The Starwood Hotel chain is the latest target of a class action lawsuit charging excessive 401k fees. As plan sponsor, it is hard not to feel like you and your company are sitting ducks for law firms ready to pounce on you with a participant class action law suit. The drum-beat of litigation has been relentless in the past year. So what can you do to protect yourself and avoid a class action lawsuit?
The truthful answer to the question of how to avoid a class action lawsuit against your company-sponsored retirement plan is that you can’t. Law firms and participants can sue virtually at any time for any reason. There is nothing to discourage an individual or entity from bringing suit in the court except the investment of time. However, when looking at the legal briefs filed over the past year, there is a clear pattern. Excessive fees lawsuits are the leading cause of litigation. It would be wise for plan sponsors to conduct a thorough review of plan fees.
Along with best practices, reviewing your procedures and documenting your activities meticulously, is the best medicine to avoid a class action lawsuit. However, the tide is starting to turn and companies are starting to fight back (instead of settling) and are successfully defending frivolous suits and getting favorable court decisions as well.
The Starwood Hotel chain is the latest casualty in the rash of lawsuits filed against a plan sponsor. The suit, Charles Creamer et al. vs. Starwood Hotels and Resorts Worldwide Inc., was filed Dec. 16 in California district court. The suit alleges “well in excess of $25 million” in damages.
According to a report in Pensions&Investments:
Plaintiffs in the Starwood suit claim the plan’s index funds caused participants to “pay seven times more than a reasonable fee due to multiple layers of fees.”
For example, institutional shares of BlackRock (BLK)’s LifePath 2050 index target-date fund has net operating expenses of 20 basis points, in addition to operating expenses of the underlying index funds, such as 8 basis points for the BlackRock Russell 1000 fund, according to the complaint. That’s a 24-basis-point surcharge to the overall expense ratio of 4 basis points for institutional shares of Vanguard’s Institutional Index Fund, plaintiffs claim.
