Due largely to the success of the Schlichter Bogard & Denton law firm representing class action plaintiffs in 401(k) lawsuits, notes industry insider Steff Chalk, a well-founded fear of being involved in an excessive-fee case is forcing corporate risk managers to rethink their retirement plan offerings.
The St. Loius-based law firm has built its reputation by obtaining settlements totaling approximately $300 million. In one case alone, the settlement awarded was $62 million, with the firm receiving $22.3 million — more than a third of the settlement.
“Fortune 500 plans are in the crosshairs,” notes Chalk, executive director of The Retirement Advisor University (TRAU) and The Plan Sponsor University (TPSU), in his most recent NAPA Net the Magazine column.
Corporate risk managers are being forced to assess their 401(k) plan differently today, he observes. When gathering facts, assessing exposure, running the analysis and estimating resource costs associated with defense litigation, risk managers no longer categorize the company 401(k) plan solely as a benefit to the organization. “Today’s 401(k) plan is moving from an off-the-balance-sheet-trust item to an off-the-balance-sheet potential liability — a liability that increases with the passing of every pay period,” says Chalk. “For corporate risk managers, being correct that a fiduciary breach did not occur is of little consolation compared with the cost of a protracted battle in the courts.”
Chalk cites three unusual questions that plan sponsors are asking:
- In light of Schlichter Bogard & Denton’s $22.3 million fee, is a $22.3 million fee for a $62 million settlement reasonable? “Unquestionably, it is legal,” says Chalk. “However, the courts have schooled the industry well in the differences between legal and reasonable.”
- Does participant data constitute an asset of the trust? If one believes that to be the case, says Chalk, the next question becomes, “Does using the assets of the trust (data, information, committee minutes, participant records, etc.) to generate a $22.3 million fee violate the spirit of ERISA’s exclusive benefit rule?” Stated differently, he asks, were plan assets used for the exclusive benefit of plan participants and beneficiaries?
- Is there a process or structure that could circumvent the need for the orderly distribution of ERISA-based settlements, emploing a formula other than a one-third/two-thirds calculation? “Perhaps the DOL could provide a value-add service that would notify plan sponsors of such violations,” Chalk suggests. “Perhaps, during a plan audit, the audit firm checklist could include ‘fee reasonableness’ as a line item.”
In addition to Chalk’s regular “Inside the Plan Sponsor’s Mind” column, the summer issue of NAPA Net the Magazine includes the cover story profiling the winner of the 2016 NAPA 401(k) Advisor Leadership Award, as well as feature articles on the DOL’s final fiduciary rule and a wrapup of this year’s NAPA 401(k) Summit in Nashville. The issue also features insights from regular contributors Jerry Bramlett, Warren Cormier, Nevin Adams, David Levine, Brian Graff, Don Trone, Sam Brandwein, Fred Barstein and Lisa Schneider.