Your Plan Might Be an Excessive Fee Litigation Target If…

Last week another of the so-called excessive fee lawsuits was settled – not adjudicated, mind you. Here are some factors that the targets of these lawsuits seem to have in common.

Now, in fairness, most of these cases haven’t actually gone to court – and, by my count, most of the ones that actually get to court are won by the employers/plan sponsors. Even the Tibble case, which drew so much attention when it made it to the Supreme Court, eventually came out in favor of the plan sponsors (though they “lost” the Supreme Court decision).

However, a lot of litigation has been filed over the past decade, and millions of dollars spent — reminding me of an old mentor’s admonition that you can spend a lot of money in court being “right.” That so many employers have decided that it is “cheaper” to settle for millions of dollars gives you some idea of the magnitude of these challenges.

So, with that in mind – and with apologies to Jeff (“you might be a redneck…”) Foxworthy: Your plan might be an excessive fee litigation target if…

It’s a multi-billion dollar plan.

Nearly all of the excessive fee lawsuits filed since 2006 (when the St. Louis-based law firm of Schlichter, Bogard & Denton launched the first batch) have been against plans that had close to, or in most cases in excess of, $1 billion in assets. There’s no real mystery here. Willie Sutton robbed banks for the same reason: that’s where the money is. And if you’re a class action litigator, that also happens to be where a large number of similarly situated individuals can be found.

Harder to figure out is why plans of that size, and the expertise/resources that such employers can ostensibly bring to plan administration, have been so vulnerable.

Your multi-billion dollar plan has retail class mutual funds.

Granted, even at the largest employers, individuals frequently find themselves assigned the responsibility for being a plan fiduciary with little or no training or background. Still, in this day and age, it’s remarkable that so many of these targets were either so ignorant of the concept of share classes or so poor at negotiating with their providers that they included options in their multi-billion dollar plan menus funds that were, in some cases, no more competitive in price than what the individual plan participants could have acquired in their IRA.

You have proprietary funds on your menu.

As a financial services provider, there are any number of valid business reasons to include your own funds on the menu you offer to your workers. It’s a testament to your willingness to “eat your own cooking,” a statement of confidence in the skill and acumen of your investment management staff.

However, this access can be used to prop up funds with steady cash flow that aren’t deserving of that confidence, and can provide at least the temptation on the part of committee members to favor internal offerings to the exclusion of external choices. Moreover, since it can be difficult politically to “fire” an internal service provider, the plan might find itself paying “retail” prices, not only for funds, but for administrative services – an issue that has been made in several of these lawsuits.

The bottom line: However outstanding your internal options are, the current litigation environment seems to favor a “Caesar’s wife” approach – your actions need to be above (and beyond) suspicion.

You can’t remember the last time you benchmarked your plan/investments.

Let’s face it, even changing a single fund on an existing menu can be complicated, much less a full blown consideration of changing record keepers and fund menus. And plan sponsors, even plan sponsors at multi-billion dollar plans, juggle myriad responsibilities and are constantly pulled in multiple directions. “If it ain’t broke, don’t fix it” is a mantra born of practicality, if not necessity, for most. If the current process and services are working, that is often “enough.”

But if you haven’t been through some kind of competitive bidding/review process in recent memory – well, “it seems to be working” isn’t necessarily in keeping with the legal admonition to ensure that the services rendered and fees paid for those services are “reasonable” and in the best interests of plan participants and their beneficiaries.

And even if it is in the eyes of a judge, a motivated plaintiff’s bar can likely make an issue of it.

You are still paying asset-based record keeping charges, rather than a per-participant fee.

Okay, this is a new one. I don’t recall seeing this being an issue until this year – and though it has been alleged, and incorporated in a couple of the most recent settlements, to my recollection, no court has ever ruled on this.

That said, the current and apparently emerging argument is based on the notion that there is little correlation between record keeping services and the dollar value of that account. And the most recent litigation puts forth some fairly specific notions of what that reasonable per-participant charge should be. And did I mention that this has even been raised in some very recent litigation involving a $10 million plan?

You haven’t hired a qualified retirement plan advisor to help.

