Your Plan Might Be an Excessive Fee Litigation Target If…

Last week another of the so-called excessive fee lawsuits was settled – not adjudicated, mind you. Here are some factors that the targets of these lawsuits seem to have in common.

Now, in fairness, most of these cases haven’t actually gone to court – and, by my count, most of the ones that actually get to court are won by the employers/plan sponsors. Even the Tibble case, which drew so much attention when it made it to the Supreme Court, eventually came out in favor of the plan sponsors (though they “lost” the Supreme Court decision).

However, a lot of litigation has been filed over the past decade, and millions of dollars spent — reminding me of an old mentor’s admonition that you can spend a lot of money in court being “right.” That so many employers have decided that it is “cheaper” to settle for millions of dollars gives you some idea of the magnitude of these challenges.

So, with that in mind – and with apologies to Jeff (“you might be a redneck…”) Foxworthy: Your plan might be an excessive fee litigation target if…

It’s a multi-billion dollar plan.

Nearly all of the excessive fee lawsuits filed since 2006 (when the St. Louis-based law firm of Schlichter, Bogard & Denton launched the first batch) have been against plans that had close to, or in most cases in excess of, $1 billion in assets. There’s no real mystery here. Willie Sutton robbed banks for the same reason: that’s where the money is. And if you’re a class action litigator, that also happens to be where a large number of similarly situated individuals can be found.

Harder to figure out is why plans of that size, and the expertise/resources that such employers can ostensibly bring to plan administration, have been so vulnerable.

Your multi-billion dollar plan has retail class mutual funds.

Granted, even at the largest employers, individuals frequently find themselves assigned the responsibility for being a plan fiduciary with little or no training or background. Still, in this day and age, it’s remarkable that so many of these targets were either so ignorant of the concept of share classes or so poor at negotiating with their providers that they included options in their multi-billion dollar plan menus funds that were, in some cases, no more competitive in price than what the individual plan participants could have acquired in their IRA.

You have proprietary funds on your menu.

As a financial services provider, there are any number of valid business reasons to include your own funds on the menu you offer to your workers. It’s a testament to your willingness to “eat your own cooking,” a statement of confidence in the skill and acumen of your investment management staff.

However, this access can be used to prop up funds with steady cash flow that aren’t deserving of that confidence, and can provide at least the temptation on the part of committee members to favor internal offerings to the exclusion of external choices. Moreover, since it can be difficult politically to “fire” an internal service provider, the plan might find itself paying “retail” prices, not only for funds, but for administrative services – an issue that has been made in several of these lawsuits.

The bottom line: However outstanding your internal options are, the current litigation environment seems to favor a “Caesar’s wife” approach – your actions need to be above (and beyond) suspicion.

You can’t remember the last time you benchmarked your plan/investments.

Let’s face it, even changing a single fund on an existing menu can be complicated, much less a full blown consideration of changing record keepers and fund menus. And plan sponsors, even plan sponsors at multi-billion dollar plans, juggle myriad responsibilities and are constantly pulled in multiple directions. “If it ain’t broke, don’t fix it” is a mantra born of practicality, if not necessity, for most. If the current process and services are working, that is often “enough.”

But if you haven’t been through some kind of competitive bidding/review process in recent memory – well, “it seems to be working” isn’t necessarily in keeping with the legal admonition to ensure that the services rendered and fees paid for those services are “reasonable” and in the best interests of plan participants and their beneficiaries.

And even if it is in the eyes of a judge, a motivated plaintiff’s bar can likely make an issue of it.

You are still paying asset-based record keeping charges, rather than a per-participant fee.

Okay, this is a new one. I don’t recall seeing this being an issue until this year – and though it has been alleged, and incorporated in a couple of the most recent settlements, to my recollection, no court has ever ruled on this.

That said, the current and apparently emerging argument is based on the notion that there is little correlation between record keeping services and the dollar value of that account. And the most recent litigation puts forth some fairly specific notions of what that reasonable per-participant charge should be. And did I mention that this has even been raised in some very recent litigation involving a $10 million plan?

You haven’t hired a qualified retirement plan advisor to help.

It’s possible that advisors have been involved in these plans, but to date I can only recall one situation where an advisor was involved/named (though not as a party to the litigation), and that more an investment consultant than an advisor, per se.

That said, when you look at the issues like share class selection, and the lack of regular review (not to mention documentation of that review) in many of these cases, you can’t help but think, “Where was the advisor?” The answer seems to be that these plans hadn’t engaged those services.

And then you can’t help but wonder what difference their involvement might have made.

Add Your Comments

3 Comments

  1. Posted June 21, 2016 at 10:58 am | Permalink

    With relentless audits, continuous rule changes,
    Endless compliance overhead, small wonder that Advisors are leaving the retirement planning sector and actually terminating client’s relationships.
    BTW, has anyone tried to get an accountant to audit their client’s plan lately? They’re throwing in the towel too.

    Keep cheering us up Nev!
    Your presumed dishonest servant,
    Tom B

  2. jim rowley
    Posted June 21, 2016 at 11:44 am | Permalink

    If your plan is doing all those things (or not doing them) how can you expect not to be sued?

    Jim

  3. Nevin E. Adams, JD
    Posted June 21, 2016 at 7:55 pm | Permalink

    Tom – appreciate the comments (and the smile, thanks!). Still a LOT more plans that don’t fit those criteria than do. And don’t forget my last item…

Post a Comment

Your email is never published nor shared. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>