The cost of bundled record-keeping/trustee services could go sky high if all trustees are held to those higher standards, experts say.
"For the industry, it's horrible," said Mark Weisberg, partner in the ERISA group of Chicago law firm of Katten Muchin Zavis & Rosenman. "I think many plans want a directed trustee. They want to pay as little as possible."
Mr. Weisberg said small- and midsized plan sponsors will be most affected because they don't have the leverage or the money to move away from bundling to hire separate record keepers and trustees.
"We'll absolutely see fees going up," he said.
Some experts believe it's too early to say what effect, if any, the Northern Trust-Enron issue will have on the cost of doing business in the 401(k) market. "All the court is saying is that the facts are such they want to pursue it. It's a little too early to get excited," said Ed Ferrigno, vice president of the Profit Sharing/401(k) Council of America, Chicago.
"It would be a significant change if they do change the treatment of a directed trustee," he said.
The decision to let participants sue Northern also suggests that record keepers are not necessarily protected by arguing that they are only directed trustees and not responsible, since they only follow orders.
"Now," said one attorney who asked not to be named, "there are literally tens of thousands of compliance officers out there licking their chops."
This situation is very similar to the IBM Corp. cash balance ruling, the attorney said. The case hasn't yet been fully adjudicated but the ruling is "having massive impact on cash balance implementation and administration," he said.
The decision would result in record keepers "tightening up their administrative processes and compliance issues to include reviewing of plan investment options," the attorney said. The Houston decision "is an unwelcome one for directed trustees," said Stephen M. Saxon, an attorney for the SPARK Institute, the Washington-based legislative and educational arm of the Society of Professional Administrators and Recordkeepers.
Mr. Saxon was critical of the Houston judge's decision. He said Judge Harmon "believes Northern Trust had the power to postpone the (Enron) plan lockdown, or conversion period. The idea that a terminated service provider has the ability to postpone its own termination … is almost laughable. It borders on the incredible," he said. "This will send tremors through the retirement services industry.
"If the decision holds up, a custodian could be considered a fiduciary and, even though they are following direction of the plan sponsor, directed trustees would be fiduciaries," Mr. Saxon said. "We are very concerned about it, you can bet. If record keepers become fiduciaries, that makes us very nervous."
Mr. Saxon said there is "no question" that the potential risk now faced by directed trustees has increased as a result of the Houston decision.
"The crystal ball is very cloudy right now, but it could affect the way we do business. Directed trustees don't get paid to assume this level of risk and evaluating investments." If the ruling stands, he said, "it's time to think about getting out of the business."
Joseph Ready, senior vice president of Wachovia Retirement Services, Charlotte, N.C., which has about $23 billion in defined contribution record-keeping assets, said officials there "are still evaluating the (Enron) decision."