401(k) Plan Excessive Fees Litigation under ERISA—Recent Developments
According to Department of Labor (“DOL”) guidance, one of the responsibilities of fiduciaries to ERISA plans is to monitor the fees and expenses charged to the plans, to determine that those fees and expenses are reasonable and not excessive.1 On this basis, a number of lawsuits have been filed over the past eleven years – including several in the last two years – alleging various fiduciary breaches in connection with (1) the purportedly high level of fees and expenses being paid on 401(k) plan investments, which in several instances were then shared with plan service providers under a practice referred to as “revenue sharing,” and (2) the purportedly high level of fees being paid for recordkeeping services. These lawsuits have been brought against both plan sponsors, for permitting the plan to pay the excessive fees, and plan service providers, for charging the excessive fees. Several of these cases have settled for large amounts, while others continue to be litigated.
Recent developments in Plan Sponsor Litigation
ERISA, as interpreted by DOL, requires plan fiduciaries to act prudently in selecting service providers and investments and in monitoring the performance of those service providers and investments on an ongoing basis. According to DOL guidance, one of the factors that fiduciaries should consider as part of this prudent process is the amount of fees and expenses that the service provider or investment fund will charge, evaluating the reasonableness of the costs to the plan both at the time of initial selection and periodically for so long as the plan uses the particular service provider or fund.
In many cases involving excessive fees, plan participants have alleged that plan sponsors breached their fiduciary duties by failing to seek out and select lower-fee mutual funds (or for larger plans, other potentially lower-fee alternatives, such as collective funds or separately managed accounts) available to institutional investors to offer in the plan’s investment lineup.
They also have alleged that the purportedly high level of fees being paid on plan investments was then shared with plan service providers such as recordkeepers, a practice referred to as “revenue sharing,” resulting in the service providers receiving excessive compensation in connection with the services they were providing to the plans.
In the early cases, including several brought by the same law firm in September and October 20062 the fees charged by the mutual funds used by the plans in question were said to be too high by comparison to the fees charged on Vanguard index funds, viewed as the lowest in the industry, and the recordkeeping fees were said to be too high due to unsupervised revenue sharing. The argument comparing mutual fund fees to Vanguard fund fees, as such, has not prevailed in any of the cases that reached the decision stage. More recently, the same law firm has put forward a more developed form of this argument (and its other arguments) in a lawsuit involving the Anthem 401(k) plan, said to be one of the largest 401(k) plans in the country with more than $5 billion in assets (Bell v. Anthem, Inc., filed on December 29, 2015). According to the complaint, which follows the general pattern of other recent complaints in this area, the Anthem plan fiduciaries breached their fiduciary duties under ERISA by:
- Not using the lowest fee share class in several mutual fund and collective fund investment options (most of which notably were Vanguard mutual funds, so they were likely already low-fee options). This follows from the conclusion reached in the Tibble v. Edison case (which was appealed to the U.S. Supreme Court on a different issue), in which the Ninth Circuit held that it is a fiduciary breach to use other than the lowest-fee share class of a mutual fund where the lowest-fee share class is available to the plan for investment. The fiduciaries of the Anthem plan in fact had switched to the lowest fee share classes of the particular funds in 2013, but the plaintiffs argue that they should have done so several years earlier when those share classes first became available.
- Using non-Vanguard mutual funds, because these funds charged fees that the plaintiffs considered far higher than reasonable investment management fees for Vanguard passive and active funds using the same strategies (similar to the argument the law firm made in the original 2006 lawsuits).
- Not seeking to use possibly lower-cost investment vehicles in place of mutual funds of the same investment managers, and not using the plan’s leverage as one of the largest 401(k) plans in the United States to negotiate low fees on such accounts.
- Not using lower-fee Vanguard collective trust funds in place of higher-fee Vanguard and third-party mutual funds.
- Paying excessive administrative/recordkeeping fees by failing to monitor and control both hard dollar and asset-based revenue sharing payments, and failing to conduct a competitive bidding process for recordkeeping services.
- Including a money market fund in the plan’s lineup when a stable value fund would have provided a much higher investment return.
A similar lawsuit was brought two months later by the same law firm against Chevron Corp. (White v. Chevron Corp., filed on February 17, 2016).
The concern raised by these allegations is that the focus is almost exclusively on mutual fund and investment advisory fees, suggesting that 401(k) plan fiduciaries may be in breach of their ERISA fiduciary duties any time they use an investment that has higher advisory fees than any other investment. Except with regard to the money market fund versus stable value fund issue, there is little mention of investment performance considerations. There is also no mention of the legal and administrative costs of using collective investment funds or other types of investment vehicles and stable value funds instead of mutual funds in a 401(k) plan. In addition, the fact that the Anthem plan did switch more than two years before the complaint was filed to lower fee share classes in most of its funds was not enough to keep it from getting sued.
