Art by JCiardielloIn reviewing recent lawsuits filed against 401(k) fiduciaries claiming that fees are too high—for recordkeeping and administrative services, investment management, brokerage window investments, investment advice and even the sweep in a company stock fund—I’m struck by how resourceful and relentless plaintiffs’ lawyers have been on this issue. The payouts (in the cases that have gone to trial at least) have not been tobacco-litigation sized, but they have been substantial.
Obviously, the law firms involved (in truth, mostly just one firm) see this as a promising area for continuing litigation. Speculating as to why, I would say that the plaintiffs’ lawyers see the structural alignment-of-interests problem endemic to defined contribution (DC) plans—typically, the sponsor is choosing which funds to offer and what recordkeeper to retain, but participants are paying the bill—has led, and still leads, some sponsors to under-do their duty to get the best deal for participants.
In this circumstance, you can see why the average employer-plan sponsor would simply turn to the attorney in the room and ask: “What do I have to do to not get sued?” Unfortunately, while the lawyer can tell you what you have to do—get the lowest fee/best deal for plan participants—she can’t tell you how to do it. For that, you need somebody who knows a lot about how the services the plan pays for are priced and how those prices can be reduced without compromising quality.
For which purpose I propose we create the position of DC plan Chief Fee Officer: an individual whose job it is to get the lowest fee for any given plan service, and whose compensation/bonus is determined by how effective he is at that job. Given how much litigation has become a driver of DC plan policy, and the cost—in judgments, settlements and damage to reputation—of that litigation, it seems to me that the appointment of someone whose interests are directly aligned with participants would go a long way to dealing with fee issues before they turn into lawsuits.NEXT: The role of a Chief Fee Officer
A critical piece of most of these fee lawsuits is the claim that sponsor fiduciaries did not even know what fees were being paid. If you have an individual—a sponsor-appointed fiduciary—whose only job is to monitor and drive down plan fees, that’s not going to happen.
Obviously, and as defense lawyers in these cases are always saying, you have to balance cost/fees with quality/performance. And I imagine that there will be tension between the Chief Fee Officer and the Chief Investment Officer and the HR department. That may not be a bad thing.
HR may believe that certain value-adds—a high quality call center, funds that you “can read about in the paper,” a blue-chip investment education program—are critical to plan success. Maybe they are, but it should be someone’s job to ask: what do they cost and do participants think they are worth that cost?
The Chief Fee Officer doesn’t have to win every one of these arguments. He doesn’t even have to win one of them. That they take place and are documented is the important thing: that plan fiduciaries can prove that, when they decided to move forward with, e.g., the higher-priced call center, they had considered the issue of fees and had made a prudent decision in that regard.
No one can stop plaintiffs’ lawyers from suing you. But if you can demonstrate a prudent process, under the Employee Retirement Income Security Act (ERISA) you, the fiduciary, win. Appointing a Chief Fee Officer whose job it is to monitor and drive down plan costs will demonstrate a commitment to such a process with respect to plan fees.
Michael Barry is president of the Plan Advisory Services Group, a consulting group that helps financial services corporations with the regulatory issues facing their plan sponsor clients. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Asset International or its affiliates.