A series of lawsuits filed recently against seven large companies and their 401(k) retirement-plan overseers has underscored the care that a sometimes-overlooked corner of the compliance realm needs while monitoring the fees paid in connection with plan investments.
Duffie
The lawsuits, according to Traywick Duffie of the law firm Hunton & Williams, “are tracking what the government has actually been saying for a couple of years: that there needs to be more disclosure and openness about these fees for the different aspects of managing 401(k)” and other types of employer-sponsored retirement plans.
The lawsuits in question were filed on Sept. 11, 2006, against seven employers in Missouri and Illinois by a law firm in St. Louis. Although the companies and retirement plans targeted in that initial burst of litigation are all very large, lawyers tell Compliance Week that the theories of recovery asserted in the lawsuits could apply to any 401(k) plan and plan sponsor.
The suits were filed on behalf of participants in defined-contribution plans—those that allow participants to direct their investments among a variety of funds. The defendants in the suits are the plan sponsors, members of the boards of directors, and others.
The basic theory of the suits is that the defendants breached their duty under ERISA—the Employee Retirement Income Security Act of 1974—by subjecting the plans and plan participants to excessive fees and expenses, and consequently reducing the value of participants’ investments. Although ERISA has a “safe harbor” provision that protects such plans from liability if fees are disclosed properly, the lawsuits claim the defendants can’t take advantage of this safe harbor because they did not fully disclose the fees and expenses that were charged.
Sanchez
Karen Sanchez, director of retirement-plan services at the accounting and consulting firm Sikich, says she’s not surprised that lawsuits have been brought over the fee issue. “People have been talking for years about the documentation you should have. I think people are becoming more aware of what the issues are,” she says. “Fees have become hidden in the past. People are more aware to look for those things. Poor disclosure had led to some [plaintiffs] taking up the charge in lawsuits.”
LAWSUITS
A list of the seven companies that are being sued in class-action lawsuits for allegedly breaching their fiduciary duty regarding their 401(k) plans follows.
Company/Headquarters
Amount Of Defined-Contribution Assets
Lockheed Martin Corp., Bethesda, Md.
$14 billion
United Technologies Corp., Hartford, Conn.
Nearly $14 billion
Northrop Grumman Corp., Los Angeles
More than $11 billion
Caterpillar Inc., Peoria, Ill.
More than $4.5 billion
General Dynamics Corp., Falls Church, Va.
$5.96 billion
International Paper Co., Memphis, Tenn.
$4.4 billion
Exelon Corp., Chicago
More than $3 billion
Pension & Benefits Online (Sept. 26, 2006)
Attorney Ron Kravitz, who has lectured on the topic of fees paid in the context of 401(k) plans, says “these are interesting cases; there’s something to it.” Although plans vary according to size and level of sophistication, “some plans are not adequately reviewing fees, and that ultimately eats into the investment returns,” says Kravitz, a partner at the law firm Liner Yankelevitz Sunshine & Regenstre.
The good news, Kravitz says, “is that these cases are going to cause fiduciaries to look into the fees and make some changes—possibly negotiate better deals.”
Keeping Participants Informed
According to the lawsuits, the “hidden” fees and revenue-sharing payments amounted to prohibited transactions between the plans and their service providers. The plaintiffs assert that these fees and payments violate the requirement in ERISA that plan assets be used solely for the benefit of participants and beneficiaries.
Banish
“What [these lawsuits] are saying is that the fiduciary did not act prudently because they did not adequately investigate the fees the plan was paying,” says Jeffrey Banish, of the law firm Hunton & Williams. “A plan can be charged the reasonable expenses, but inherent in that analysis is that fees not be disproportionate to services rendered.”
Although ERISA provides protection for retirement plans that allow participants to direct their own investments, one element in getting that protection is that participants be apprised of information that allows them to make an informed investment decision, Banish notes. “If you don’t disclose these fees—if they’re complicated to understand, hidden behind gobbledygook—you can’t make informed decisions.”
Friedman
Steven Friedman, a partner at law firm Littler Mendelson, says he is “a bit surprised” such suits haven’t been filed earlier. “With a stock market that hasn’t been as robust as we’ve liked to have seen it for about six years, it’s not surprising that there are some law firms and some plan participants that are questioning the prudence of the folks managing their plan investment,” he says.
But Howard Shapiro of the law firm Proskauer Rose says companies and plans “don’t ignore these kinds of situations now,” and the lawsuits may not get very far. “They’re already very focused on the kinds of fees and payments they’re making to plan service providers. The idea that the litigation attempts to generate … is that plan officials, these fiduciaries, are ignoring their duties to get a fair service for the fees,” he says. “I just don’t believe that to be true.”
“What [these lawsuits] are saying is that the fiduciary did not act prudently because they did not adequately investigate the fees the plan was paying. … A plan can be charged the reasonable expenses, but inherent in that analysis is that fees not be disproportionate to services rendered.”
— Jeffrey Banish, Partner, Hunton & Williams
Shapiro
Although larger companies may have more leverage to negotiate with plan providers, Shapiro says it’s “naïve to believe that small companies … are frittering away participant money on exorbitant payments to service providers of plans.”
What To Do
Companies that wish to lessen the chances that they will be sued over the handling of their investment plans “should be going to all their service providers now asking for the details behind the numbers so they can understand whether they’re paying too much,” says Kenneth Raskin, a partner with the law firm White & Case.
Plan providers “will often provide the same product with certain differences,” Raskin says. “The problem is that, in the past, the buyers were not always informed. It’s like going to an auto dealer and not really knowing how much the sticker price was compared to the wholesale price.”
Sanchez says plan fiduciaries “have to know what the fees are in order to determine if they’re reasonable; they have to unbundle everything and dig into the investment returns.” One suggestion from Sanchez: Get bids on your plan. “Go back to the provider and say, ‘Here’s what the competition is charging.’”
According to Sanchez, an outside investment adviser should help monitor the investment fund. “And you would want to have periodic reviews of your funds; at least quarterly,” she says. “Compare them to benchmarks—review the fees that are being charged against published surveys, whatever database you can get. And make sure you’re disclosing the fees so participants know what they’re being charged … The rule is to establish a process and follow through with that process.”
Raskin
Raskin notes that help may be on the way in the form of additional guidance from the Department of Labor about what needs to be disclosed. “The DoL has gotten on the bandwagon,” he says. “Up until now sometimes [it has] been difficult for employers that sponsor plans to understand what fees they’ve been charged. There’s no legal requirement for service providers to report back to the employer what fees they’ve been charging. But recent notices put out by the DoL suggest that they’re going to require the service providers to give that information to the plan sponsor. People will get to see what’s behind the fees.”
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