Excessive fee suits offer advisor lessons

SAN ANTONIO – More than 30 lawsuits have been filed against 401(k) plan sponsors in the past few years, leaving little doubt that the retirement field is strewn with legal landmines.

Attorneys Mike Prame and David Levine, speaking Monday at the 2013 Center for Due Diligence conference, drew up a map of sorts to help retirement advisors tiptoe their way to safety.

The Groom Law Group lawyers noted that many of the suits have been filed by Schlichter, Bogard and Denton, a St. Louis, Mo., law firm that likes to tout its “aggressive approach to representing our clients.”

“We have successfully litigated national class-action cases for employees and retirees alleging excessive fees against some of the largest companies in the country, and we continue that fight for our clients,” the firm boasts on its website.

The targets of its ERISA-related suits have been plan sponsor fiduciaries as well as retirement service providers.

Many of the cases have been settled, often in part because legal costs are so high. Last week, in one of the biggest settlements in an excessive-fees case to date, International Paper agreed to a roughly $30 million payment.

The lawsuit against it, in part, accused the company of switching out a low-cost Vanguard S&P 500 fund with an expensive, actively managed large cap stock fund, which underperformed the S&P 500 and the Russell 1000 Index.

As part of the settlement, IP said it would no longer prohibit employees from withdrawing their money from the company stock fund.

Prame said, like the IP cases, many of these suits have alleged unreasonable, hidden and excessive fees.  

Recordkeeping and cross-subsidization issues sit at the heart of many of the more significant clashes, Prame said.

Even the float on plan contributions has been a bone of contention in some of these cases, the lawyers said.

In short, these suits have been more complicated than fee disputes. 

For example, in Tussey v. ABB, a judge last year awarded the plaintiffs nearly $37 million after finding the defendants had failed to properly monitor recordkeeping costs. Fidelity, the court found, was paid an amount that exceeded the market costs for plan services in order to subsidize certain “corporate services” Fidelity provided.

But in Levine’s view, “it all came down to a process point.”

And that’s why investment policy statements are so important, he told the audience.

Elaborating after their presentation, Levine said advisors should carefully consider whether their investment policy statements include “a level of flexibility that allows for variation from the IPS requirements or procedures as necessary to avoid inadvertent foot faults.”

Other claims in Tussey asserted fiduciary breaches had occurred, included selecting more expensive share classes when less-expensive ones were available. The plaintiffs also sued because, they claimed, ABB had removed a Vanguard fund from the plan and replaced it with a Fidelity fund without a winnowing process.

A number of other big lessons emerged from the case for advisors, Levine said, including:

  • Where a decision is made contrary to an initial recommendation, advisors should work with their clients to help document the reasons why they did not comply and also why the final decision was reached.
  • Advisors can play a key role in documenting the allocation of fees across multiple plans when a provider services more than one plan.

The bottom line? Advisors need to be constantly revising their processes given constantly changing litigation strategies and DOL enforcement.

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