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What do the following companies have in common?

All of them are, or have been, in lawsuits over 401k plan fees.

More than 70 million workers and retirees have money in 401k plans representing trillions of dollars. With the advent of the ERISA 408(b)2 disclosure rule from the Department of Labor, the whole landscape changed with respect to 401k fees. It mandated that service providers disclose ALL of the fees paid by participants – including those hidden, or soft dollar charges.

According to an AARP study in 2007, 83% of plan participants were unaware of how much they were paying in fees and how. Fee lawsuits have been around for nearly a decade, but with the new disclosure rules, their number has exploded.

So far, participants have outright won or settled for hundreds of millions of dollars from these actions. They challenged ERISA 404(c), protection that companies relied upon. ERISA 404(c) protected plan sponsors fiduciaries from liability for losses that participants experience in the plan’s investment options when the participants are given sufficient information to make informed decisions. However, the lawsuits successfully argued that said sponsors failed to adequately inform participants of ALL fees netted against their account – and without this information they could not make informed investment decisions.

In more recent filings, litigation revolves on what is “reasonable” and uses ERISA § 406(b)(3), which states:

“A fiduciary with respect to a plan shall not receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction  involving the assets of the plan.”

How could this apply to your plan sponsor? The application lies in the fact that many providers base pricing on fund selection and the revenues it generates. Some pay more money back to the plan if you use their funds, which leads to fund selection based on neither revenue sharing, nor suitability, nor performance. A company/plan sponsor could provide a plan that was beneficial to their financial interests while being detrimental to the participant’s interests.

What is a plan sponsor to do? Take preventative action. Hire an advisor to put a process in place to justify the decisions with respect to the plan. Have an IPS, follow it, and monitor the funds. Benchmark the plan at least every three years and have a sound rationale as to why the provider was chosen, the services offered, and the funds selected. Disclosure does not mean you must only buy on price, it means that you must be able to justify the value the participants pay for what they receive.

To summarize, retirement plan litigation is exploding. With trillions of dollars in 401k plans, the stakes are high for everyone. It can be a big payday for a law firm. Be proactive – get an advisor and follow a defined process. By doing this, you will put your sponsor in a more defendable position should the summons knock at your door.  We can help – contact Jim Moore today at jmoore@cpsinsurance.com or 949-225-7145.

Written By: Jim Moore

Phone/Fax: 949.225.7145

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