While there have been many excessive 401(k) plan fee suits brought over the years, few have been successful. A recent case presenting some particularly bad facts was decided in favor of the plaintiffs and that decision was sustained in part by a federal appellate court.
After a 4-week trial, a trial court in Missouri found plan fiduciaries for a billion dollar 401(k) plan liable for breaching their duties to plan participants by failing to monitor recordkeeping costs, negotiate rebates and prudently select and retain investment options. The court awarded the plaintiffs some $35,000,000 in damages against the persons acting as fiduciaries on the employer’s behalf for breaches of fiduciary duties. These people are referred to simply as the “administrators.” On appeal the district court judgment was affirmed in part and reversed in part.
The first breach of fiduciary duty involved the administrator’s use of revenue sharing compensation paid by Fidelity mutual funds in the Plan to pay for recordkeeping and other administrative expenses incurred by Fidelity’s affiliated trust company. Although the Court acknowledged that fiduciaries may use revenue sharing to pay for administrative fees (rather than paying with a “hard dollar,” per participant fee), it found the administrator’s use of revenue sharing in this case breached their duties.
The appellate court distinguished cases that found no fiduciary breach because the plan offered a wide choice of mutual fund investments, including low-cost funds. Here the administrators failed to (1) calculate the amount the plan was paying Fidelity for recordkeeping through revenue sharing, (2) determine whether Fidelity’s pricing was competitive, (3) adequately leverage the plan’s size to reduce fees, and (4) make an effort to prevent plan assets from being used to subsidize the cost of other services being provided by Fidelity to the company, even after the company’s own outside consultant notified the administrators the plan was overpaying for recordkeeping and might be subsidizing other corporate services. (Fidelity provided additional administrative services to the company unrelated to the plan, including payroll processing and recordkeeping functions for the company’s defined benefit and welfare plans.) These facts were sufficient for the appellate court to affirm the holding that the administrators had breached their fiduciary duties. The receipt of revenue sharing was not condemned, but the failure to undertake a deliberative process to determine why the recordkeeping costs being paid were reasonable.
In addition to finding breaches of fiduciary duties as a result of revenue sharing practices, the trial court found that the administrators violated their fiduciary duties to the plan by their decision to remove a Vanguard fund that it believed had “deteriorating performance,” and to map the funds therein to the age-appropriate Fidelity target-date fund. The trial court found that by selecting funds with higher revenue sharing payments, the administrators minimized the employer’s out-of -pocket costs.
The appellate court vacated the $21.8 million dollar judgment on this issue. The appeals court agreed with the administrator’s contention that the trial court’s analysis showed “improper hindsight bias.” The court also noted there was nothing in the trial court’s opinion to indicate that it applied the proper standard of review. The plan document gives the plan administrator discretion in interpreting the plan and making decisions with respect to the plan. Where that is the case, those decisions should be reversed only where there is an abuse of discretion; that is, where the decision is not reasonable. The court concluded the plan administrator “deserves discretion to the extent its . . . investment choices were reasonable given what it knew at the time [the investment decisions were made].”
This case presents some rather bad facts that influenced the court in its conclusion. It highlights the importance of both following established processes in making fiduciary decisions and acting for the exclusive benefit of the plan participants and beneficiaries. More specifically, administrators need to have a workable investment policy statement and need to follow it. While using revenue sharing payments to reduce out of pocket expenses is perfectly acceptable, plan fiduciaries need to know what the actual costs for plan services are and be able to conclude that the costs incurred are reasonable (not necessarily the lowest) for the services provided.