It used to be that retirement plan administration was a routine affair. Not anymore. Excessive 401 or 403 fees are the hot new area of ERISA lawsuits. They can be costlier than wage and hour lawsuits and personally hit the retirement plan fiduciaries.
NYU was recently sued by a plan participant who alleges that they overpaid administrative fees in the plans. It was also alleged that NYU should have used its negotiating power to cut the cost as NYU had $4.2 billion in assets for 24,000 participants at the end of 2014, but selected high cost low performing funds for its 403(b) plans. Yale and the Massachusetts Institute of Technology were also sued at the same time for charging excessive fees on their retirement savings.
Why is the fee issue so important? According to a U.S. Department of Labor publication, “assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7%, and fees and expenses reduce your average returns by 0.5%, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5%, however, your account balance will grow to only $163,000. The 1% difference in fees and expenses would reduce your account balance at retirement by 28%.”
There are three fee categories impacting 401(k) and 403(b) accounts: plan administration fees, investment fees, and individual service fees. Plan administration fees are expenses for the day-to-day operation of the plan as a whole from website access to planning software to investment advice, and more. Investment fees are the largest component of the fee structure and relate to managing the various investments. The fees are generally assessed as a percentage of the assets invested. These fees are directly deducted from the total return of the investment. Finally, there are individual service fees, for example, fees assessed when taking a loan from the plan or for other individual options that are available.
There are also three additional types of fees that impact the specific investment in the plan: sales charges, management fees, and other fees. Sales charges, or more commonly known as loads or commissions, are the costs for buying or selling a specific investment in the plan. Not all investments in a plan have them. Management or investment advisory or account maintenance fees are ongoing charges for managing the assets of the investment fund. They are generally stated as a percentage of the amount of assets invested in the fund. Other fees refer to costs associated with recordkeeping or statements of the specific investment.
By law, all plans are required to identify all fees paid by participants in the plans.
Why is this becoming a plaintiff attorney’s new assault on employers? The new transparency requirements help. Also, in 2015 three long running fee litigation cases settled for over $220 million, including the payment of over $80 million in attorneys’ fees. These results were achieved even though many of the plaintiffs lost many claims during the litigation. These claims generally have similar accusations – from failure to use bargaining power to the selection of the type of funds offered. For example, one fund was sued because it offered lower-cost Vanguard funds and a Vanguard money market fund instead of a stable value fund. The argument followed that the decision to offer the Vanguard money market fund instead of a stable value fund cost plan participants $130 million in retirement savings.
But employers can’t win even if they use a stable value fund. Another case accused the employer of selecting the Fidelity stable value fund that was mismanaged previously and over corrected with an overly conservative investment strategy costing investors millions, among other things. This area of law is developing and is very problematic. If the new Persuader Rule is enforced, litigation in the 401 arena is expected to skyrocket.
Although in the past retirement funds oversight was considered an arcane responsibility, it is not anymore. Plan administrators need to be well trained and have an audit checklist that will at minimum show due diligence in administering the fund. Even if a third party administrator is being used, it is not a defense for plan fiduciaries. Employers will be well heeded to contact their ERISA attorney to review and strategize how to do due diligence with their retirement fund program.
Source: NYTimes, 8/9/16, Washington Square News 8/26/17, Proskauer July 2016