Protecting Your Company from 401(k) Plan Fee Litigation

By Pamela M. Marcal

Last fall, several well-publicized class-action lawsuits were filed against 401(k) plan fiduciaries and plan sponsors of Fortune 500 companies. These lawsuits claim that 401 (k) plans have been paying excessive fees to service providers and that plan fiduciaries have incurred these excessive fees because they failed to properly identify and evaluate the fees paid to 401 (k) service providers.

Under ERISA, fiduciaries have a duty to ensure that the fees and expenses paid to 401 (k) service providers are “reasonable” light of the services provided and must adequately disclose those fees to participants. It is important that plan fiduciaries understand both the direct and indirect fees they pay for 401(k) services. They must also be certain that the services provided to the company and the participants are necessary and the amounts paid for the services are reasonable. Plan fiduciaries must also periodically review existing service providers, to ensure plan participants are not paying excessive fees.

In most cases, the 401 (k) service providers’ direct and indirect charges are difficult to determine, because the structures are complex. The information needed to evaluate the 401 (k) service providers do not provide the information in an easily usable form. At a minimum, companies are charged by their service providers for investment management and plan administrative services. Generally, operation of the 401 (k) plan is financed indirectly through mutual fund expense ratios. There may also be 12b-1 fees, finders’ fees, and “other” fees. In some cases, the plan sponsor or participants also finance plan operations directly through set-dollar fees.
Implementing the following suggestions will help to ensure your company is fulfilling its fiduciary obligations and benefiting the plan, and its participants, through competitive service provider fee arrangements:

Review. Plan fiduciaries need to know the “total” costs of providing a 401 (k) plan. Fiduciaries should know exactly how much of the plan’s assets are being paid each year to service providers, directly or indirectly, and must be aware of industry compensation practices, like revenue sharing arrangements and additional fees paid to service providers for distribution services. Make sure investment fees and revenue sharing are equitable on a fund-by-fund basis, not just overall, since not all participants invest in the same funds. At least once a year, plan fiduciaries should review these charges and make adjustments, if necessary.

Document Plan fiduciaries need to document the review and negotiation of all plan services arrangements, including investment, record keeping, trustee, and administrative services. The documents need to demonstrate that the fiduciaries investigated and considered the appropriateness of fees and are aware of the total costs of providing the plan. The documents should also reflect that the fees are monitored on an ongoing basis.
Communicate Make sure all plan fees are clearly reported to participants. Consider extracting fee information from various sources (e.g., prospectuses, service provider reports, Form 5500s, summary plan descriptions) and providing plan participants with a brief (one – or – two page) annual plan fee report that captures all of the information about fees from various sources – prospectuses, service provider reports, Form 5500s, summary plan descriptions, etc.

This article is intended for general informational purposes only, and should not be construed as legal advice. Always contact your legal counsel for advice or answers to your questions.