Though plaintiff’s attorneys seem to be on a roll in 401k lawsuits, a court recently dismissed a case brought by a plan participant against Merrill Lynch, their record keeper. The plaintiff was an attorney representing himself in the plan provided by his law firm, Clifford Chance. The courts held that Merrill was not a fiduciary and was therefore could not be held responsible.
At issue was whether Merrill Lynch acted as an ERISA fiduciary when selecting the menu of investments made available in the Clifford Chance plan, a claim that courts have consistently rejected against other record keepers. The court noted that creating the fund line did not make Merrill a fiduciary because it did not provide the kind of regular and individualized investment advice to the plan that would cause it to be an ERISA fiduciary.
The DOL has vigorously disagreed with this kind of thinking in other cases brought against providers and their new rule, which redefines who is to be considered a fiduciary under ERISA, may open the doors for new lawsuits against record keepers.
At issue is whether the fees charged are reasonable, especially for the proprietary funds of the record keeper. Imbedded in most investments offered in defined contribution (DC) plans like 401ks is what is known as revenue sharing paid by participants above and beyond the cost of managing the money. Revenue sharing “wraps” around the investment cost and is regularly paid to offset record keeping, administration and advisory services, and it can differ for the exact same fund depending on the share class. Recent lawsuits brought against plan sponsors allege that the fees were unreasonable or that the employer did not properly negotiate for a better deal or lower share class on behalf of their employees.
If courts do hold that record keepers are fiduciaries, then a whole new wave of lawsuits could emerge especially against smaller plans. Suing one plan at a time is not cost efficient for lawyers unless the plan is really big or they can get class action status. But suing big record keepers with tens of thousands of clients would be very attractive – and potentially dangerous as it could raise costs, limit services and even spur more provider consolidation as well as expose smaller plans to the rash of 401k lawsuits.
