Expected fee-disclosure legislation and the recent spate of 401(k) fee lawsuits are driving some defined contribution plan executives to create a paper trail to protect themselves from litigation.
In response to the threat of litigation, some plan executives are creating “fee policy statements” or are amending existing investment policy statements. Fee policy statements explicitly provide a range of acceptable fee levels for record-keeping and investment management services, including redemption fees and revenue-sharing agreements.
Revenue sharing has been at the heart of lawsuits targeting numerous corporate 401(k) plan sponsors.
The types of fees typically outlined in these statements are:
• Contract fees, expressed as basis points and cover investment management.
• Fund fees, which include 12b-1 fees, are associated with marketing and internal administration. These fees typically are based on a percentage of an individual’s assets that are invested in a particular fund.
• Per-participant fees, such as record-keeping fees paid by the plan sponsor.
• Statement fees, which cover services such as mailing quarterly statements to participants and providing telephone and Web access to participants.
Several class-action lawsuits allege that plan sponsors failed to meet their fiduciary responsibilities by ignoring revenue-sharing payments that investment managers paid to record keepers and other service providers. The suits also charge that plan executives failed to disclose these fees to participants, as required by the Employee Retirement Income Security Act.
Some DC plan executives are putting fee policy statements in place to avert the threat of future litigation.
Cynthia Hayes, managing director at Merrill Lynch Retirement Group, Pennington, N.J., said a few clients are taking action now, working with consultants to draft fee policy statements, separate from their existing investment policy document.
Early trend
The trend, however, is in the very early stages.
“There is more discussion with consultants among large plan sponsors in the mega market right now. What we’re seeing is these plan sponsors having a greater awareness of the issues. Large sponsors think they are making rational decisions and the fee policy (statements) could defend the process for making those decisions,” said Ms. Hayes.
Boston College, Chestnut Hill, Mass., and Florida Power & Light, Juno Beach, Fla., are among the companies that have instituted such policies for their 401(k) plans.
Boston College amended its investment policy in late 2006 to include a section that outlines acceptable fee ranges and lays out what reasonable fees are for eachasset class and investment style, according to a consultant who works with the plan.
An official at the $2 billion Florida Power & Light plan, who asked not to be named, said officials have created a policy statement that outlines what the plan considers “reasonable fees” for current and future investments. Managers must fit within the guidelines.
“The guidelines are spelled out in black and white,” said the official.
The Ohio Deferred Compensation Plan, Columbus, amended its investment policy to explicitly say the program does not pay commissions, front- or back-end loads, or surrender fees, said Keith Overly, executive director of the $6 billion 457 plan.
Plan executives declined to disclose what their acceptable fee ranges are so investment managers won’t take advantage during the competitive bid process, offering fees at the higher end of the scale.
Cynthia Egan, president of T. Rowe Price Retirement Plan Services, Baltimore, said a few clients have expressed interest in creating a separate fee policy or beefing up their investment policy with more fee requirements.
“I think it’s something that some plans are looking at, and we might see more of it,” said Ms. Egan. Plan executives are looking to protect themselves, she said.
“It’s an early trend today but it will become more dominant over the next 18 months. We will see consultants embrace it like investment policies 10 years ago,” said Ms. Hayes.
