Recent Lawsuit Demonstrates Continuing Need for Plan Fiduciaries to Document Decision-Making Process

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By B. David Joffe, Esq.

Bradley Arant Boult Cummings LLP, Nashville, TN

Late last year, another lawsuit was brought on behalf of participants in a 401(k) plan alleging breaches of fiduciary duties resulting from allegedly high plan fees. This type of case is not novel; the law firm that brought the claim has been class counsel in 15 other class action lawsuits asserting similar claims. However, the new lawsuit makes broad allegations against a plan administered by Vanguard that primarily uses lower cost Vanguard funds. This lawsuit should make all employers take note and realize that their plans may be sued with regard to their fee structure and that they need to take appropriate action to be in position to defend their decisions against a similar lawsuit.

Participants in the Anthem 401(k) Plan (the "Anthem Plan") sued the Anthem, Inc. Pension Committee and related parties for breach of fiduciary duties under the Employee Retirement Income Security Act. The Anthem Plan, the complaint alleges, has over $5 billion in assets and is in the top 1% of 401(k) plans based on assets.  According to the complaint, as of December 31, 2014, the Anthem Plan offered 11 Vanguard mutual funds, a series of Vanguard collective trust target date funds, two non-Vanguard mutual funds, and an Anthem, Inc. common stock fund. Vanguard entities serve as both the third-party administrator and trustee of the Anthem Plan.

The complaint alleges that the Anthem Plan paid unreasonable investment management fees for "excessively high-priced investment options." The plaintiffs claim that Anthem selected "high-priced share classes of mutual funds, instead of identical lower-cost share classes of those same mutual funds," purportedly resulting in a loss of over $18 million to the participants. While this type of claim is not new, it is a reminder to plan fiduciaries to evaluate the lowest-cost share class for the mutual funds offered under their plans. While the plaintiffs seem to overstate the requirement to always use the lowest-cost share class available, the fiduciaries of other plans may be able to protect themselves in similar litigation by having a documented process which demonstrates that they considered the lowest-cost share class available and, when such lowest-cost share class was not selected, the reasoning that led them to the selection of a more expensive share class.

The complaint also alleges that the fees charged for the actively managed funds (Artisan and Touchstone funds) were excessive compared to certain Vanguard alternatives. This too is not a novel claim. Actively managed funds are more expensive than passively managed funds. However, as with the selection of share classes, it is important for plan fiduciaries to evaluate and document the reasons why a particular actively managed fund was selected.  For example, plan fiduciaries may be able to establish and document that particular funds with higher fees have performed better, net of fees, than similar funds with lower fees. Some plans may also offer both actively and passively managed funds in certain style categories to provide the plan participants with a choice of investment strategies.

The plaintiffs also allege that the fees charged for the actively managed funds were excessive compared to what they would have been in "separate accounts." The plaintiffs cite a Department of Labor study concluding that the expenses of separate accounts are "one-fourth of the expenses incurred through retail mutual funds." The plaintiffs' claim is simplistic in asserting the ease with which plans may use separate accounts; only the largest of plans generally have that option readily available. However, for plans that are able to use such accounts, it would be advisable to consider them as part of the review process. Similarly, the plaintiffs claim that the mutual funds fees were excessive compared to the costs that could have been incurred for collective trusts. For larger plans that can use collective trusts, it is also advisable for the fiduciaries to consider and document their consideration of this option.

The complaint notes that the Anthem Plan did switch to directly charging the participants for expenses in 2013.  Prior to September 30, 2013, the Anthem Plan paid administrative expenses through hard dollar fees and asset-based revenue sharing.  The plaintiffs first claim that the pre-September 30, 2013 charges equate to $80 to $94 per participant, which they also claim is excessive.  After September 30, 2013, the Anthem Plan switched to an annual flat fee of $42 per participant. The plaintiffs then claim that a "reasonable" fee would only have been $30 per participant. The plaintiffs implicitly fault the Anthem Plan for changing the fee structure too long after it was appropriate to make such a change. Although per participant pricing may be a prudent method to allocate plan expenses in many situations, the case highlights the need for plan fiduciaries to carefully characterize how and why changes are made at a particular time.

The complaint further alleges that the use of a money market fund rather than a stable value fund was imprudent.  Over time, there may be advantages to the use of one type of fund over another. Again, the important lesson for fiduciaries is to consider the alternatives and document why a particular type of fund was selected over another.

This case is another cautionary tale for the fiduciaries of 401(k) plans and similar defined contributions plans.  As these cases continue to develop, it will be important for plan fiduciaries to have retained a record of a well-documented, regular process of selecting and monitoring investment options available under their plans.

For more information, in the Tax Management Portfolios, see Horahan and Hennessy, 365 T.M., ERISA — Fiduciary Responsibility and Prohibited Transactions,  and in Tax Practice Series, see ¶5530, Fiduciary Duties and Prohibited Transactions.

© 2016 Bradley Arant Boult Cummings LLP