Over the past few years, there has been a plethora of litigation regarding tax-qualified retirement plans that invested in or permitted participants to invest in the stock of the plan sponsor.
These cases alleged various breaches of fiduciary duty under the Employee Retirement Income Security Act of 1974, as amended, and they frequently resulted in a settlement with the employer (or plan fiduciaries), or with a fiduciary liability insurance policy footing the bill.
There was a great deal of conjecture about what the next wave of fiduciary breach cases would be. It now appears that we have the answer: plan fees. Unlike the company stock controversy, which mostly affects larger employers, this issue has the potential to affect every retirement plan, but particularly 401(k) plans.
Financial professionals who work with employers and 401(k) plans need to be following this new wave of cases to protect themselves and understand what employers and their legal advisors are thinking about plan investment fees and related issues.
On Sept. 11, 2006, 7 class action lawsuits were filed. Those suits focused on investment-related fees paid by several 401(k) plans sponsored by Fortune 500 employers. Several other plan sponsors have since been sued. The complaints filed in the suits allege a variety of breaches by fiduciaries of their duties under ERISA, which, according to the complaints, resulted in the plans and their participants paying excessive fees and expenses. The excess fees and expenses reduced participant plan accounts and, ultimately, the amount of funds the participants will have for their retirement, the complaints allege.
The lawsuits name the plan fiduciaries, the plan sponsors, the members of the sponsors’ boards of directors, and individuals involved with plan administration and plan investments as defendants. If the plaintiffs in these suits are successful in achieving significant recoveries, it is likely they will set the groundwork for future lawsuits or other legal action regarding fees charged to participant accounts.
…the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purpose of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.
ERISA Section 403(c)(1).
ERISA requires plan fiduciaries to discharge their duties with respect to a plan “solely in the interest of participants and beneficiaries and:
A. For the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
B. With the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”
ERISA Section 404(a)(1) A & B.
Under ERISA, fiduciaries are held to the standard of a “prudent expert,” which means good intentions that result in poor performance for a plan because of a lack of knowledge or expertise may still constitute fiduciary breaches. The lawsuits filed to date allege plan fiduciaries violated the fiduciary standard of prudence even though the practices being challenged are common throughout the 401(k) industry. The following types of fiduciary breaches have been alleged in the complaints:
1) Causing the plan to enter into agreements with service providers that resulted in the plans paying excessive fees and fees that were not solely for the benefit of plan participants.
2) Failing to examine, review and monitor the fees being paid by the plan.
3) Failing to inform and educate itself of trends and practices in the retirement, financial investments and securities industries that impact the fees paid by the plan.