It’s possible that advisors have been involved in these plans, but to date I can only recall one situation where an advisor was involved/named (though not as a party to the litigation), and that more an investment consultant than an advisor, per se.

That said, when you look at the issues like share class selection, and the lack of regular review (not to mention documentation of that review) in many of these cases, you can’t help but think, “Where was the advisor?” The answer seems to be that these plans hadn’t engaged those services.

And then you can’t help but wonder what difference their involvement might have made.

- Nevin E. Adams, JD

Your Plan Might Be an Excessive Fee Litigation Target If…

Last week another of the so-called excessive fee lawsuits was settled – not adjudicated, mind you. Here are some factors that the targets of these lawsuits seem to have in common.

Now, in fairness, most of these cases haven’t actually gone to court – and, by my count, most of the ones that actually get to court are won by the employers/plan sponsors. Even the Tibble case, which drew so much attention when it made it to the Supreme Court, eventually came out in favor of the plan sponsors (though they “lost” the Supreme Court decision).

However, a lot of litigation has been filed over the past decade, and millions of dollars spent — reminding me of an old mentor’s admonition that you can spend a lot of money in court being “right.” That so many employers have decided that it is “cheaper” to settle for millions of dollars gives you some idea of the magnitude of these challenges.

So, with that in mind – and with apologies to Jeff (“you might be a redneck…”) Foxworthy: Your plan might be an excessive fee litigation target if…

It’s a multi-billion dollar plan.

Nearly all of the excessive fee lawsuits filed since 2006 (when the St. Louis-based law firm of Schlichter, Bogard & Denton launched the first batch) have been against plans that had close to, or in most cases in excess of, $1 billion in assets. There’s no real mystery here. Willie Sutton robbed banks for the same reason: that’s where the money is. And if you’re a class action litigator, that also happens to be where a large number of similarly situated individuals can be found.

Harder to figure out is why plans of that size, and the expertise/resources that such employers can ostensibly bring to plan administration, have been so vulnerable.

Your multi-billion dollar plan has retail class mutual funds.

Granted, even at the largest employers, individuals frequently find themselves assigned the responsibility for being a plan fiduciary with little or no training or background. Still, in this day and age, it’s remarkable that so many of these targets were either so ignorant of the concept of share classes or so poor at negotiating with their providers that they included options in their multi-billion dollar plan menus funds that were, in some cases, no more competitive in price than what the individual plan participants could have acquired in their IRA.

You have proprietary funds on your menu.

As a financial services provider, there are any number of valid business reasons to include your own funds on the menu you offer to your workers. It’s a testament to your willingness to “eat your own cooking,” a statement of confidence in the skill and acumen of your investment management staff.

However, this access can be used to prop up funds with steady cash flow that aren’t deserving of that confidence, and can provide at least the temptation on the part of committee members to favor internal offerings to the exclusion of external choices. Moreover, since it can be difficult politically to “fire” an internal service provider, the plan might find itself paying “retail” prices, not only for funds, but for administrative services – an issue that has been made in several of these lawsuits.

The bottom line: However outstanding your internal options are, the current litigation environment seems to favor a “Caesar’s wife” approach – your actions need to be above (and beyond) suspicion.

You can’t remember the last time you benchmarked your plan/investments.

Let’s face it, even changing a single fund on an existing menu can be complicated, much less a full blown consideration of changing record keepers and fund menus. And plan sponsors, even plan sponsors at multi-billion dollar plans, juggle myriad responsibilities and are constantly pulled in multiple directions. “If it ain’t broke, don’t fix it” is a mantra born of practicality, if not necessity, for most. If the current process and services are working, that is often “enough.”

But if you haven’t been through some kind of competitive bidding/review process in recent memory – well, “it seems to be working” isn’t necessarily in keeping with the legal admonition to ensure that the services rendered and fees paid for those services are “reasonable” and in the best interests of plan participants and their beneficiaries.

And even if it is in the eyes of a judge, a motivated plaintiff’s bar can likely make an issue of it.

You are still paying asset-based record keeping charges, rather than a per-participant fee.

Okay, this is a new one. I don’t recall seeing this being an issue until this year – and though it has been alleged, and incorporated in a couple of the most recent settlements, to my recollection, no court has ever ruled on this.

