A recent lawsuit alleging fiduciary duty violations caught the attention of many in the employee benefits business. The filing received considerable attention not because of the nature of the charges, but because it involved a small business. Many large employers have ultimately compensated participants to address similar charges. Let’s take a closer look at why the filing of this case matters for large organizations, small businesses, and all those in between.
The Big Details of the Case
Employees of LaMettry’s Collision Inc. filed — and then later dropped — a class action suit against the company, alleging that key executives allowed the company’s $9.2 million plan to pay excessive investment, recordkeeping, and administrative fees at their expense. It is interesting to note that only the company’s CEO and CFO — both plan trustees — were the defendants. Why were the plan’s record-keeper, its brokerage, and the advisor representative excluded from the lawsuit? Charging them would have required proof that they also held fiduciary duty to plan participants — an assertion that would have been difficult to justify.
The plan’s investment options include approximately 11 mutual funds, seven pooled separate accounts, and a guaranteed investment contract offered by the broker. According to the complaint, the defendants selected retail-priced investment options that “likely offered no additional services at all compared to equivalent or lower fee institutional funds.” The asset-based fees for two of the retail-class shares of two identified funds were 1.17% and 1.3%, vs. 0.73% and 0.69%, respectively, for the institutional-share classes of those funds.
The plaintiffs alleged that the defendants had failed to consider the lower-fee funds and actively monitor the selected funds’ fees compared to the lower-fee funds. In addition, the lack of any additional value or services in exchange for the higher fees charged by the selected funds caused plan participants to pay hundreds of thousands of dollars in excessive fees.
Growing Recordkeeping Concerns
The lawsuit also charged that the plan overpaid for recordkeeping services. The complaint stated that recordkeeping is necessary for every defined-contribution plan and that prudent fiduciaries must solicit requests for proposals from companies that provide recordkeeping services to control plan costs.
The plan was paying a 1.22% asset-based fee for recordkeeping services, resulting in a $113,000 annual charge. The plaintiffs claimed that if instead those services had been charged on a competitive per-participant annual fee basis, then plan participants would have been better off.
The complaint also faulted the defendants for failing to disclose revenue-sharing fees that the asset managers to the recordkeeper. Finally, the plaintiffs questioned the plan’s paying of an umbrella administrative fee averaging 0.58% – for which, the lawsuit charged, participants received little to no value. This fee amounted to an annual cost of over $50,000.
Part of the Employee Retirement Income Security Act (ERISA) focuses heavily on fiduciaries’ decision-making procedures. Accordingly, the plaintiffs charged that the CEO and CFO lacked a process “a prudent process – or any process – for the consideration, selection, evaluation, or active monitoring of these funds or their fees with respect to alternatives, including lower-fee funds.”
Sizing Up Opportunities to Reduce Participants’ Recordkeeping Fees
Given the increased attention on plan costs, how can plan sponsors prevent participants from paying “excessive” recordkeeping fees? Sponsors have several choices when allocating fees:
Pay fees from employer funds. While this is the simplest choice, it is also the most costly for employers. Nonetheless, with that approach, whether fees are “reasonable” is irrelevant from the participants’ perspective.
Allocate recordkeeping fees equally among participants. In doing so, plan sponsors can try to avoid disproportionately benefitting participants with investments in high-revenue-sharing funds. When participants bear at least some of the recordkeeping fees, the fees should not only be reasonably priced but also shared equitably. Additionally, sponsors can ask record-keepers to use revenue-sharing fees they receive from asset managers to offset recordkeeping charges that would otherwise be levied against participant accounts. It is important to note that some funds (e.g., actively managed stock funds) share more revenue with record-keepers than others.
Limit plan investments to R6 shares. “R6 shares” comprise an emerging class of funds that are lower in cost but do not share revenue with record-keepers. While this limitation simplifies accounting for recordkeeping charges against individual participant accounts, those costs still exist and must be paid in some other way.
CRI Can Help You Address Fiduciary Concerns of Any Size
Although the charges in the lawsuit may normally be more suited for a large organization, small employers may find themselves in similar cases if they do not take essential precautionary steps. Because the plaintiffs dropped the case “without prejudice,” the lawsuit could (theoretically) come back to life. Even though this is unlikely, the lesson of the filing is clear: Employers of all sizes must follow all fiduciary rules. Contact CRI if you need assistance ensuring that your organization abides by its fiduciary duties.