While the Anthem lawsuit was permitted to go forward in March 2017 (other than on the money market fund claim, which the court found to be “conclusory”), the Chevron lawsuit was dismissed. In its May 2017 decision, the court in Chevron ruled that the plaintiffs did not allege sufficient facts to show that Chevron took any action for the purpose of benefiting itself or the plan’s recordkeeper, that the plan’s recordkeeping fees were unreasonable, or that the selection of a money market fund instead of a stable value fund was a fiduciary breach. In addition, the claim that other available funds (such as collective funds) were less expensive, standing alone, was not sufficient to show that the selection of the funds used in the plan was a fiduciary breach, as there were no allegations that Chevron’s process of selecting the funds for its 401(k) plan was imprudent. In an earlier decision from August 2016, the court emphasized that a claim of high fees alone is not sufficient to show a fiduciary breach, because ERISA plan fiduciaries “have latitude to value investment features other than price.”
Another recent lawsuit filed by the same law firm focuses instead on recordkeeping fees. It alleges that Oracle Corp. breached its ERISA fiduciary duties by failing to negotiate a reasonable, fixed per-participant recordkeeping fee for its 401(k) plan, but rather had agreed to an asset-based fee, with the result that the plan paid excessive fees (including through mutual fund revenue sharing) as the plan’s assets increased without any change in the services provided. In March 2017, the court permitted this lawsuit to go forward.
A further development starting in 2016 has been the filing of excessive fee lawsuits against a number of universities, claiming that the plan sponsors breached their fiduciary duties by using multiple recordkeeping firms and too many investment options (more than 400 in one case), resulting in higher fees to the plan participants. This was largely a function of these being 403(b) plans, which prior to 2009 generally were not viewed as subject to ERISA and were operated differently from ERISA-governed 401(k) plans. In the court decisions to date, these lawsuits have been permitted to go forward, although most courts so far have rejected the claim that having too many investment options in itself is a fiduciary breach.
A number of these cases against plan sponsors have been settled, including some after many years of litigation, for multi-million dollar payments. In the past two years, both Novant Health and Boeing (one of the original September 2006 defendants) agreed to settle, pending court approval, for $32 million and $57 million, respectively. Additionally, two long-running cases, Abbott v. Lockheed Martin Corp. (another of the original group) and Krueger v. Ameriprise Financial, Inc., recently settled for $62 million (the largest amount to date in any such settlement) and $27.5 million, respectively.
In addition to the liability amount, these settlements have included terms requiring the plan fiduciaries to conduct a competitive bidding process or change how they disclose revenue-sharing arrangements to plan participants. For example, in the Ameriprise litigation, in addition to the cash settlement, Ameriprise agreed to conduct a competitive bidding process for recordkeeping and investment consulting services; continue to refrain from receiving compensation for administrative services it provides to the plan, other than reimbursement of its direct expenses as permitted by ERISA; continue to pay fees to the recordkeeper on a flat fee or fee-per-participant basis; and continue to provide participant statements that comply with all applicable DOL participant disclosure rules and that include disclosure of all plan expenses paid by participants directly or through plan investment options. The terms of the settlement also are to be reviewed by an independent fiduciary acting on behalf of the plan, to comply with DOL Prohibited Transaction Class Exemption 2003-39.
Only two of these cases to date have gone to trial, involving ABB Inc. and Edison International. Both resulted in findings that the plan sponsor was liable for excessive fees charged to plan participants. The ABB case involved recordkeeping fees and fees on certain investment funds. The Edison case focused on the plan’s use of share classes other than the lowest fee share class for certain mutual funds in the plan, where the plan fiduciaries could not show that they were aware of, or even inquired about, the availability of lower-fee share classes.
Given these recent developments and trends, it is important that plan sponsors be aware of the issues surrounding plan service fees and revenue sharing, and take these issues into account when negotiating and agreeing to fee schedules and revenue sharing arrangements.
To be able to demonstrate a prudent process, plan sponsors may wish to consider adopting (and then adhering to) an investment policy statement or similar process document that lays out a framework for the initial and ongoing review of service provider and investment fees. As part of such a process, plan sponsors should take into account all the applicable fees and expenses when initially selecting an investment option such as a mutual fund, including revenue sharing payments that may go to plan service providers and the effect that may have on the reasonableness of the service providers’ fees. The process should also include reviewing and considering the fee and other compensation information provided through the 408(b)(2) disclosure documents they receive (which should be requested if not provided, to avoid potential prohibited transaction issues for the plan sponsor), and periodic monitoring of the fees and compensation on an ongoing basis, including through updates of the previously disclosed information for 408(b)(2) and Form 5500 Schedule C disclosure purposes. Plan sponsors may wish to consider whether engaging an independent consultant to assist in these determinations in certain instances may be appropriate, particularly with regard to being able to compare a particular service provider’s or investment fund’s fees to others in the market to evaluate whether the fees meet the ERISA standard of being reasonable and not excessive.