PD2007: 401(k) Fee Suits: Fending Off The Devil

CHICAGO - For many plan sponsors, providers and advisers these days, the devil has a face and a name - St. Louis attorney Jerome Schlichter.

That’s because Schlichter’s law firm, Schlichter, Bogard & Denton, has spearheaded much of the spate of recent legal challenges to 401(k) fees (See Law Firm Launches Lawsuits Over 401(k) Fees)– an issue that has also been taken up by Department of Labor (DoL) regulators (See DoL Asks For Advice on 401(k) Fee Disclosures) and federal lawmakers (see PD2007: CA Democrat Seen as Important Pension Player , Congressional Committee Hears 401(k) Fee Disclosure Testimony ).

How plan sponsors and advisers can deal with Schlichter – and his fellow plaintiffs’ attorneys – was a key topic at a discussion panel on the 401(k) fee issue at PLANSPONSOR’s recent PLAN DESIGNS conference . The suits have typically alleged that plan sponsors and providers have charged excessive fees and not adequately disclosed them to participants.

Thomas Pittman, Chief Marketing Officer, The Newport Group, said the issue is far from just a plan sponsor matter – it also affects both advisers and providers as well. For example, requests for proposals (RFP) now routinely ask about issues such as revenue sharing arrangements.

Whether it should be a major plan sponsor issue is apparently a new concept to a “vast” number of sponsors with a limited understanding of their plan’s fees, Pittman asserted.

Asking lots of questions is actually a great idea, suggested Jennifer Marconi Flodin, COO, Plan Sponsor Advisors, who said she was consulting with defense lawyers on two of the fee suits. Advisers should get their clients to insist that providers acknowledge all direct and indirect revenue streams involved with the sponsor’s plan, she said.

“It’s about what’s hidden under the layers where the participants have a hard time seeing what’s there,” Flodin asserted.

‘Under the Spotlight’

Apparently at least some sponsors have already embarked on just such a fee fact-finding effort. Attorney Nancy Ross, a partner in the firm McDermott, Will & Emery, said the firm has seen a “major increase” in the number of companies going to their attorneys and advisers to help them conduct a fee audit.

“The spotlight more than ever before is on the plan sponsor and investment adviser,” Ross told the audience. “More than ever before, you guys are under the spotlight.”

Several panel members contended that the spotlight did not so much focus on the amount of fees in a particular plan as on the extent to which the plan took the necessary steps to get the lowest expenses possible.

“The fees really aren’t that high,” said Jeb Graham, Retirement Plan Consultant, CAPTRUST Advisors.”The issue is going to shift to where the issue is not the fees but that the oversight is lax.”

Flodin agreed. “The complaints say ‘Can (fees) be less?’,” she told the audience. ” ‘(Plaintiffs’ lawyers ask) is there another version of that retail fund you’re offering at 70 bps?’ “

Focusing on the pending fee cases, Ross told the panel audience that plantiffs' lawyers have to pay careful attention to the legal jurisdiction in which they file suit. The federal judges and judicial atmosphere in some parts of the country are much more amenable to a plaintiff's claims than in other areas, she said.

That's why a number of the fee cases have ended up in the U.S. District Court for the Southern District of Illinois, which Ross contended was a "hotbed for jury awards" and where many of the federal judges had relationships with the plaintiffs' attorneys, she maintained.

Ross also discussed the recent dismissal of a fee suit involving Deere & Co., which she called a "watershed decision."

In a rejection of key arguments advanced in many of the fee lawsuits, U.S. District Judge John Shabaz of the U.S. District Court for the Western District of Wisconsin contended that Deere, Fidelity Management Trust Company, and Fidelity Management and Research Company had followed current laws and regulations on plan fee disclosures. Fidelity is trustee and recordkeeper for the farm equipment maker's 401(k) plan. (See Judge Throws Out Deere-Fidelity Fee Suit; IMHO: Fighting Words ).

The attorney claimed the case was notable because Deere was able to mount a successful 404(c) defense, which Ross said is not easy because of its complex set of steps a sponsor has to take. "404(c) is very dangerous because it has so many requirements and if the plan sponsor misses one, you're out," she warned. "It's very cumbersome."

With the decision by Shabaz to accept Deere's defense, other similarly situated employers may have an easier time in the future.

"Other judges say we won't let you use 404(c) as a shield," Ross told the group. "(The Deere case) has been a tremendous advance for those cases that can fit into the same set of circumstances."