Small 401k plans often feel safe when the issues of lawsuits are mentioned as most if not all excessive 401k fee cases have been brought against larger plans where the assets and potential damages are more attractive to attorneys. That sense of security may be ending with a recently filed lawsuit against a $9.2 million Minnesota plan with 114 active participants brought by a local law firm.
The class action complaint in the Damberg et al v. LaMettry’s Collision Inc. et al suit filed against the company as well the its president and CFO alleged that excessive fees were paid to money managers where cheaper alternatives for the same investments were available either in the form of lower priced or institutional mutual fund share classes or through the use of collective trusts or separately managed accounts rather than more expensive mutual funds.
Specifically, the complaint alleges the company and its trustees breached their fiduciary duty under ERISA because:
Defendants did not have or engage in a prudent process for the selection of these options, the evaluation of the fees, active monitoring of the options and fees, and ensuring that reasonably priced, prudent options were selected for the Plan.
Though not named in the suit, the complaint claims that fees paid the plan’s 401k record keeper were also excessive citing that, in addition to revenue sharing “kick backs”, the plan paid asset based fees amounting to $886 per participant annually alleging that reasonable costs were $18. The complaint states:
Defendants failed to assess or actively monitor the reasonableness of the fees and allowed the Plan to pay excessive fees throughout the relevant period. Defendants had a flawed process – or no process at all – for soliciting competitive bids, evaluating proposals with respect to services offered and reasonableness of fees for those services, actively monitoring the reasonableness of fees assessed to Plan participants, and choosing a service provider on a periodic, competitive basis.
Previous excessive fee lawsuits against larger 401k plans have laid the groundwork for local law firms to file suits against smaller companies likely to settle to avoid the significant legal fees which national record keepers had been willing to incur to avoid dangerous precedents. With personal assets of the company’s senior management at risk and aggressive local law firms smelling blood, look for more cases to be filed which will only spike when the market suffers significant declines.
The new DOL conflict of interest rule will also increase the possibility of lawsuits not just against advisors and their broker dealers but also plan fiduciaries that hired them and did not prudently select or monitor their fees or activities on behalf of their plan participants.
The results: companies will either get more serious about monitoring fees: outsource more of these duties to co-fiduciaries; or possibly get rid of their 401k plan altogether.
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