When you think about Vanguard, the first thought that comes to mind is low cost index funds. So how can a group of participants at a $5 billion plan file a class action law suit against their employer for excessive fees when the record keeper and investment manager is Vanguard?
The class action lawsuit recently filed in federal court in Southern Indiana by the Schlichter law firm, who started the onslaught of lawsuits against 401(k) plans a decade ago, claims that lower share classes were available to Anthem Health which has over $5 billion in assets. Additionally, the suit claims that record keeping and administrative fees lowered to $42 per participant in September 2013 from $80-$94 were still above a reasonable rate. Finally, the suit alleges that returns in the money market fund were “microscopic” compared to what they could have gotten in stable value funds.
Lessons to be learned? Regardless of the provider and their reputation and the use of low cost investments, employers sponsoring a 401(k) or other type of DC (defined contribution) plan have the fiduciary duty to look for and negotiate better pricing if available. Which means it’s imperative to benchmark fees v. value for all service providers including record keeper, money managers and advisors. Also, to conduct an RFP for record keepers and advisors at least every three to five years.
Secondly, it’s important to understand revenue sharing and share classes to get to the bottom of how much the record keeper is getting paid which is harder to do when the investments are also managed by the provider. Once done, you need to negotiate to get the best deal on behalf of your participants – it’s the primary duty of an ERISA fiduciary.
Finally, the excessive use of a record keeper’s proprietary funds which while not a de facto issue can raise concerns that are not present for outside investments.
Jerome Schlichter, funded by recent successes also recently filed a lawsuit against an HR outsourcer and their record keeper/money manager. Look for more from this law firm and for other firms to follow emboldened by his success as more money floods into DC plans and IRAs.
