The rash of 401k lawsuits continues as a participant sued Safeway and their record keeper in Lorenz v. Safeway alleging excessive fees in their target date funds (TDF) managed by JP Morgan seeking class action status – the second excessive 401k fee lawsuit filed against the grocer. On the other hand, a 401k lawsuit filed against Chevron was dismissed with a September 30, 2016 deadline for plaintiffs to file an amended complaint.
At the heart of the Safeway excessive fee lawsuit is the practice of revenue sharing where a portion of the fees paid by investors in a fund are used to offset the cost of running the plan. Not only does it make it more difficult for plan sponsors to understand the amounts paid, regardless of attempts by the DOL under 2012 regulations 408b2 and 404a to provide greater fee transparency, revenue sharing opens up plan sponsors to excessive fee lawsuits. The cost to administer a plan is mostly dependent on the number of participants while, under revenue sharing, the fees are based on the assets. So as the assets grow, the fees should decline and plan sponsors as prudent experts should be regularly looking to negotiate the best deal on behalf of participants.
In the recent case against Safeway and their record keeper Empower-Retirement (successor to Great-West and JP Morgan’s record keeping businesses), the number of participants dropped by almost 10% while the assets in the funds more than doubled.
The issues of excessive fees under revenue sharing becomes even trickier when the funds are managed by the record keeper which was the case when JP Morgan was Safeway’s provider, especially with TDFs which are attracting so much of the new contributions. And with TDFs pricing dropping punctuated by the recently announced Schwab TDF at 0.08% using index funds, plan sponsors must provide independent, documents, prudent due diligence to justify higher expense funds with greater revenue sharing especially for those managed by the record keeper.
The judge dismissing the Chevron case, on the other hand, noting that the workers failed to raise a “plausible inference” of wrongdoing. “The mere fact that the fund’s price dropped is not sufficient to state a claim for breach of fiduciary duty,” she wrote. The judge also said it was acceptable for the plan to offer a money market fund rather than a higher-return stable value fund for plan participants seeking to preserve capital. Ironically, the provider in the Chevron excessive fee case is Vanguard considered to be a low cost vendor.
