(k)Plans:A Hidden Agenda

Illustration By Richard Downs

Smaller employers as well as advisers could become entangled in the current wave of 401(k) fee lawsuits if a recently filed case is a harbinger of things to come.

Bruner et al. v. VLP Corporate Services, LLC , filed June 26 in U.S. District Court for the District of Kansas, centers on the 401(k) plan at a Wichita, Kansas, medical practice, Orthopaedic & Sports Medicine at Cypress, LLC (OSM). The plan's three trustees—doctors at the practice—filed the suit on behalf of the plan and its participants. Previous 401(k) fee suits focus on very large corporations, but the plan's 2007 Form 5500 indicated that it had $2 million in assets, says Gregory Ash, an Overland Park, Kansas-based partner at law firm Spencer Fane Britt & Browne LLP, who recently was retained by two of the lawsuit's defendants. (He was interviewed prior to being retained.)

Defendants named in the suit include the plan's custodian, The Charles Schwab Corp.; its former recordkeeper, VLP Corporate Services, LLC (which the plan replaced in early 2008); and investment consultant SJP Advisors, LLC. Reports have suggested that VLP and SJP are affiliated. Christine Mora, VLP's in-house legal counsel, says they "are not under the same ownership structure," but declines to comment further.

The lawsuit filing is unclear on the advisory firm's role, but gives the impression that, while not hired as an adviser by the employer, SJP got involved in recommending investments to the sponsor, says Sherwin Kaplan, a counsel at law firm Nixon Peabody LLP in Washington and a former U.S. Department of Labor official. SJP "was not an adviser to the plan, but acted solely as a subadviser to the model portfolios," Mora says. All management fees paid to SJP were "fully disclosed" to the employer and "continuously available to the plan sponsor and its participants through the VLP Web site," she says.

The complaint's accusations include charging excessive fees, SJP and VLP effectively setting their own compensation by disbursing plan assets to themselves via Charles Schwab Trust Co. without the sponsor's knowledge, and failing to adequately disclose the revenue-sharing they received. Because the providers effectively exercised fiduciary control over the plan for the purposes of enriching themselves, the complaint says, they violated ERISA.

The complaint compares the recordkeeping fees it says were charged by VLP with those of its replacement, Allen, Gibbs & Houlik, L.C. (AGH). If the plan "had engaged AGH in 2007 instead of VLP to provide recordkeeping services, compensation paid to the recordkeeper for the Plan would have been $2,425 instead of $15,106," the complaint says, adding that the services provided were "virtually identical."

The suit also claims that "[d]efendants replaced mutual fund shares with higher-cost shares of a different class of the same mutual fund in order to receive higher compensation without providing any additional services for the additional compensation." Some previous fee suits argued that revenue sharing is inherently illegal. "These guys do not ever say that revenue sharing is wrong: They say that there was improper revenue sharing, undisclosed revenue sharing," Kaplan says. "A lot of the prohibited transactions they (the plaintiffs) talk about would be legal if there was full disclosure and the plan sponsor was making the decisions." As for the allegation about SJP and VLP disbursing plan assets to themselves without authorization, "They are saying that they had a free draw on the assets," Kaplan says. "If you exercise control over plan assets, that is enough to make you a plan fiduciary, no matter what you are called and, to the extent that any fiduciary is in a position to set its own fees, it is a prohibited transaction."