Lawsuits allege that
participants were charged excessive fees for 401(k)
investments
ERISA plaintiffs' firms appear to have a new pet
project: 401(k) fees.
Since September, 10 lawsuits have been filed in federal
court alleging that participants had to bear unnecessarily
high 401(k) fees. The lawsuits targeted plan sponsors and
their officers, directors, and employees. "What we
allege is breach of fiduciary duty, and the duty of loyalty
and prudence," says Jerome Schlichter, founding
partner at St. Louis-based law firm Schlichter, Bogard
& Denton LLP, which filed the suits. "Among other
things, we are alleging that the fees and expenses were
excessive, and that they were not properly monitored."
He declines to talk in more depth about the cases, or about
plans to file more lawsuits.
As of press time, Schlichter Bogard & Denton also
had moved to transfer two of the suits, but that effort may
not be "forum shopping," says Greg Ash, a Kansas City-based
partner and chair of the ERISA litigation group at law firm
Spencer Fane Britt & Browne, LLP. In the Northrop
Grumman Corp. and United Technologies Corp. suits, the
transfer request is likely "because they realized that the
venue was not proper where they originally filed—because
the plans were not administered there—or that certain
individual defendants they named were not subject to
jurisdiction there," he says. In addition, defendants in
the International Paper Co. and Lockheed Martin Corp. cases
have asked the courts to transfer those lawsuits to federal
courts in other states, arguing that the original venue is
either improper or inconvenient, he says.
The suits shine a light on the controversial issue of
revenue-sharing, and assert among other things that
participants needed to get more information about these
deals. Some dispute that contention. "Does the average
participant care?" asks Ted Scallet, a principal at Groom
Law Group in Washington. "They want to know that the cost
of the fund is 125 basis points. They could not care less
that 24% goes to sales and overhead, etc."
The suits seem likely to trigger a broader wave of
concern for an industry plagued with concerns about
questionable revenue-sharing practices and market-timing.
In late October, the Los Angeles Times reported that a
group of teachers acting as an advisory committee for the
Los Angeles Unified School District (LAUSD) in its
selection of a 457 plan provider expressed concern that the
district might find itself liable for failing to disclose
the revenue-sharing arrangements used by AIG-VALIC—which
ultimately relented and disclosed the breakdown of those
arrangements in order to win the business. The
district's teachers union, United Teachers Los Angeles,
also threatened to withhold its support for the 457 plan
unless full disclosure was made.
The lawsuits basically make three allegations, Scallet
says. First, that participants did not receive adequate
disclosure of fees. Second, that the total fees are
excessive because they include revenue-sharing that pays
for things "that are not a direct cost of the services
provided to the plan by the mutual fund complex," he says.
Third, the fiduciaries picked funds with excessive fees,
and subsequently did not monitor fees adequately.
Of course, ERISA does not require fiduciaries to pick
the lowest-cost funds. "The question is: Are the total fees
being paid by participants reasonable in light of the
services they receive?" says David Wray, president of the
Chicago-based Profit Sharing/401(k) Council of America. "I
do not think we have had any recent clarification on
exactly what 'reasonable' means."
Fiduciaries do not always have to select the absolute
lowest-cost funds, "if the return justifies the expense,"
agrees Derek Loeser, a Seattle-based partner at Keller
Rohrback LLP, a well-known ERISA plaintiffs' firm, but, he
continues, "Fiduciaries should be looking for inexpensive
funds that are run by trustworthy people.
"As 401(k)s become more important for people's
retirements, they get more focused on what is wrong with
these funds," Loeser says. He sees plenty wrong.
"Participants are not at the center of many fiduciaries'
investment selection," he says. "Fee-sharing and kickbacks
and other things seem to enrich some fiduciaries at the
expense of participants. That can have a huge impact on the
value of someone's retirement savings."
Scallet cites several other explanations for the timing.
In the past two or three years, he says, the investigations
of New York State Attorney General Eliot Spitzer have put
the spotlight on "what the plaintiffs' bar might call the
'secret world of fees in the financial-services industry.'"
Also during that time, the U.S. Department of Labor has
begun working on projects aimed at "getting a better
understanding of, and disclosure of, these sorts of
payments." Finally, he says, recent years have seen the
rise of class-action firms specializing in ERISA cases.
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