401(k) Plan Expenses: High Courts, High Stakes

Sczepanski-Rebecca-OPTBy Rebecca Sczepanski, HunterMaclean

For GeorgiaCEO

High-profile cases working their way through the courts illustrate the high stakes associated with a failure to monitor and manager 401(k) plan fees and expenses. A well-managed retirement plan is an extremely valuable benefit that can positively impact the lives of employees and their beneficiaries and enhance a company’s reputation. However, managing retirement benefits can be complicated, and CEOs need to be vigilant about clearly defining and fulfilling fiduciary responsibilities.

A wave of class-action litigation initiated in the mid-2000s is finally bearing fruit for plaintiffs. The 8th Circuit Court of Appeals issued its opinion in Tussey v. ABB Inc. in March 2014. That Court held that ABB Inc. had failed to monitor the excessive fees paid to Fidelity from its 401(k) plan and remanded other holdings for the district court’s further consideration. ABB Inc.’s current tab is $13.4 million for the excessive fees, plus payment of the plaintiffs’ attorney fees (recoverable by successful plaintiffs under federal law, approximately $13.4 million before the appeal), its own legal fees for its defense, and possibly additional damages for improperly mapping investment funds. The only party who was completely relieved of liability under the decision was the service provider, Fidelity.

The second recent case of note, the 2013 9th Circuit opinion of Tibble v. Edison International, was generally an employer-friendly case. It determined that a shorter deadline for bringing fiduciary breach lawsuits was appropriate and that a plan administrator was entitled to deference for its plan interpretations even when there is a conflict of interest and the interpretation favors the plan sponsor. Nevertheless, Edison was held responsible for using higher-cost retail-class shares for three of the mutual funds in its plan, as it had not inquired whether lower-cost institutional class shares were available to a plan of its size. Both sides appealed the decision to the U.S. Supreme Court, which agreed to hear the case—the first time the Supreme Court has done so in the 401(k) plan fee context. Oral arguments have been heard, and a decision is expected this month.

The U.S. Department of Labor (DOL) is increasingly concerned about the effect of high fees on plan participants. This has led to updated regulations, explicitly placing the responsibility for the funds made available on the employer. In 2012, these rules began requiring the plan administrator (typically the employer) to make enhanced disclosures to participants of the expenses paid from the plan and to explicitly approve plan-paid service provider fees. Failure to comply risks lawsuits, penalties, and excise taxes. These rules encourage greater transparency and demand heightened attention from CEOs to minimize potential liability, and they are increasingly a focus in DOL audits.

No company is immune from the threat of lawsuits filed by retirement plan participants. Unprepared plan sponsors could be hit with costly damages that can jeopardize both corporate and personal assets. These cases are expensive to defend and even more expensive to lose. CEOs of businesses with 401(k) plans should carefully consider the precedents set by these two cases and avoid “behind-the-scenes” payments and the use of expensive investment funds that subsidize non-retirement plan services. CEOs unsure of whether their company has adopted and is executing sound fiduciary policies and procedures should consult with an experienced employment benefits attorney.