401(k)-type plan sponsors pay large claims for excessive fees

Large claims paid for excessive feesCompensation and Benefits Bulletin
Much has been said since the U.S. Department of Labor (DOL) issued final regulations in 2012 to implement the plan expense disclosure rules for 401(k) and 403(b) participant-directed individual retirement plans. Under those rules, plan fiduciaries must be provided with specific fee and expense information to permit them to perform their duties in deciding whether plan expenses are reasonable. This additional information has resulted in increased fiduciary risk simply because fiduciaries can no longer argue that they didn’t know about “hidden fees” and similar indirect arrangements that now must be disclosed.  

In addition, a second set of DOL regulations, also effective in 2012, requires that plan fiduciaries provide similarly detailed information to plan participants. This may in some cases increase participants’ sensitivity to the amount of plan expenses they are paying and lets them compare what they are paying with others.  

Even prior to implementation of the disclosure rules, plan participants were holding fiduciaries accountable for items specifically listed in the DOL’s regulations. Three court cases illustrate what can happen to plan fiduciaries and plan sponsors that do not pay close attention to the rules.  

1. George v. Kraft Foods Global, Inc.
In June 2012, Kraft Foods Global settled a class-action lawsuit for $9.5 million with plaintiffs who claimed that the fiduciaries responsible for overseeing the company retirement plan breached their duties under rules of the Employee Retirement Income Security Act (ERISA). Plaintiffs claimed fiduciaries allowed the 401(k) plan to pay excessive investment management and other fees, and maintained excessive cash in the company stock investment funds. This case highlights that companies sponsoring retirement plans must ensure that fees are reasonable and investments are appropriate.  

2. Braden v. Wal-Mart Stores, Inc.
Also in 2012, Wal-Mart settled a retirement-plan lawsuit in which it agreed to pay the plaintiffs $13.5 million, retain an independent fiduciary to recommend investment options, and consider adding low-index funds to its plan.

Plaintiffs made the following claims:

  • Wal-Mart’s 401(k) plan offered funds that charged excessive fees.
  • Wal-Mart breached its fiduciary duty by not using its market power to negotiate a more competitive expense ratio, for example by using lower-priced share classes.
  • In a practice known as “revenue sharing,” payment of a portion of the expense ratio to the plan trustee, presumably to defray record-keeping and similar plan expenses, violated ERISA’s prohibited transaction rules.
3. Abbott v. Lockheed Martin Corp.
More recently, in February 2015, Lockheed Martin agreed to pay $62 million to settle a class-action lawsuit related to its 401(k) plan. Additionally, the company has to file an annual notice with the court to demonstrate that allocation of the plan’s stable-value fund is being monitored. Plan participants claimed that the plan sponsor invested assets in funds with excessive record-keeping fees and high expense-ratio fees.  

All three cases will affect large and small companies. The cases may represent a movement to take legal recourse against plan sponsors and fiduciaries that do not pay attention to fees being charged to retirement plans. To meet fiduciary responsibility and avoid such legal actions, employers would be wise to do the following:

  • Identify and provide ongoing education to all plan fiduciaries, who should fully understand ERISA and the key elements of the plan.
  • Adopt a formal investment policy statement.
  • Review investment options periodically and conduct an annual fiduciary audit.
  • Conduct retirement committee meetings at least quarterly, including as often as possible with investment advisers, outside counsel and similar professionals retained to advise the committee on its duties.


McKell Pinder
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