A Wave Of Class Action Lawsuits Over 401(k) Plan Fees Has Begun

4) Failing to understand the compensation methods used by 401(k) plan vendors.

5) Permitting revenue-sharing arrangements that share asset-based compensation earned by investment managers with other service providers.

6) Failing to establish, implement and follow procedures to prudently and properly determine if plan fees and expenses were reasonable and incurred solely for the benefit of plan participants.

7) Failing to disclose to participants the fees and expenses being paid from the plan and how they impact participant accounts.

8) Failing to discover, disclose and stop the plan’s payment of excessive fees and expenses.

9) Appointing plan fiduciaries who did not carry out their fiduciary responsibilities under ERISA and failing to monitor their performance and replace them when appropriate for failing to carry out their duties.

10) Causing fees to be paid for purposes not permitted by ERISA.

The complaints request the fiduciaries be required to make up any and all losses suffered by plan participants as a result of these alleged breaches of fiduciary responsibility. Since the employer frequently indemnifies plan fiduciaries for actions that do not involve negligence or willful misconduct on the part of the plan fiduciaries, any recovery may ultimately be paid by the employer or its fiduciary liability carrier.

The complaints are currently proceeding through the courts. One defendant has achieved a dismissal of a portion of the claim which ties the administrative fees to investment losses, and another has moved to dismiss the entire complaint due to the defendant’s alleged compliance with ERISA ?404(c). The complaints are still in an extremely early stage and should be monitored as they develop.

The issue of plan expenses and fees has also received heightened scrutiny from the regulatory agencies. As part of a 2005 investigation by the U.S. Securities and Exchange Commission into the practices of pension consultants, the SEC reviewed their compensation methods.

The U.S. Department of Labor has proposed changes to the annual reports required to be filed by pension plans–IRS Form 5500–that would require more detailed disclosure on the compensation paid to service providers and the identification of providers who fail to provide the required fee information.

The DOL has also discussed an amendment to ERISA’s prohibited transaction exemption rules. The amendment would expand the requirement that plan sponsors consider information about compensation in selecting service providers, and the DOL recently held hearings on the compensation practices of service providers in the 401(k) industry.

The DOL has recently released its “regulatory agenda,” highlighting topics that will be the subject of regulation in the coming months. The disclosure of plan fees is prominently noted. As a preliminary step toward such regulation, the DOL released a request for information and input regarding current fee disclosures, and opinions of members of the public regarding how the rules should be changed. Given the increased attention to plan fees and expenses, regardless of the outcome of the lawsuits that have been filed, we can anticipate further involvement by the regulators in this area.

The allegations seem to assert that commonly accepted fee structures are inherently improper and that plan fiduciaries have failed to properly evaluate them and protect the interests of plan participants. Whether the fees being paid by a plan are excessive and whether fiduciaries breached their responsibilities under ERISA in evaluating plan fees and expenses will have to be considered on a plan-by-plan basis.

In light of recent lawsuits and the focus of regulators on plan fees and expenses, plan sponsors and fiduciaries should review their current procedures for evaluating plan expenses, as well as the information on plan fees and expenses that have been provided to participants. Disclosure to participants of fees and other investment information, in addition to potentially protecting a fiduciary from liability for the issues described in this article, may be required to take advantage of certain relief from responsibility for investment selections made by plan participants.

To the extent they have not done so recently, plan sponsors and fiduciaries should review their existing service provider fee arrangements and disclosures in detail, including any revenue sharing arrangements. It is important to keep in mind, however, that fiduciaries are not obligated to make their decisions solely based on the fees charged to the plan. However, cost is a key factor in the decision-making process of choosing a service provider.

As always, consideration should also be given as to whether those charged with reviewing plan fees and expenses have the requisite expertise and experience to properly evaluate them. Documenting and establishing a record of a prudent fiduciary process having been undertaken in evaluating the reasonableness of the fees and expenses paid by a plan, relative to the services provided, may facilitate a defense against a lawsuit or inquiry on plan fees and expenses.

Additionally, adequate disclosure of fee and expense information to participants may help the fiduciary establish some insulation for the responsibility of selecting more expensive products, particularly where fees differ among various investment alternatives (e.g., mutual funds).