By Carol Buckmann
Is 401(k) fee litigation over? Now that many of the cases contending that large 401(k) plans paid fees that were too high have been settled or decided, it would be tempting for sponsors of plans that haven’t been sued to breathe a sigh of relief. They should not do so, because litigation continues unabated with new theories and new targets.
Are the targets just WAL-MART and Fidelity-sized? Not any more. Two suits were recently filed against fiduciaries of plans with assets of about $25 million dollars, though one has been withdrawn. Practitioners worry that this may be the start of a spate of suits against fiduciaries of smaller plans. And the targets have also been weighted towards plans that include proprietary funds in their lineups, a practice which has been fairly common. Proprietary funds are not just an issue for the Fidelity and Vanguard and Principal plans that cover their own employees; sponsors who establish plans with prototype providers often feel pressure to include the provider’s own funds in their lineup regardless of whether they are the best in their class and need to evaluate their exposure if they select these funds.
Here is a summary of some of the suits and the arguments plaintiffs make that participants are overpaying for services:
- Great-West is being sued in a class action based on its operation of its stable value fund. Plaintiffs claim that its ability to set interest rates enabled it to increase profits at the expense of plan participants.
- The current suit involving a $25 million plan suit targets the investment adviser (Centera) as well as the fiduciaries of the plan sponsor (Checksmart Financial).
- Arguments continue to be raised, including in the Checksmart complaint, that a menu of index funds should be provided in every 401(k) plan. The Checksmart complaint and other suits contend that 401(k) plans should look only to index funds as over time actively managed funds do not outperform index funds. (The suggestion that the decision to provide actively managed funds is imprudent is a generalization that investment professionals will dispute.)
- Any plan that includes a sponsor’s own proprietary funds that have higher fees than their class or are not at the top ranking of performance for their class is at particular risk. Plans covering the provider’s own employees always raise self-dealing charges. The essence is that the fiduciaries have operated the plan so as to receive management fees from the investment of plan assets in their own funds even when the investments are not in the interest of the participants. Suits have recently been filed regarding the plans New York Life and American Century Companies provide for their own employees.
- Plaintiffs continue to argue that discretion to set fees in the form of adjustments under contracts (such as Great-West’s setting the interest rate participants receive) makes providers fiduciaries, even though they have not been succeeding with this argument when cases actually go to trial.
Where does this leave the 401(k) fiduciary who hasn’t yet been sued? There is more reason than ever to for them to adopt fiduciary best practices with regard to plan fees. Here are a few suggestions:
- Hire a co-fiduciary investment adviser or a fiduciary investment manager if you don’t already have one. Few plan fiduciaries have the time or expertise to evaluate fund choices, but experts familiar with the market can help you determine which funds are really best and make sure that you have a mix of asset classes available. An investment manager can even make the decisions for you if you are willing to delegate control. Don’t wait for the new fiduciary regulations to come into effect if you rely on a broker who hasn’t accepted fiduciary status for advice about your investment menu.
- Don’t set it and forget it. The U.S. Supreme Court has said that investment responsibilities are ongoing, and fund performance and fees can change over time.
- Benchmark fees and do RFPs on a regular basis to evaluate your fees. You can often use RFP results to negotiate with your current provider for lower fees if you are otherwise satisfied with your current provider.
- Evaluate share classes and revenue sharing arrangements to get the best deal for your participants.
- Consider adopting a formal fee review policy setting out the standards to be used by the plan fiduciaries. These are becoming more common. If you don’t have one, at least make sure that your investment policy statement includes provisions dealing with plan fees.
- One final bit of advice is that if you are sued despite having taken these steps, have adequate fiduciary liability insurance in place. Lawsuits are expensive even if you win.