Headline-grabbing suits against Boeing Co., Anthem Inc., Chevron Corp. and others over excessive fees and understanding and offering appropriate investment options associated with their 401(k) programs are a warning to retirement plan sponsors: Take obligations under the Employee Retirement Income Security Act of 1974 seriously.
Few participants are familiar with all the fees within their own retirement account or have read the disclosures provided to them by their employer. Indeed, most individuals toss such literature in the trash. However, for plan sponsors responsible for retirement plans, knowing chapter and verse of that information related to fees and disclosures is vital.
A class-action was filed in late December in U.S. District Court by participants in Anthem's 401(k) plan, which has more than $5 billion in assets. Among other things, plaintiffs claim the company breached its fiduciary responsibility by allowing excessive investment management and administrative fees.
The suit is especially surprising because Anthem mainly used funds by Vanguard, known for its low-cost funds. Bell et al. v. Anthem Inc. et al. states that Anthem fiduciaries breached their ERISA duties by using “high-priced share classes of mutual funds rather than identical lower-cost share classes of those same mutual funds which were readily available to the plan.”
One of the most troublesome aspects of the Anthem case is the claim that plan sponsors should have offered a stable value fund rather than Vanguard's money market fund. That's an unusual assertion since stable value and money market funds are very different products and each has their own pros and cons.
In February, a similar suit was filed against Chevron, also challenging the use of a Vanguard money market fund in its 401(k) plan instead of a better-performing stable value fund.
The Anthem and Chevron cases are worrisome, “because plaintiffs can always allege that the investment options were imprudent, too expensive generally or too expensive compared to investments with similar risk and return characteristics,” Jordan Schreier, an ERISA attorney with Detroit-based law firm Dickinson Wright, explained to us.
The Anthem and Chevron suits follow the recent settlement of a case over fees and expenses charged by Boeing's 401(k) plan, which had $46 billion in assets at the end of 2014. That suit dragged on for nine years but was settled last year for $57 million, shortly after the U.S. Supreme Court ruled that it is the responsibility of fiduciaries of retirement plans to better monitor investments' fees and performance and to remove ones that are unsound (Tibble v. Edison International).
There has been a spate of suits in recent months challenging 401(k) fees and/or stable value investments against firms including Deutsche Bank Americas Holding Corp., Fidelity Management Trust Co., New York Life Insurance Co., Insperity Inc., Verizon Communications Inc., CVS Health Corp., Massachusetts Mutual Life Insurance Co., Oracle Corp. and Prudential.
Smaller firms are also at risk of a challenge over fees or 401(k) plan management. As a result, lawyers are fielding calls from clients, concerned that plan participants may file a complaint with the Department of Labor, which oversees ERISA. DOL complaints can lead to an audit and even civil or criminal charges — a process that may make an IRS audit seem like a cake walk.
Many wonder if recent lawsuits will prompt some employers to consider not offering a 401(k) plan due to the risk of being sued. But such plans have become integral to most compensation plans, and with labor markets so tight, it's hard to imagine these retirement plans being eliminated. Rather, it is imperative that fiduciaries have a well-defined process in place to help defend them against these types of lawsuits.
In Tibble v. Edison, the U.S. Supreme Court said that fiduciaries should conduct a systematic review of their decisions at reasonable intervals. Therein lies the long-term protection against such suits: “It will be easier for a plan investment committee to defend a breach claim if the committee engages in a thoughtful, deliberative and reasonable process,” Dickinson Wright's Mr. Schreier said.
And, Mr. Schreier noted that the U.S. federal district court said in Tussey v. ABB that a court should not overturn a fiduciary's reasonable prudent investment decision just because another reasonable decision could have been made.
The cases against Anthem, Chevron and Boeing are a reminder that plan sponsors must undertake regular reviews of fees, assess share classes used and asset classes offered to participants, and review returns and risks. Sponsors should also examine fees paid to all plan providers (record-keeper, managers/mutual funds, consultants/brokers, custodians, etc.) and whether the sponsor has received and reviewed all 408(b)(2) disclosures, the so-called “fee notices.” The same holds for sponsors of ERISA 403(b) retirement plans offered by non-profit employers.
Mark Dixon and Susan Shoemaker are Partners of Plante Moran Financial Advisors. Mark leads the institutional investment consulting practice, and Susan leads the qualified plan practice.