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June 8 — The decadelong litigation effort challenging the fees charged to 401(k) investors has reached a previously unthinkable target: a Minnesota auto body repair company with barely 100 participants and less than $10 million in assets.
Workers have used litigation to challenge 401(k) fees for more than a decade, but the frequency of these lawsuits recently picked up steam. Since September 2015, more than a dozen lawsuits have been filed challenging the fees paid by 401(k) plans of large companies like Intel Corp., Anthem Inc., Verizon Communications Inc. and Chevron Corp.
Most of these cases concern mega plans with assets in the billions of dollars, but the lawsuit filed in May against Minneapolis-based LaMettry's Collision and its $9 million 401(k) plan has gotten the attention of many players in the small-plan universe.Size* of 401(k)s Involved in Fee Lawsuits
Verizon Communications Inc.: $30 billion Chevron Corp. $19 billion Intel Corp.: $14.9 billion Oracle Corp.: $11 billion American Airlines Inc.: $9.1 billion Anthem Inc.: $5 billion Deutsche Bank Americas: $2.9 billion Insperity Inc.: $2 billion M&T Bank Corp.: $1.9 billion BB&T Corp.: $1.6 billion DST Systems Inc.: $1.4 billion Putnam Investments LLC: $589 million Allianz Asset Management: $772 million LaMettry's Collision: $9.2 million *as alleged in court filings
This universe is anything but small: Nearly 75,000 401(k) plans have $25 million or fewer in assets, and more than 4.2 million workers have their retirement savings in these plans, according to recent data from the Employee Benefit Research Institute. Research shows that these smaller plans typically carry higher fees than larger plans that can use their size as leverage to negotiate better deals, making them vulnerable to lawsuits claiming excessive fees.
If a company with a $9 million 401(k) plan can be sued for excessive fees, is any company safe?
Bloomberg BNA asked employee benefits attorneys how this litigation is reshaping the 401(k) industry. They pointed to lower industrywide fees and a reluctance by plans to embrace alternative financial strategies as potential side effects. They also predicted that companies would begin looking more closely at fiduciary liability insurance and the possibility of banding together through multiple employer plans.
The average fees paid by 401(k) investors declined by about 30 percent between 2000 and 2014, according to research by the Investment Company Institute. ICI also found that between 2009 and 2012, the largest declines occurred in plans with assets under $1 million—the very plans likely to carry the highest fees in the first place.
These declines have continued at a “particularly sharp” pace over the past few years, according to Carl Engstrom, a Minneapolis-based attorney with Nichols Kaster who represents 401(k) investors in lawsuits against companies like American Airlines and Deutsche Bank.
Engstrom told Bloomberg BNA that the decline in fees can be traced to the decadelong series of lawsuits challenging those fees—and in particular, a handful of large settlements over the past few years, like the $57 million deal Boeing Co. inked with its workers and the $62 million settlement agreed to by Lockheed Martin Corp.
“The effect has been enormously positive overall,” Engstrom said. “It's had a tremendous effect on improving fiduciary practices among large plans.”
Even so, Engstrom said the improved practices being adopted by larger plans haven't fully trickled down to smaller and mid-sized plans yet.
“There's a lot more that needs to be done,” he said.
Allison Wilkerson, a partner with McDermott Will & Emery in Dallas who advises 401(k) plans, agreed that we're seeing a “general move toward lower fees” in the wake of this litigation effort. Plan sponsors are also responding by looking into flat, per-participant fees that are easier to understand and explain, Wilkerson said.
David N. Levine, an attorney with Groom Law Group in Washington who advises 401(k) plans, expressed concerns about how the litigation has focused on plan fees at the expense of other important considerations.
Although this focus on being “cheap, cheap, cheap” makes for a clear and understandable argument, Levine said there are a “million reasons”—including complexity of payroll, location and workforce composition—why a particular plan might not choose the absolute cheapest investment options available.
Levine also cautioned that driving down plan fees through litigation could end up undermining the goal of a secure vehicle for retirement savings.
“Fees have continued to drop, but there's only so far you can drive down costs without affecting service or services,” he said.
Levine identified another negative side effect of ongoing plan fee litigation: a potential reluctance by plan sponsors to innovate.
