News flash to smaller 401k plans – you are not immune from excessive fee lawsuits. The second excessive fee lawsuit was filed in Ohio against a $25 million 401k plan sponsor with 1700 participants and the plan’s advisor in Ohio. Though the Minnesota suit filed against a $9 million was withdrawn, which experts say is very unusual, the message is clear. Lawyers and participants see opportunities in 401k plans of all sizes. In fact, there may be greater opportunities in smaller plans where companies have less resources and training to run their retirement plan.
In Bernaola v. Checksmart Financial, a participant in the check cashing firm alleged that the fees were “grossly excessive” while the performance was “underwhelming”, a deadly combination. A vast majority of the assets are in risk based professional managed investments which are proprietary to the plan’s record keeper within a pre-set menu. The participant also alleged that there were too few, low cost passive funds that follow an index.
Specifically, the lawsuit claimed that the plan sponsor failed in their duty to ensure that the fees and expenses of the plan were fair and reasonable.
There are a number of issues and lessons from this lawsuit which, by the way, has just been filed and has a long way before there is any resolution. The record keeper used by the $25 million plan focuses on plans under $10 million with an average closer to $1 million. Plan pricing changes as do services as a plan grows and it’s incumbent upon plan sponsors to make sure that they are leveraging their buying power to get the best pricing possible (not cheapest) based on the plan’s assets, participants and account balances. Not many record keepers will offer to reduce pricing voluntarily or say that the plan is too big for them to service. In addition, there are different types of services for different size plans which needs to be evaluated periodically through a prudent, documented benchmarking or RFP process.
Finally, the investments offered by the record keeper may be appropriate but plan sponsors have to pay careful attention to proprietary investments especially those that are professionally managed like target date or risk based funds that are the plans’ default option which seems to be the case in the Bernaola lawsuit. If the plan does not have a documented, prudent due diligence process in selecting and monitoring these funds, the plaintiff may have a good case against their employer in what is being categorized as “asleep at the switch” case reviewed in a 401kTV Master Class “Rash of 401k Lawsuits”.
