Chicago lawyer James E. Bayles Jr., of the Morgan, Lewis & Bockius firm, filed the legal document containing the defense against Employee Retirement Income Security Act (ERISA) fiduciary breach allegations in the federal court lawsuit filed by St. Louis law firm Schlichter, Bogard & Denton (See CIGNA Latest Target of 401(k) Fee Suit ). The Schlichter firm got national publicity earlier this year after filing a raft of similar lawsuits alleging ERISA breaches over 401(k) fees.
In the defense document filed in the U.S. District Court for the Central District of Illinois April 25, Bayles not only argued that CIGNA had met its legal disclosure requirements, he asserted that participants bore some responsibility for the level of fees charged because they chose to invest in particular fund options.
“The statute, the implementing regulations, and recent regulatory activity all confirm that ERISA currently requires plan fiduciaries to disclose only limited information about plan fees and expenses,” Bayles wrote. “These limited disclosure obligations extend to fees the plan pays directly to service providers out of plan assets, not to all forms of compensation plan service providers receive, such as revenue sharing.”
Bayles continued: “…Because the fees associated with each investment option offered by the Plan are fully disclosed in accordance with ERISA and (Department of Labor) DoL regulations, the fees incurred by the Plan are the product of Plaintiffs’ and other participants’ fully-informed discretionary investment decisions.”
To support his contention that current fee disclosures are currently limited, Bayles pointed to recent efforts by the DoL to gather public comments about proposals to make fee disclosure rules more wide ranging to include both direct and indirect plan payments (See Fees Ability , Fee and Expense Disclosures to Participants in Individual Account Plans ).
“Although a broader obligation to disclose fees and expenses has been proposed,” Bayles aruged, “it is not now the law, and has no legal effect.”Arguing that Section 404(c) requires plan fiduciaries to disclose for each investment alternative only transaction fees and expenses; and annual operating fees expressed in the aggregate "as a percentage of average net assets," Bayles argued that the plaintiffs and other participants received participant education materials disclosing all fees for each of the plan's 22 investment alternatives "in precisely the manner Section 404(c)'s implementing regulations specify, particularly each fund's expense ratio - the wellhead of the revenue sharing stream."
Bayles continued: "Although Plaintiffs may not have known how this revenue stream was ultimately divided among fund and plan service providers, they indisputably knew the relative amount of these expenses and could control their costs simply by choosing funds with lower expense ratios. Thus, the 'losses' Plaintiffs claim Defendants inflicted on the Plan in the form of high service fees were, in fact, the product of participant investment choices - precisely the circumstance under which Section 404(c)'s safe harbor operates."
The disclosure came in a participant education flyer entitled "Investment Choices," which is part of the CIGNA 401(k) summary plan description and prospectus, the lawyer contended.
The expense ratios for the various investment alternatives range from 0.17% for the Dryden S&P 500 Index to 0.96% for the International Blend/The Boston Company Fund, according to the document.
Other disclosures in the CIGNA defense document:
- Since at least 1999, the 401(k) plan has paid no direct, "hard dollar" fees to any of its administrative service providers. Instead, they compensated for their recordkeeping, administrative and other services solely through revenue sharing arrangements. The only fees associated with the company stock fund are transaction fees (e.g. stockbrokers' commissions) generated by participant investment activity, which are charged directly to the participants' individual accounts.
- It wouldn't have helped participants to scrutinize the plan's annual reports because "those reports would not have provided them with the comprehensive information about fee arrangements with service providers they claim Defendants unlawfully failed to disclose, because ERISA does not require the Plan to report these arrangements in any form other than as aggregate amounts the Plan directly paid."
The case is Nolte, Lewis and Mitchell versus CIGNA Corporation, No. 2:07-cv-02046-HAB-DGB, C.D. Ill.
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