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

A recent settlement in Tracey, et al., v. Massachusetts Institute of Technology secured $18.1 million in relief for a class of 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 may have greater reverberations for sponsors.

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

Originally brought in 2016 in U.S. District Court for the District of Massachusetts, the claim against MIT alleged the plan paid 300 percent more than the "market rate" for recordkeeping services 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 paid Fidelity recordkeeping fees based on a percentage of assets in proprietary Fidelity funds. Since 2010, the plan lost $15.8 million to excessive recordkeeping fees from unmonitored investments, and another $30 million for high cost investments, the plaintiffs alleged.

The "per-head" recordkeeping fee requirement has been negotiated in other recent settlements, said Jerry Schlichter, founding partner of Schlichter Bogard & Denton, and the lead attorney for plaintiffs in the MIT plan.

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

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

The question of whether asset-based service charges — which increase revenue to providers as the value of plan assets grow — are a breach of the Employee Retirement Income Security Act's requirement to administer retirement assets in the best interest of savers 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 court upheld a lower court decision that said, in part, asset-based administrative fees are a breach of ERISA.

The latest MIT decision underscores that sponsors that implement asset-based revenue-sharing agreements are "on notice," said Schlichter. "Sponsors need to do more than just let payments be paid."

Sticking it to small accounts?

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

Scores of claims against sponsors have almost universally claimed asset-based administrative fees are an inherent breach of ERISA.

But some consultants caution that there are unintended consequences to restricting sponsors to per-head payment arrangements. If a plan charges $40 per head in recordkeeping fees, smaller accounts would end up paying a greater percentage of their savings.

Schlichter says the non-monetary relief negotiated in the MIT settlement, and other cases, accounts for that scenario. Another stipulation of the settlement instructs plan fiduciaries to allocate expenses in a way that is "fair, equitable, and appropriate 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 on assets," explained Schlichter. "That protects the small investor."

In effect, there is a cap on what small accounts pay for services. There is no set industry limit—it depends on how many participants are in the plan — which is why the RFP process is so vital, says Schlichter.

Stifling innovation?

Another argument that has been raised by consultants and the defense bar is that a race to the bottom on recordkeeping fees will restrict plan innovation as more sponsors are focused on financial literacy and delivering bespoke savings strategies for participants.

"There is a lot of talk about getting participants better services, and even personalized cradle-to-grave planning through financial wellness programs. And more participants are going to need personalized advice when it comes to spending their savings in retirement. The idea that recordkeeping is a bare-boned service doesn't completely square with the services so many people say participants need," said Ross Bremen, a partner at consultancy NEPC in a previous interview.

But the argument that satisfying ERISA's reasonable cost provision hurts participants is legally tenuous, said Schlichter.

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

Additional services beyond recordkeeping can be priced in the market place, and offered at a reasonable cost, thinks Schlichter.

No cross-selling to plan participants

An even more novel provision of the MIT settlement, which was also written into settlements with Johns Hopkins and Vanderbilt University plans, prohibits recordkeepers from cross-selling non-plan products, like IRA rollovers, insurance products, and wealth management services.

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

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

And he likens the use of private information to sell non-plan products to a doctor selling a patient's information to a third party product vendor.

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

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Schlichter: Sponsors 'on notice' about using asset-based recordkeeping fees

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