The 401(k) Fee Blame Game: Who’s Next?

Chances are you’ve read about the flurry of cases recently filed against nearly a dozen 401(k) plan sponsors, alleging fiduciary breach by allowing plans to levy unreasonably high fees. Regardless of the legal outcome, the complaints are creating a buzz while encouraging plan sponsors everywhere to reassess their own situation.

In a recent client alert, law firm Dechert LLP wrote that “Under ERISA, an employer that provides a 401(k) plan to its employees is a “Plan Sponsor” and may also serve as “Plan Administrator.” Both the Sponsor and Administrator are fiduciaries of the 401(k) plan. ERISA requires that that the Sponsor and Administrator ensure that fees borne by the plans be reasonable, and be incurred solely for the benefit of plan participants. In addition, 401(k) plans generally provide for participant-directed investment and are designed to comply with the rules under ERISA Section 404(c) which permit Plan Sponsors and Administrators to avail themselves, under certain circumstances, of a statutory safe harbor from fiduciary liability for the results of such investment elections. The safe harbor under ERISA Section 404(c) is available only where the fiduciaries allow the participants “the opportunity to obtain sufficient information to make informed decisions with regard to investment alternatives available under the plan.”

More recently, Mr. Robert J. Grassi (Director, Pensions & Investments – Corning Inc.) and Attorney Michael J. Prame (Principal, The Groom Law Group) addressed this important issue as part of the Association for Financial Professionals Annual Conference – “401(k) Plan Fees: What You Need to Know and What You Need to Do.” Citing concerns such as lack of fee transparency, hidden costs and potential conflicts of interest, Grassi and Prame provided audience members with a laundry list of types of direct and indirect compensation, respectively.

Both gentlemen talked about “the other shoe still to drop”, adding that the U.S. Department of Labor is “formulating guidance that would essentially require plan fiduciaries, before contracting with a service provider, to consider the indirect compensation to be received by the service provider.” They described a basis for imposing this obligation on fiduciaries in the form of the Frost/Aetna letters whereby “fiduciaries have a duty to obtain ‘sufficient information’ about the compensation that service providers receive from third-parties so that plan fiduciaries can make ‘informed decisions’ about whether the amounts that the plan pays are reasonable.” Expected U.S. Department of Labor initiatives to amend 408(b)(2) regulations are likely to accelerate additional disclosure about plan fees.

Regulatory and policy-making scrutiny is on the rise. As we wrote in an earlier post, the U.S. Department of Labor wants to amend Form 5500, Schedule C, to include more stringent information about fee arrangements with service providers beyond what is currently required. U.S. Congressman George Miller has requested a report from the General Accounting Office about pension fees and the SEC reported on the relationship between pension consultants and fees in 2005.

Noteworthy is the sentiment that company decision-makers in the hot seat today will likely be followed by external plan fiduciaries next. According to attorney Stephen D. Rosenberg, author of the Boston ERISA & Insurance Litigation Blog, “Given the number of different advisors and other players involved in the operations of these types of retirement vehicles, there are bound to be plenty of fiduciaries – as that term is understood in the context of ERISA – involved in almost any 401(k) plan, making for plenty of targets for such suits.”

One thing is certain. The spotlight will not dim on the fee issue any time soon.

Editor’s Note:
The paper about fees by banker Ed Lynch, attorney Fred Reish and Dr. Susan M. Mangiero, Accredited Investment Fiduciary Analyst will be completed soon. We have created a list of recipients who requested our paper.