In the past year, litigation filed under the Employee Retirement Income Security Act (ERISA) has exploded, and it’s quickly becoming an ever-present reality for employers. One of the most recent and fastest-growing areas of this litigation involves 401(k) fee cases. Because the lawsuits are very new and still not well publicized, they catch many employers off-guard. There are some steps employers should take, however, to ensure they aren’t at risk for this emerging form of litigation.
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Background
ERISA, the statute that governs many employee benefits provided by employers, states that a fiduciary of a plan must make plan decisions “for the exclusive purpose of providing benefits to the participants” and for “defraying reasonable expenses of administering the plan.” Plan fiduciaries also must make investment decisions as a person experienced in such investments. Fortunately, some fiduciaries can obtain relief under Section 404(c) of ERISA, which says fiduciaries won’t be held liable in cases of self-directed plans, such as a 401(k) retirement plan, when employees make their own investment decisions from a menu of investment options.
Regulations also require Section 404(c) plans to provide participants with a description of fees related to transactions and expenses connected to the plan as well as supply — upon request — a description of each fund’s operating expenses paid from participant account balances. Additionally, ERISA annual reporting rules require plans to annually report to the U.S. Department of Labor (DOL) (Form 5500) the fees and expenses the plan paid to accountants, attorneys, recordkeepers, trustees, and other service providers.
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Anatomy of 401(k) fee suits
While it’s difficult to describe the “typical” 401(k) fee suit because they’re just now making their way to court, several of the suits have involved participants in 401(k) plans suing the plan sponsors as well as related fiduciaries. The individuals filing the suits name the sponsoring employer, plan committees, and even company officers, directors, and employees as defendants. Some of the most common allegations are that the fiduciaries breached their duty when they caused or allowed plan providers to be paid excessive fees for their services or failed to “capture” certain money embedded within the investment vehicles offered under the plan. The employees then often ask the court to restore any losses suffered or for an accounting of the transactions related to the plans and their assets.
One prime example of these cases is George v. Kraft Foods. In that case, participants in Kraft’s 401(k) plan alleged that the company breached its fiduciary duty under ERISA. Their central claim was that Kraft failed “to contain Plan costs” and permitted the plan to pay “unreasonable fees to service providers to the Plan for, [among other things], trustee, record keeping, administration, investment advisory, investment management, brokerage, insurance, consulting, accounting, legal, printing, mailing, and other services.” The participants essentially argued that Kraft’s failure to minimize costs led to higher fees, which in turn were passed on to them.
Kraft asked the court to dismiss the participants’ complaint, claiming that its excessive length and poor structure justified its dismissal. The court rejected its arguments and permitted the participants’ claims regarding excess fees to be maintained.
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Bottom line
It’s difficult to determine at this early stage just how courts will rule on 401(k) fee cases. But the recent burgeoning of lawsuits in this area should make you reassess your own 401(k) plans.
Among other things, you should monitor plan and fund expenses to ensure you have negotiated the best deal for participants. You also should ensure that expenses connected to plans are supported by clear, accessible documentation. Finally, the U.S. Department of Labor is considering implementing regulations that will require service providers to disclose the fees involved with the plan. You should provide fee information to plan participants to satisfy the regulations and avoid litigation down the road.