'Best' Case?

On September 11, 2006, while the nation was focused on the fifth anniversary of the 09/11 terrorist attacks, a St. Louis law firm launched its own “attack” on a wide array of 401(k) plan practices, primarily centered around the application and reporting of fees. However, unlike the terrorist attacks, this 09/11 event was launched well below the normal media radar screens. In fact, even today, some two weeks after the complaints have been filed in court by the law firm of Schlichter, Bogard & Denton, I don’t believe it has been picked up by any major media outlet.

That a suit has been filed regarding revenue-sharing practices is hardly a surprise, of course – it’s not even the first (for example, see “Nationwide ERISA Suit Survives Challenge”). Moreover, a number of notable ERISA litigation firms have, for some time, effectively solicited these claims from participants via postings on their respective Web sites. However, what is most striking, IMHO (aside from the relative “obscurity” of the filings), is the breadth of the allegations they contain.

These suits are not just about revenue-sharing, though that is clearly a key element of the fiduciary abuses alleged. Rather, the charges all revolve around the disclosure of fees to participants – more accurately, the lack of disclosure. Along the way, how fees are calculated on company stock accounts, the use of non-institutional class shares by large 401(k) plans, the apparent lack of disclosure to participants of hard-dollar fees (which are disclosed to regulators), and even the presentation of ostensibly passive funds as actively managed all are taken to task. And, as you can no doubt discern from that list, the allegations are made against large plans with billions of dollars in assets. All in all, regarding the fee structures in the 401(k) industry, the complaint says, “At best, these fee structures are complicated and confusing when disclosed to Plan participants. At worst, they are excessive, undisclosed, and illegal.”

Nor does this appear to be the random work of some hack firm trying to make a name for itself. In reading through the half dozen of these complaints I currently have access to (there reportedly are, or will be, 20 or so), it is clear that the law firm has carefully reviewed plan documents and/or summary plan descriptions, 5500 filings, and participant communications. While each filing has certain consistent points and arguments, the allegations also reflect a working awareness of the unique structures of each plan and the various providers. Moreover – and you can’t say this about every lawsuit I have seen filed in this business – they seem to understand how these programs actually work; the unitization of company stock holdings alongside a cash component, the difference in pricing between institutional class shares and retail offerings, the nuances of master trust reporting. Finally, and in a compelling fashion, IMHO, they do a fine job of restating the duties and obligations of plan fiduciaries.

Filing a complaint is hardly the same as prevailing against a vigorous defense in a court of law, or surviving an appeal - and at this point, we have only one side of the argument to consider. We cannot say with any degree of certainty that these plan fiduciaries and their service providers have not acted in accordance with ERISA’s mandates, or that plan participants have not been well-served by these structures.

It is clear, however, that a lot of practices this industry has too long taken for granted are now going to be subjected to a fresh - and harsh - degree of scrutiny.

- Nevin Adams editors@plansponsor.com