Fiduciaries of Small 401(k) Targeted in Excessive Fee Suit

The lawsuit argues that even a 114-participant, $9 million dollar 401(k) plan can get lower fees on investments and services.

In many of the retirement plan excessive fee suits involving large plans, it is argued that the size of the plans’ portfolios gives them real bargaining power to negotiate lower fees for investments and administration.

A new lawsuit argues that a $9 million dollar plan also has the ability to negotiate for substantially lower fees than an individual would pay.

The primary argument in Damberg v. LaMettry’s Collision, Inc. is that LaMettry’s 401(k) plan used higher-priced retail class shares when lower-priced institutional class shares were available. The plaintiffs say plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by selecting inappropriate and imprudent mutual fund classes for plan assets that exposed plan participants to excessive fees, even when lower-cost options were available for the same set of investments and when the plan could meet required minimum investment hurdles. 

With the increase in retirement plan excessive fee suits and a wider range of arguments in those suits, this case is one example of how unpredictable it is what plan sponsors will be targeted.

The plaintiffs also accuse plan fiduciaries of failing to have or engage in a prudent process—or any process—for the consideration, evaluation, selection, and active monitoring for these funds or lower fee alternatives.

In addition to the excessive investment fees, the lawsuit argues that the 114-participant plan paid too much for other fees. Plaintiffs claim plan fiduciaries breached their fiduciary duty by selecting an unduly expensive structure for the 401(k) plan—a bundled recordkeeping and investment management structure.

NEXT: Excessive fees due to bundled arrangement

According to the complaint, Voya charged plan participants fees to offset sales and marketing expenses in addition to various support services. Voya charged plan participants two separate charges to administer this structure in addition to the previously mentioned investment fees: the Daily Asset Charge and the Voya Admin Fee. The charges were assessed as a percentage of plan assets daily and deducted from the participants monthly. When both fees are combined, the Total Daily Asset Charges (TDAC), the daily fees associated with administering the structure range from 0.00% up to 0.90%.

The lawsuit accuses plan fiduciaries of failing to conduct a request for proposals (RFP) for the structure to minimize expenses, failing to evaluate whether an unbundled or alternative fee structure was a better option, failing to conduct due diligence regarding whether the assessed fees were appropriate, and failing to actively monitor the selected structure’s fees and expenses.

The lawsuit contends that for retirement plans with more than 100 participants, a reasonable annual per capita fee paid by retirement plan participants should not exceed $18. It says plan fiduciaries allowed the plan to pay dramatically higher fees than reasonable throughout the statutory period. For example, in 2014, Voya received revenue from the plan for recordkeeping services that varied with participants’ investment choices and dollar amounts invested, and the total fees approximated 1.22% of plan assets, for a total of $113,000. “Despite a reasonable per-capita fee for these services being no more than $18 for a plan of this size in terms of total participants, the plan paid almost $886, or 4,900% higher than a reasonable fee for these services,” the complaint says.

Plaintiffs allege plan fiduciaries 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.

The complaint is here.

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