South Carolina Lawyer
SC Lawyer, May 2007, #1.
Employers and 401(k) Service Providers: The Looming Battles Over Hidden Fees and Costs
South Carolina LawyerMay 2007Employers and 401(k) Service Providers: The Looming Battles Over Hidden Fees and CostsBy Joel Daniel, Chip Hunt and Chip HardyThe driving force of potentially high-impact changes in the retirement plan services arena is the significant attention now being focused on the topic of revenue sharing arrangements and fee practices of 401(k) plan service providers. The implications for plan fiduciaries, including employers who sponsor retirement plans, and plan participants can be serious.
Recent media headlines, highly publicized class-action lawsuits, New York Attorney General Elliott Spitzer's high profile settlements and a recently released government report calling for congressional action all spotlight the problematic issues relating to the unnecessarily complex and confusing 401(k) fee practices so prevalent within the retirement plan services sector. The problem for unsuspecting plan fiduciaries is that liability for inattention may rest on them. Accordingly, investment and retirement committee members, human resource professionals, corporate senior management teams and other plan fiduciaries need to be informed of the issues and consider a prudent course of action to take now in order to maintain the retirement plan's integrity, protect themselves and, most importantly, to preserve employee confidence in the plan. Attorneys representing employers that sponsor 401(k) and similar plans should advise their clients to review the plan service fees to help avoid unwanted breach of fiduciary duty claims.
Plan sponsors should be diligent
Plan sponsors should review all plan service provider fee arrangements. There will likely be resistance from service providers; therefore, actually executing the prudent course of action may not be easy, but is necessary to mitigate the risk of liability. In the quest for executing a prudent course of action, plan fiduciaries must understand one crucial point - following a prudent process in selecting and monitoring plan service providers and related fees is the key to avoiding fiduciary liability. In other words, the focus of any fiduciary inquiry is on the procedures followed, not results achieved. The exercise of a routine and disciplined process for managing plan-related decisions significantly improves the plan's chances for avoiding fiduciary liability and obtaining success over the long term.
Generally, plan fiduciaries do not have the knowledge, skills and resources to independently complete these tasks. ERISA explicitly authorizes plan fiduciaries to hire competent experts to assist in this task. Further, courts have ruled that ERISA fiduciaries have a duty to seek the advice of an independent expert in circumstances where committee members feel they lack the knowledge and ability to implement these review processes. See, e.g. Bussian v. RJR Nabisco, Inc., 223 F.3d 286 (5th Cir. 2000); Katsaros v. Cody, 744 F.2d 270 (2d Cir. 1984); Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982).
Historical perspective on plan fees offers insight
The fee practices of service providers, which are so commonplace today within the retirement plans service arena, are a relatively new phenomena, having only evolved over the past 20 years. The evolution of today's fee practices is directly related to the proliferation of 401(k) plans and the corresponding growth of the mutual fund industry.
Traditionally, the employer (or the plan trust) paid service fees directly to each respective...