The rash of 401k lawsuits continue with the latest filed by the Schlichter law firm on behalf of 100,000 current and former employees against Northrop Grumman based on excessive fees paid to Hewitt, the company’s 401k record keeper. Like many other excessive fee lawsuits, Marshall v. Northrop Grumman Corp. basically alleges that the plan sponsor was asleep at the switch causing employees to pay $10 million in excessive fees to the record keeper.
Along with a flat fee arrangement, Hewitt received compensation from their managed account provider, Financial Engines jacking up annual fees from about $40/participant to over $70 while the lawsuit claimed $25 was more reasonable. Though the participant count at the plan declined, the flat fee received by Hewitt remained the same while fees paid to them by Financial Engines increased 10 times even though Hewitt provided no additional service.
In an unrelated case, Patrico v. Voya Fin., Inc., a participant in a Nestle 401k plan sued Voya for receiving excessive fees for service provided by Financial Engines even though they provided no additional benefit.
At the heart of the issue for both cases is revenue sharing between a plan’s record keeper and money managers. Though many larger 401k and 403b plans have move to institutionally priced share classes devoid of revenue sharing like 12b1 and sub-transfer agency (sub-TA fees) paying a flat fee to their record keepers, the latest lawsuits unveil payments paid by the plan’s managed account provider Financial Engines in what is basically a play to pay situation. Record keepers add little or no value to the managed account services, so the additional fees earned must be included to determine if the overall fees received are reasonable, a key fiduciary role of the plan sponsor.
Not knowing all the compensation received by 3rd parties hired by a plan sponsor paid to service providers like record keepers, advisors and TPAs is a real problem which may include compensation received by affiliates like broker dealers or other forms of indirect support in order to calculate the full payments received.
