In what is becoming a wave of lawsuits involving defined contribution (DC) plans like 401(k)s, Oracle was sued by participants over excessive fees and imprudent investments. While not alleging self-dealing like some other recent suits, the plaintiffs allege claim that the process and discharge of fiduciary duty was not prudent. Of note is that the suit was filed by the Schlichter Bogard & Denton law firm which has won over $600 million in cases and settlements over the past decade with other suits recently filed.
In particular, the Oracle suit alleges that fees charged participants, which ranged from $68-$140 per head, were excessive and that that some of the funds under performed. Of note, the participants in the plan grew from 38,000 in 2009 to 60,000 in 2015 and assets in the plan grew from$3.6 billion to $11 billion implying that costs should have declined more. Also implied is that Oracle did not conduct a competitive RFP to determine if comparable services could have been obtained at a cheaper price.
Thomas Clark, an attorney with the Wagner Law Firm who had previously worked at Shlichter Bogard & Denton, outlines the recently filed suits separating those that include self-dealing, like the case against BB&T by their employees and the suit against Insperity and Reliance Trust, versus the Oracle suit and the one against Anthem which focus on process. Empower-Retirement was also recently sued by a participant in a smaller plan over excessive fees.
What is going on? First, there’s a lot of money in DC plans and which is attractive to plaintiff’s attorneys emboldened by the success of the Schlichter law firm. But more important, many employers sponsoring DC plans, even the very largest ones, have not paid as much attention to their DC plan as they do with their DB (defined benefit plan). As a result, the process may not be prudent, fees could be lower with just a bit of investigation, benchmarking and competitive bidding, and, in the case of the Insperity/Reliance and BB&T suits, self-dealing at the expense of plan participants may have occurred.
Simply put, the fiduciary duty of a DC plan sponsor is to ensure that the plan is designed in the sole interest of the participants (to eliminate self-dealing) and that fees are reasonable (which can only occur if a documented prudent process is undertaken). For smaller plan who may not be able to afford to engage ERISA lawyers to review their plan, the key is hiring an experienced plan advisor able to act as a fiduciary. Which means that the first step is to determine if you have the right advisor for your plan which starts with (you guessed it) a prudent process, either benchmarking annually and periodically going out to bid with a formal RFP.