That said, the current and apparently emerging argument is based on the notion that there is little correlation between record keeping services and the dollar value of that account. And the most recent litigation puts forth some fairly specific notions of what that reasonable per-participant charge should be. And did I mention that this has even been raised in some very recent litigation involving a $10 million plan?

You haven’t hired a qualified retirement plan advisor to help.

It’s possible that advisors have been involved in these plans, but to date I can only recall one situation where an advisor was involved/named (though not as a party to the litigation), and that more an investment consultant than an advisor, per se.

That said, when you look at the issues like share class selection, and the lack of regular review (not to mention documentation of that review) in many of these cases, you can’t help but think, “Where was the advisor?” The answer seems to be that these plans hadn’t engaged those services.

And then you can’t help but wonder what difference their involvement might have made.

- Nevin E. Adams, JD

"Missed" Deeds and 401(k) Fees

The Nov. 7 issue of The New York Times included a story about “Finding, and Battling, Hidden Costs of 401(k) Plans.” The story focused primarily on the plight of Ronald Tussey, the named plaintiff in Tussey v. ABB, Inc., one of the so-called “excess fee” revenue sharing cases.

Tussey, now 70, claims that he was told that his retirement plan was “free,” even though, according to the Times article, “middlemen¹ were deducting expenses from his savings.” The story also notes that Tussey “never thought that his retirement plan might be flawed,” and that “he trusted his company so much he kept his money in his 401(k) long after he left.”

Over the years, I have been astounded at the allegations of fiduciary misconduct in these revenue-sharing cases. Each has its own flavor, of course, but for the most part they have struck me not so much as the outcomes of bad acts, per se, but rather steps that should have been taken in keeping with their fiduciary duty to ensure that the fees and services provided are reasonable and in the best interests of participants and their beneficiaries.

In Tussey’s case, ABB (his former employer) is alleged to have been told by a consultant that they were paying too much for record keeping fees, and then did nothing about it — for instance, though their decision to close a balanced fund and force participants into age-appropriate target-date funds. The use of float was also challenged. Both of those charges were dismissed by the 8th U.S. Circuit Court of Appeals; just this week the U.S. Supreme Court declined to hear the case.

But the point of the Times article was all about fees,² outlining places and ways that readers can find out about the “…raft of obscure fees and services that few employees will be able to discern,” while also cautioning that none of those resources can help them figure out how much is too much. (That did not, however, keep the author of the article from redefining ERISA’s prudent man standard of care to mean “…finding a reasonable selection of low-cost funds and services.”)

A couple of weeks back, my wife and I met with our financial advisor to transfer and consolidate some small IRAs. Having attended to the basics, the conversation turned to investments, and then to a couple of fund recommendations. The advisor carefully outlined the expense ratios associated with the fund (which seemed reasonable to me), and then turned to the charges associated with investing in that fund. He didn’t call them a load, of course,  but that’s what it was, and a hefty one at that. And, Ronald Tussey’s status notwithstanding, I was reminded again just how lucky most 401(k) participants are.

Even if, as the article frets, participants aren’t able to find or understand thier 401(k) fees and don’t know what is reasonable — even if they assume such things are free — their retirement savings are under the care and oversight of a plan fiduciary. That fiduciary is personally responsible for ensuring that the fees and services are reasonable, is expected to engage the services of experts, if necessary, to make that determination, and is accountable not only for the things that are done wrong — the misdeeds — but for the “missed” deeds as well.

Nevin E. Adams, JD

1. “Middlemen” in this case seem to have been Fidelity Management Trust Company, the plan’s trustee and record keeper, as well as Fidelity Management and Research Company, the investment advisor to the Fidelity mutual funds on the plan.

2. Lending numerical support to their claims, the Times article cites a 2012 report on 401(k) fees by the left-leaning Demos advocacy group claiming that “nearly a third” of the investment returns of a medium-income two-earner family was being taken by fees, according to its model. That model, it should be noted, assumed that each fund had trading costs equal to the explicit expense ratio of the fund. The report was authored by Robert Hiltonsmith, who some may recall being featured in the 2013 PBS Frontline special, “The Retirement Gamble.”