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Retirement plan lawsuits often target company boards

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Hidden fees trap

NEW YORK — Directors and officers are often being named as defendants in lawsuits filed by retirement plan participants who are charging their companies’ 401(k) plans have unnecessary and undisclosed fees.

Those who serve on their companies’ compensation committees are defendants in these suits, and it is “very common for the members of boards of directors to (also) be named in these suits as the parties who selected the members” of these committees, said Rhonda Prussack, New York-based senior vice president and head of fiduciary and employment practices liability for Berkshire Hathaway Specialty Insurance Co.

She was the moderator during a session on plan fee litigation during the Professional Underwriting Liability Society’s 2019 Directors & Officers Symposium in New York on Wednesday.

The trend began in 2006, when a plaintiff law firm began filing dozens of these suits, which led to “some very large settlements,” said Ms. Prussack.

There was a bit of a lull, then the U.S. Supreme Court held in a 2015 case involving plan fiduciaries, Tibble v. Edison International, that there was a breach of fiduciary duty and that fiduciaries had an ongoing duty to monitor the performance of investments, including the monitoring of fees.

“Since then, literally scores of class action litigation” alleging inappropriate, undisclosed or overly high fees in 401(k) plans have been filed, she said.

One of the areas where a problem may arise is revenue sharing, said Kai H. Richter, a partner with plaintiff law firm Nichols Kaster PLLP in Minneapolis. “A lot of plan sponsors like to pay for record-keeping through revenue sharing,” he said. If the percentage being rebated to the record-keeper is based on asset growth, these fees “can get out of whack” even if the benchmark was set appropriately initially, and plan participants wind up overpaying for record-keeping, said Mr. Richter. One possible solution, he said, is to set a limit on the amount of revenue sharing a record-keeper can retain.

There is a lack of predictability in this area of the law, said Brian T. Ortelere, a partner with Morgan, Lewis & Bockius LLP in Philadelphia, who defends employee benefits litigation. “The law under ERISA is constantly evolving,” he said.

Mr. Richter said despite the choice of investments available, plan sponsors should think of their 401(k) plans the same way they would their pension plans, if they still have one. “I think there’s a perception” that, because participants choose their own investments “the fiduciary duties are watered down.”

“I would strongly suggest that is a perception that will lend itself to liability, because it will not be consistent with the judiciary standards under ERISA,” said Mr. Richter. Those standards do not depend on whether it is a 401(k) plan or a pension plan, he said.

In fact, U.S. Department of Labor regulations specify that a participant exercising independent control over assets in an account does not relieve fiduciaries of the duty to select and monitor the plan’s investments, he said.

Another issue discussed during the session was financial services companies that offer their own funds as part of their 401(k) plans. ERISA prohibits offering proprietary services, although the Department of Labor says plan fiduciaries have the statutory right to determine an exception to this, providing it meets ERISA’s reasonableness requirements, Mr. Richter said.

Mr. Richter said from his standpoint, however, this issue “presents some low-hanging fruit to the plaintiffs bar.” Fiduciaries who want to put money into a proprietary plan must ask themselves if this is because they work for the company, or because it is the best-in-class investment. And even if the latter is the case, “someone might have a different opinion,” Mr. Richter said.

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