(Updated June 23 with statement from MassMutual)
In what could be a harbinger for the future of 401k excessive fee lawsuits, MassMutual recently settled with a class of 14,000 participants for $31 million over what plaintiff’s claimed was excessive fees caused in part by the use of propriety funds, especially for the fixed income investment, in the case of Gordan v. Mass. Mutual Life Ins. Co.
The suit was filed in 2013 by the St. Louis firm of Schlichter Bogard which heralded the rash of 401k lawsuits almost a decade ago and is getting even more aggressive on the heels of wins and settlements with almost a half dozen lawsuits pending.
The excessive fee lawsuit by MassMutual participants was based in part on the use of proprietary funds but also on the method of how fees to pay for services were charged, common to most plans. Though costs are based primarily on the number of participants in a 401k or 403b plan along with the services provided, revenue or fees are based on a percentage of assets meaning fees could go up as assets in the plan grow with little relation to the services provided.
As part of the settlement, MassMutual agreed to keep fees at $35 per participant for the next four years.
A spokesman for MassMutual, David Potter issued the following statement to 401kTV in response to the settlement:
While MassMutual denies the allegations within the complaint and admits no fault or liability, we are pleased to put this matter behind us, avoiding the expense, distraction and uncertainty associated with protracted litigation. MassMutual is proud to continue to extend our award-winning retirement plan services and benefits to our employees and field participants to help them secure their future and protect the ones they love. Importantly, the amount of the settlement is not material to MassMutual’s financial strength, nor its 2016 financial results.
Along with asset based costs, another issue for plan sponsors with excessive fees is revenue sharing where service fees are embedded in the cost of the investments through 12b1 and Sub-Transfer Agency (Sub TA) fees. Though not a per se violation, revenue sharing can make it more difficult for plan sponsors to determine the actual fees paid.
The MassMutual excessive fee lawsuit fee case is significant for plan sponsors in a number of ways. More settlements bring more lawsuits which are more profitable for law firms as they do not have to risk losing in court and not receiving any fees. The Schlichter law firm filed the lawsuit after extensively reviewing public documents and interviewing participants – almost like a private DOL pre-investigation exercise. Finally, costs and fees in stable value or fixed income, an important class of investments second only to target date funds, are hard for plan sponsors and advisors to understand making them vulnerable for abuse.
With the new DOL rule on conflict of interest, look for more lawsuits against both plan advisors and plan sponsors who might have selected them without the proper due diligence.
