inc., (2) allowing excessive fees to be paid to the plans’ recordkeeper Great West, and (3) including more expensive share classes for all of the plans’ mutual funds.  (see Plan Sponsor Sued over $6 million Paid to Broker). More specifically, the complaint alleged that the broker, in just a few short years, had their compensation increase from about $800,000 to as much as $6 million as the assets of the plans drastically increased. In mid September, the district court denied the defendants’ motion to dismiss, allowing the case to move forward.

It is uncommon, but not unheard of, for excessive fee cases to settle so early in litigation before any type of dispositive motion is filed or class certification is sought. According to filings by the parties, shortly after the complaint was filed, the parties exchanged thousands of documents and entered into early mediation. All defendants in lawsuits are entitled to their day in court, but the severity of the allegations by the plaintiffs may have had a strong influence on the early settlement.

For example, the plaintiffs alleged in the complaint that Davis had an extensive business and land development relationship with Novant Health, including companies owned, controlled, or substantially invested in by Mr. Davis, which entered into land development projects and office building leasing arrangements in the greater-Winston-Salem area with Novant Health. Davis was also accused of providing Novant Health a gift in excess of $5 million by a Davis-owned development company, East Coast Capital, just as the company announced the plans of a large business development known as the Southeast Gateway, which included Novant Health occupying 40,000 square feet of this office development for a call center.

Whether these allegations are true or not, the extensive affirmative relief agreed to by the parties demonstrates their plausibility. During the four settlement period, the defendants have agreed to:

1. conclude a comprehensive request for proposal (“RFP”) competitive bidding process, conducted and led by an outside consultant, for recordkeeping, investment consulting and participant education services for the Plans;
2. engage a mutually agreed upon Independent Consultant to assess the adequacy of the RFP process and assess Defendants’ anticipated selection of service providers for the Plans;
3. ensure that Plans’ administrative service providers are not reimbursed for their services based on a percentage-of-plan-assets basis;
4. review all current investment options in the Plans and revise the investment options, as needed, ensuring that those options are selected or retained for the exclusive best interests of the Plans’ participants;
5. the Independent Consultant reviewing the investment option selection process and provide recommendations, if necessary;
6. the Independent Consultant conducting an annual review, for four years, of Novant’s management of the Plans;
7. removing Davis, and related entities, from any involvement with the Plans;
8. removing Davis and related entities from Novant employee benefit plans;
9. not enter into any new real estate or business relationships with Davis and related entities;
10. not offer any Mass Mutual investments in the Plans or any other investment that provides compensation to Davis and related entities;
11. provide accurate communications to participants in the Plans;
12. not offer any brokerage services to the Plans; and
13. adopt a new investment policy statement to ensure that the Plans are operated for the exclusive best interests of the Plans’ participants.

According to the settlement agreement, the Independent Consultant will be Innovest Portfolio Solutions, LLC based in Denver, CO. It does not suggest how or why they were retained. Additionally, the defendants will retain an independent fiduciary to approve the settlement, but the agreement did not specify who that party will be.

Our Thoughts

As discussed above, no allegation is proven true until a court of law decides so (and then years later an appeals court agrees). But where there is an abundance of smoke, there is usually fire. And the early settlement of this case suggests that the plan fiduciaries were engaging in conduct that did not meet the stringent standards of ERISA. While the allegations of real estate deals and money payments are dramatic, the fiduciary of the average plan can look to this lawsuit and settlement as an example that ERISA requires you to act in the best interest of plan participants at all times. That often involves hiring conflict free experts and regularly reviewing a plan’s investments and service provider arrangements.

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