As time ran out on 2015, another of the so-called “excessive fee” lawsuits raised eyebrows throughout the retirement industry.
As has been the case in most of these, the entity being sued was a large 401(k) plan – this time perhaps one of the largest, the Anthem 401(k) Plan, which has more than $5 billion in plan assets. The class action was brought at the instigation of three participants of that plan, and by the St. Louis-based law firm of Schlichter, Bogard & Denton. And, once again, the issue raised was that the plan’s fiduciaries had fallen short of their fiduciary duties under ERISA by allowing “unreasonable expenses to be charged for administration of the Plan, and selected and retained high-cost and poor-performing investments compared to available alternatives.”
Now, unlike some of these suits, it wasn’t alleged that the fiduciaries didn’t review or monitor the plan’s investment options, nor were they alleged to have chosen funds with inappropriate revenue-sharing structures. This wasn’t a situation where the fiduciaries ignored the counsel of an advisor who told them they were paying too much for record keeping fees, or an instance where the plan fiduciaries had taken no action following their review of that fund menu (they had moved toward less expensive options in 2013), or a challenge about the use of more expensive active management options when passive, index choices would allegedly have done the trick.
No, here what seems to have made the fund charges unreasonable was simply that that they were not the cheapest option available. Now, the plan’s investment menu was dominated by Vanguard funds, often held up in these class actions by plaintiffs’ counsel as an example of less expensive alternatives to funds on the defendant plan menus. Indeed, even for the two non-Vanguard funds on the menu, the highest expense ratio cited in the suit was 0.50%, and most were much lower. Even the plans’ target-date funds were at 0.16% to 0.18%.
That said, the plaintiff’s filing notes that if the Anthem plan had invested “in the much lower-cost versions of the Plan’s mutual fund options from December 29, 2009 through July 22, 2013 (the date when the plan effected the move to the lower cost options),” participants “would not have lost over $18 million of their retirement savings through unnecessary expenses.”
But what seems more ominous about this particular filing is that while the plan’s move to a lower-cost institutional class of mutual fund shares in 2013 was acknowledged, it apparently wasn’t enough. “While certain of the Plan’s options after 2013 offered institutional share classes for the mutual funds, they did not, and still do not, capture the lower expenses available given the size of the Plan’s investment in each fund.”
That’s right, comparisons with both collective funds and separate accounts were presented: “Each mutual fund in the Plan charged fees far in excess of the rates Anthem could have obtained for the Plan by using these comparable products,” the plaintiffs alleged. And, taken to its logical conclusion, the plaintiffs seem to be arguing not just for the cheapest mutual fund option available, but the cheapest investment option available.
Now, it’s by no means certain that the court(s) will concur with this argument. There is not, so far as I am aware, any implicit or explicit assumption that in order for a fee to be deemed “reasonable” that it be the cheapest available, even under ERISA’s high bar.
However, should the Anthem plaintiffs’ arguments hold sway, it seems that fiduciaries — certainly those with big plans (and deep pockets) — can now anticipate being prepared to justify the choices they make, as well as the costs of those choices — relative to all alternatives.
Note: The case wasn’t just about mutual fund fees, of course. Also challenged were the record keeping fees for the nearly 60,000 participant plan (which ranged from $80 to $94 per participant from 2010 to 2013, before dropping to $42 per participant, a level that plaintiffs still maintain is at least 40% higher than reasonable), and the fiduciaries’ retention of a prime money market fund rather than a stable value fund.
