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CCH® PENSION — 4/17/07

Lawsuits Over 401(k) Plan Fees Continue To Grow; Defensive Measures Involve Procedures And Disclosure

from Spencer’s Benefits Reports: Litigation concerning fees paid by 401(k) plans is expanding, and plaintiff’s lawsuits now number more than one dozen, according to Bridgit M. DePietto, an associate with Morgan, Lewis & Bockius LLP, who spoke recently at the Midwest Regional Conference sponsored by the Profit Sharing/401k Council of America. Ms. DePietto, who was critical of the increased litigation, said that a three-phased approach to filing a suit is being used against large and, most recently, midsize employers.

The first phase involves newspaper advertisements requesting participants in 401(k) plans to contact a named law firm about their pension benefits. No mention is made of fees, litigation, or what the law firm is interested in finding out. The second phase is a request to the plan administrator for information under ERISA Secs. 104(b) and 404(c) about the plan providers and fees that are being paid. Presumably, this request is on behalf of the participants who responded to the advertisement. The third phase is the filing of a class action lawsuit.

Ms. DePietto pointed out that the lawsuits claim that the plan fiduciaries did one or more of the following:

  1. allowed service providers to receive unreasonably high fees from plan assets;
  2. failed to conduct a reasonable investigation into fees paid by the plan; and
  3. failed to disclose fee arrangements to plan participants. A November 2006 Government Accountability Office report estimated that more than 80% of plan participants do not know how much they pay in fees.

Under ERISA, one of the duties of the plan fiduciary is to be prudent. According to Ms. DePietto, this means that “it may not be prudent to hire the lowest-fee firm if the quality of the services rendered is substandard.”

Investigation And Disclosure

While ERISA currently does not require disclosure of revenue-sharing information to plan participants, Congress might make a change in the statute. Christopher A. Weals, a partner with Morgan Lewis, suggested disclosing fees to participants on an annual basis as well as following a “robust” process of investigating and evaluating fees.

Mr. Weals advised sending plan participants a one-page document that briefly describes all of the fee and compensation arrangements involving providers to the 401(k) plan. The report should be issued at least annually either on paper or on the Internet. By using this brief report, plan participants should have enough information about fees to help make investment decisions.

Mr. Weals also stressed that a fiduciary should never underestimate the importance of documenting the process it follows when evaluating fees so that it can be shown that the fiduciary considered all the relevant factors. The resulting decisions thus will be supported by the evidence from the investigative process.

The fiduciary also should require that the service provider disclose all sources of revenue and how the revenue is used. Mr. Weals suggested periodically sending providers requests for proposals covering detailed fee information. He added that it is important for the plan sponsor to know precisely how much money a service provider is receiving, both directly and indirectly, in connection with transactions involving the 401(k) plan.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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