Specifically, he said that the threat of litigation has made plan sponsors wary of alternative strategies like lifetime income solutions. Levine said that these strategies could ultimately benefit workers' savings goals, despite sometimes carrying higher fees than traditional investment options.
“It's making people cautious about innovation,” Levine said. “They think, ‘this might help my participants, but does it expose me to liability?'”
For his part, Engstrom predicted that the continuing threat of fee litigation would encourage more and smaller companies to consider fiduciary liability insurance policies for their 401(k) plans, which can provide a layer of protection from legal fees and settlements.
Engstrom praised these policies as a largely positive development, saying that they have the potential to “really improve fiduciary practices.”
According to Engstrom, fiduciary insurers can help retirement savers by pressuring plan fiduciaries to adopt best practices and by increasing premiums on plans that fail to do so.
These policies are regularly used by large plans with assets exceeding $100 million, Engstrom said. He called the policies “relatively inexpensive” and predicted that smaller plans would begin to find them valuable.
“I think it'll be seen as a cost of doing business,” he said.
With the threat of plan fee litigation in the air, some employers may be attracted to alternative arrangements that provide retirement savings vehicles for their employees with a lower risk for litigation.
In particular, multiple employer plans (MEPs)—in which different employers band together to offer a pooled retirement plan to their employees—received increased attention earlier this year, when the Obama Administration urged Congress to eliminate obstacles involved in establishing these kinds of arrangements.
Erin Turley, a partner in McDermott's Dallas office, said that MEPs may begin to look especially attractive in the face of ongoing plan fee litigation.
Creating one large plan instead of many small plans can reduce overall fees by giving the plan increased leverage to negotiate with service providers. It also allows the plan to take advantage of economies of scale and spread administrative costs over a larger universe of investors.
However, Turley said that the current regulatory environment isn't “particularly favorable” to the expansion of MEPs, although they're being talked about and proposed at the state level.
Engstrom said that MEPs have “some potential” and could gain traction in the future, but he expressed concerns over how much that would ultimately benefit savers.
“There are potential problems created by multiple employer plans in terms of incentives for those operating the plan,” he said. “The companies that launch MEPs generally do so as a profit-driven enterprise. Experience has taught that wherever a plan’s fiduciaries or its sponsor view an ERISA plan as a profit center, the result for employees is often higher fees, hidden fees and imprudent investments chosen because of how they benefit the plan’s fiduciaries or sponsor, rather than the participants.”
Despite this shifting legal landscape, none of the attorneys interviewed by Bloomberg BNA thought that 401(k) plans were likely to disappear in the next 10 years.
“I don't think that the ongoing litigation will have any effect on the existence of 401(k) plans,” Engstrom said. “That's a bogeyman that defendants have identified that never comes to fruition, because employees simply demand a retirement plan.”
Wilkerson agreed that employee demand would ensure that employers continue to offer 401(k) plans.
“I'm not sure you can compete in an environment without some kind of savings plan,” she said.
Although one recent lawsuit raised eyebrows by targeting a plan with less than $10 million in assets, Engstrom said that case may be a bit of “lightning in a bottle” that doesn't signal widespread litigation against plans of that size.
However, Engstrom pointed out that an inverse relationship persists between the size of a plan's assets and the level of fees it pays, with investors in smaller plans often paying the highest fees. Indeed, recent ICI data show that 401(k) plans with less than $1 million in assets carried fees five times higher than those of plans with more than $1 billion in assets.
This is a problem worth addressing, Engstrom said.
“People who work for small companies shouldn't be punished with exorbitant expenses just because they work for a small employer,” he said. ‘“Even a $9 million plan has the ability to find and administer a low-cost plan that provides excellent investment options for their employees.”
To contact the reporter on this story: Jacklyn Wille in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jo-el J. Meyer at email@example.com
The Employee Benefits Research Institute's April 2016 paper on 401(k) plan asset allocation is available at https://www.ebri.org/pdf/briefspdf/EBRI_IB_423.Apr16.401k-Update.pdf. The BrightScope/ICE Defined Contribution Plan Profile from 2014 is available at https://www.ici.org/pdf/ppr_14_dcplan_profile_401k.pdf. The ICI research perspective on the economics of 401(k) plans is available at https://www.ici.org/pdf/per21-03.pdf.
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