Organizations beware: Workers are becoming much savvier about investigating fees and other costs associated with retirement plans governed by the Employee Retirement Income Security Act.
In some parts of the country, trial lawyers even solicit participants on billboards to contact them to determine if their employer can be sued for fiduciary failures.
This activity comes in the wake of a recent settlement by Boeing Co., in a lawsuit by some 190,000 current and former employees over the fees and expenses in its 401(k) program — under terms that remain confidential — that put an end to a case that had dragged on for nine years.
The deal, struck just before the case went to trial, followed the May 2015 9-0 Supreme Court ruling in the Tibble v. Edison International case, which highlighted the responsibility on fiduciaries of retirement plans to better monitor investments' fees and performance and to remove ones that are unsound.
The ruling from the Tibble case also permits participants to file legal challenges against a fiduciary within six years of the fiduciary's breach of the continuing duty to monitor investments, which makes it more difficult for employers to dismiss legal challenges based on a statute of limitations defense.
For now, litigation has been primarily targeted at relatively big organizations with large retirement programs. Boeing, for example, had about $46 billion in assets as of the end of 2014, according to its most recent Form 5500.
In recent months, our firm has followed several cases similar to the Boeing lawsuit that have been adjudicated or are in the legal pipeline, many involving nationally known organizations similar in size to Boeing.
What is troubling is that many smaller companies — which might oversee plans in the range of, say, $30 million to $40 million, or a small fraction of a Boeing or others — might assume that their risk of a challenge over fees or other management issues is minimal.
Such complacency would be a mistake. Although small and midsized companies might not serve as prime targets for litigation, their plan participants are hearing more about the issue of 401(k) management fees — whether from news articles, billboards or talk at the water cooler — and may file a complaint, if not with an attorney, then with the Department of Labor, which regulates ERISA programs.
Non-profits and professional associations who sponsor employee retirement plans are also at risk.
A complaint by a participant to the DOL may lead to an audit, and organizations that have been through that process say it can make an IRS audit seem like a stroll in the park.
DOL auditors may not only ask for information about fees and the share-class structures that have been offered to plan participants, but often ask plan sponsors to open up minutes and other extensive documentation going back several years.
DOL audits may lead to fines and additional fees as well as potentially large legal/compliance bills and many hours of lost time.
How can a firm protect itself? These days it is incumbent upon fiduciaries to monitor closely the ERISA plans that they sponsor.
Those steps include a re-examination of the following factors:
- The fees associated with the plan;
- Whether appropriate share classes are offered to participants;
- The most recent returns on investments and the risks associated with those returns;
- Understanding how all plan providers (record-keeper, managers/mutual funds, consultants/brokers, custodians, etc. are paid; and
- Whether the firm has received and reviewed all the 408(b)(2) disclosures, the so-called “fee notices” that are provided by service providers to plan fiduciaries and that are required by the DOL.
The same advice holds for sponsors of 403(b) retirement plans that are offered by non-profit employers and which are also subject to DOL oversight.
One final tip: Make sure your employees have the best possible information about the plan. The surest way to avoid an audit of your organization's retirement plan is to ensure that participants receive appropriate information so they understand fees and services, and they know who they can call with questions.
Mark Dixon and Susan Shoemaker are Partners of Plante Moran Financial Advisors. Mark leads the institutional investment consulting practice, and Susan leads the qualified plans practice.