Scores of claims against sponsors have almostuniversally claimed asset-based administrative fees are an inherentbreach of ERISA. (Photo: Shutterstock)

Settlement agreements in lawsuits against sponsors of jumbo defined contribution plansare more often including stringent non-monetary provisions thatrestrict how recordkeepers charge for services.

A recent settlement in Tracey, et al., v. MassachusettsInstitute of Technology secured $18.1 million in relief for a classof 16,000 plan participants. Plaintiffs' attorneys' fees of up to$6.5 million will be paid from the general settlement fund.

But it is the non-monetary provisions of the settlement that mayhave greater reverberations for sponsors.

One provision requires MIT's fiduciaries to put out a requestfor proposal to at least three recordkeepers that specificallyrequires bids on a per-participant basis, and prohibits bids thatcharge a percentage of plan assets.

Originally brought in 2016 in U.S. District Court for theDistrict of Massachusetts, the claim against MIT alleged the planpaid 300 percent more than the "market rate" for recordkeepingservices to Fidelity. The plan was a 401(k), and not a 403(b) plan,as universities plans typically are.

Going against the counsel of its outside consultancy, MIT paidFidelity recordkeeping fees based on a percentage of assets inproprietary Fidelity funds. Since 2010, the plan lost $15.8 millionto excessive recordkeeping fees from unmonitored investments, andanother $30 million for high cost investments, the plaintiffsalleged.

The "per-head" recordkeeping fee requirement has been negotiatedin other recent settlements, said Jerry Schlichter, foundingpartner of Schlichter Bogard & Denton, and the lead attorneyfor plaintiffs in the MIT plan.

"That provision has been a part of a group of settlements we'vehad recently," Schlichter told BenefitsPRO.

"Taken together, it is a powerful indication that sponsors needto look very carefully at recordkeeping fees standing in isolation,particularly if those fees are being paid on an asset-basedcharge."

The question of whether asset-based service charges — whichincrease revenue to providers as the value of plan assets grow —are a breach of the Employee Retirement Income Security Act'srequirement to administer retirement assets in the best interest ofsavers was answered in Tussey v. ABB, said Schlichter.

That claim—the seminal excessive fee case filed in 2006–ultimately settled for $55 million in 2018, after an appeals courtupheld a lower court decision that said, in part, asset-basedadministrative fees are a breach of ERISA.

The latest MIT decision underscores that sponsors that implementasset-based revenue-sharing agreements are "on notice," saidSchlichter. "Sponsors need to do more than just let payments bepaid."

Sticking it to small accounts?

"Fees paid to the recordkeeper for basic recordkeeping serviceswill not be determined based on a percentage-of-plan-assets basis,"MIT's settlement agreement says.

Scores of claims against sponsors have almost universallyclaimed asset-based administrative fees are an inherent breach ofERISA.

But some consultants caution that there are unintendedconsequences to restricting sponsors to per-head paymentarrangements. If a plan charges $40 per head in recordkeeping fees,smaller accounts would end up paying a greater percentage of theirsavings.

Schlichter says the non-monetary relief negotiated in the MITsettlement, and other cases, accounts for that scenario. Anotherstipulation of the settlement instructs plan fiduciaries toallocate expenses in a way that is "fair, equitable, andappropriate for plan participants."

"Once there is a flat fee determined on a per-participant basis,the allocation of costs can then be prudently done based onassets," explained Schlichter. "That protects the smallinvestor."

In effect, there is a cap on what small accounts pay forservices. There is no set industry limit—it depends on how manyparticipants are in the plan — which is why the RFP process is sovital, says Schlichter.

Stifling innovation?

Another argument that has been raised by consultants and thedefense bar is that a race to the bottom on recordkeeping fees willrestrict plan innovation as more sponsors are focused on financialliteracy and delivering bespoke savings strategies forparticipants.

"There is a lot of talk about getting participants betterservices, and even personalized cradle-to-grave planning throughfinancial wellness programs. And more participants are going toneed personalized advice when it comes to spending their savings inretirement. The idea that recordkeeping is a bare-boned servicedoesn't completely square with the services so many people sayparticipants need," said Ross Bremen, a partner at consultancy NEPCin a previous interview.

But the argument that satisfying ERISA's reasonable costprovision hurts participants is legally tenuous, saidSchlichter.

"If the argument is that a sponsor insisting on reasonable feesis engaged in a race to the bottom that is a threat to retirementplans, then that is attempting to justify not complying with thelaw," he said. "It's unreasonable to have an open-ended, uncappedcharge that just goes up because the market goes up."

Additional services beyond recordkeeping can be priced in themarket place, and offered at a reasonable cost, thinksSchlichter.

No cross-selling to plan participants

An even more novel provision of the MIT settlement, which wasalso written into settlements with Johns Hopkins and VanderbiltUniversity plans, prohibits recordkeepers from cross-sellingnon-plan products, like IRA rollovers, insurance products, andwealth management services.

"The point is that using confidential information—socialsecurity number, age, assets—that is the most personal of financialinformation, and then using that information outside of thesponsor's plan, is a breach of ERISA," said Schlichter.

He warns sponsors to be on guard for the practice ofcross-selling, and said he is aware of some firms that aretargeting high-balance participants for wealth management services.He did not name those firms.

And he likens the use of private information to sell non-planproducts to a doctor selling a patient's information to a thirdparty product vendor.

"That would be absolutely prohibited," said Schlichter. "It isthe same with ERISA."

READ MORE:

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