While the first litigation based on retirement plan fees appeared in 2006, it has exploded since 2015.[1] Multi-million-dollar court cases are common now, with plaintiffs even winning at the Supreme Court level, as in Tibble v. Edison.
This flourishing environment for litigation is drawing more and more law firms into the fray, who are in turn filing more suits. Last year, ERISA litigation made a major shift from employer stock drop cases to excessive fees cases.[2] All plan sponsors should take note of this. While many plans do not offer company stock and were therefore immune to such cases, every single 401(k) plan is vulnerable to excessive fees.
Types Of Excessive Fees Cases
Attorneys are approaching the claim of excessive fees from multiple directions. A suit filed just last month against a hospital’s retirement plan[3] alleges that the plan purchased a more expensive share class of a mutual fund when a less expensive class was available. They called it, “one of the most common and well-known examples of an imprudent investment.”
Previous lawsuits have been brought against other companies for their choices of investments when less expensive fund families, less expensive fund types or even types of funds were available. Target-date funds are common targets for being expensive and underperforming. A suit against Insperity Inc.’s use of target-date funds recently survived a motion to dismiss and won class certification.[4]
Vanderbilt University also failed to have a class action lawsuit dismissed in January. The school is being accused of running a retirement plan with too many service providers, high-fee investment options, and excessive administrative fees. They are just the latest in a long list of schools to face such cases in the past few years, and only one has succeeded in having their case dismissed.[5]
The Future Of ERISA Litigation
After the shift from company stock litigation to excessive fees, one has to wonder what comes next. The stock market itself might provide us with the necessary clues. When the stock market is strong, as it has been, performance isn’t a top concern. Employers instead get in trouble for having active management and paying excessive fees.
As the stock market weakens, the claims change. People become more concerned with their investment options and performance. As this business cycle comes to an end, we will probably see more litigation based on a plan’s failure to offer diversified and defensive investments.[6]
How To Protect Yourself
So, it isn’t enough just to monitor your fees, as many companies are beginning to do. In fact, after all of the lawsuits that have been brought in the past couple of years, 83% of employers assessed their defined-contribution plan fees last year, according to consulting firm Callan. Of those that did assess their fees, 40% took measures to reduce their overall fees. If you haven’t reviewed your fees lately, you really need to. Thanks to fee compression, record-keeping fees have been cut by about a third since 2012.[7]
In addition to monitoring fees, you need to monitor your investment options. As the lawsuits mentioned above show us, it’s not just cost that matters, but type, performance, and diversification of options. Offering your plan participants prudent investment options will become more and more important as the current bull market slows and comes to an end.
The time and expertise required to constantly monitor fees and make wise investment option decisions can be overwhelming for plan sponsors. That is why it is a good idea to work with a financial advisor who specializes in workplace retirement plans.
An advisor can help you manage your vendors, whether they provide recordkeeping or mutual funds, and monitor fees. A highly trained and experienced advisor can also help you select the right investment menu for your participants in a fraction of the time it would take you to do so without their help.
Working with a specialized financial advisor may be the best move you can make to protect yourself and your company from ERISA litigation. If you want to learn more about how working with an advisor could benefit your company retirement plan, give our office a call at (949) 718-1600 or email us at info@beaconpointe.com
Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.
[1] http://www.investmentnews.com/article/20180118/FREE/180119916/lawsuits-push-401-k-plan-sponsors-to-cut-fees
[2] https://www.planadviser.com/erisa-litigation-landmarks-set-stage-2018/
[3] http://www.napa-net.org/news/technical-competence/erisa/new-excessive-fee-litigators-emerge/
[4] https://www.bna.com/aon-hewitt-cant-n73014473098/
[5] https://www.bna.com/vanderbilt-cant-shake-n73014473905/
[6] https://www.planadviser.com/erisa-litigation-landmarks-set-stage-2018/
[7] http://www.investmentnews.com/article/20180118/FREE/180119916/lawsuits-push-401-k-plan-sponsors-to-cut-fees
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