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Is 401(k) Litigation the ‘Next Asbestos’?

When legal experts look at a central element of your business model and compare the possible future to past events like airline deregulation and tobacco and asbestos industry settlements, things are not exactly looking good. A recent Retirement Income Journal article touches on these themes in exploring the likely impact of the rising tide of lawsuits over allegedly excessive fees charged to 401(k) participants.

In particular, many fear that last year’s Tussey v. ABB decision will spark a legal boondoggle like the asbestos and tobacco liability cases once provided. In that case, a federal district judge in Missouri ruled that ABB owed its employees a total of $35.2 million for failure to monitor recordkeeping fees charged by Fidelity and failing to negotiate rebates, as well as for shifting participants in the plan’s Vanguard Wellington fund over to Fidelity’s proprietary Freedom Fund. The judge also told Fidelity to reimburse employees for $1.7 million in lost float income and awarded the plaintiffs’ attorneys $50 million in court costs. Ultimately the issue may be headed to the Supreme Court.

One virtually certain result from the spike in lawsuits: greater downward pressure on fees. Look for fee-sharing in particular to be sharply reduced, Marcia Wagner warns. “You’re going to see massive margin compression as competition pushes all fees downward. Why? Competitors will know what other firms are charging, so people will undercut each other. It will be like the airlines in the ’80s when they were deregulated. The minimum fee will get a lot more minimum, so the industry will have to figure out how to provide services that people will still want to buy.”

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