Plan Fees Still Lawsuit Trigger for Retirement Plan Sponsors


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The legal landscape continues to be unforgiving for many retirement plan sponsors who find themselves defendants in excess plan fee lawsuits.

In the last year alone, prominent companies have been the targets of fee litigation, and even a small plan sponsor has been dragged into court because of its fees.

Plan sponsors can work with their recordkeepers to reverse the negative perception surrounding fees, a fiduciary benchmarking practitioner said.

“Recordkeepers can claim the high moral and legal ground” in making the case that plan fees are necessary to provide quality services to the plan and improve participant outcomes, Tom Kmak, founder and chief executive officer of Fiduciary Benchmarks, told a conference hosted by the SPARK Institute in Washington on June 20.

Fees Down, But Not Lawsuits

Despite a decline in average investor fees, plan sponsors continue to get hit with fee litigation.

Average 401(k) investor fees declined by about 30 percent between 2000 and 2014, with the largest declines occurring in plans with assets under $1 million, according to research by the Investment Company Institute.

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 and Chevron Corp.

The litigation frenzy has even touched smaller plans. A recent suit was filed against a Minnesota auto body repair company with barely 100 participants and less than $10 million in assets.

Sometimes it is the plan sponsor’s choice of high-cost investments when lower-cost alternatives were available that is at the heart of the alleged violation of fiduciary duties. The lawsuit against Anthem, for example, challenged the company’s selection of retail-class mutual fund shares over lower-cost institutional shares. (See related story, Anthem Sued Over 401(k) Fees Paid to Vanguard).

And sometimes revenue sharing payments are the alleged culprit. A proposed class action filed in May accuses Fidelity Management Trust Co. of breaching its ERISA fiduciary duties for allegedly receiving unreasonable compensation through its brokerage window feature and a kickback scheme with an investment advice company (See related story, Fidelity Faces ERISA Lawsuit Over 401(k) Brokerage Window).

Some plan sponsors have decided it’s better to settle these lawsuits than fight them in court.

In early June, Massachusetts Mutual Life Insurance Co. agreed to pay nearly $31 million to settle a lawsuit claiming that it mismanaged its 401(k) plan, including that the company and its top executives “larded” the company’s retirement plan with “excessive fees” and “unreasonably priced, proprietary investment options.”

Reasonable, Not Necessarily Low

Continuing consolidation in the industry, more regulations and participant lawsuits will keep the pressure on recordkeepers and plan sponsors to justify the fees imposed on plan participants, Kmak said.

Under existing fiduciary standards, fees have to be reasonable, but not necessarily low, he said.

“Reasonable expenses have been around for a long time, they are not a new thing,” he said, pointing to a DOL handbook, A Look at 401(k) Plan Fees, which states that “all services have costs” and “don’t consider fees in a vacuum.”

DOL’s new fiduciary rule also includes reasonable compensation as part of the definition of a fiduciary, Kmak said. “Every single adviser has to make sure their fees are reasonable, whether they are under the fiduciary rule or under the Best Interest Contract Exemption,” he said.

The principles promoted by DOL and in the fiduciary rule can help recordkeepers avoid a “race to the bottom” in which the promise of lower fees leads to lower plan performance, Kmak said.

Too often the setting of fees is considered a one-variable equation in which the only factor that matters is the cost, he said. Instead, he argued, the better way to consider fee setting is as a four-variable equation in which cost is the last consideration after quality, service and value.

Fee setting needn’t be a one-size-fits-all exercise, he said. For example, depending on the complexity of the plan, the recordkeeper can negotiate for a base fee from the plan sponsor and then seek a fee increase if it takes on additional fiduciary responsibilities under the plan, he said.

“The fiduciary rule is going to help you,” he told the audience of recordkeepers. “It protect your clients better, improves outcomes over time, and ensures you are being fairly treated.”

See related articles, Uptick in Fee Litigation Reshaping 401(k) Industry, and MassMutual Settles 401(k) Fee Lawsuit for $31M.

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