Compliance

New Year Brings Familiar DC Plan Litigation Actions

Two new large retirement plan fee complaints have already emerged in the first week of 2016, highlighting the substantial amount of fiduciary litigation risk still faced by plan sponsors and their provider partners.

By John Manganaro editors@assetinternational.com | January 06, 2016
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It may be a new calendar year for defined contribution (DC) retirement plans, but the professionals running them are still concerned with the same serious fiduciary risks that troubled the 401(k) industry in 2015.

Following a busy month of December, new retirement plan litigation is already grabbing industry trade media headlines this year—alleging by-now familiar varieties of malpractice on the part of some very large plan sponsors and their service providers.

The new cases include Rosen v. Prudential and Bell v. Anthem, which both at their core argue retirement plans of any substantial size have tremendous bargaining power to demand low-cost administrative and investment management services—and therefore that plan sponsors or providers who don’t negotiate strongly for a good deal for participants are making a punishable fiduciary breach. As Employee Retirement Income Security Act (ERISA) fiduciaries to the plans in question, the complaints suggest plan officials and service providers are obligated to act for the exclusive benefit of participants and beneficiaries, rather than striving to get a good deal from the plan sponsoring employer’s or service provider's perspective.  

Over the years different cases have taken different approaches to the central problems of alleged imprudence and conflicts of interest within 401(k) plans. For example in the new Bell v. Anthem complaint, it is alleged that plan fiduciaries allowed unreasonable expenses to be charged to participants for administration of the plan, and that they selected and retained high-cost and poor-performing investments compared to available alternatives. The complaint suggests the Anthem plan, “as one of the country’s largest 401(k) plans … with over $5.1 billion in total assets and over 59,000 participants with account balances,” should have gotten as good or better a deal than anyone in the institutional investing markets, but it failed to do so in a variety of ways, leading to about $18 million unnecessary fees/losses for participants. 

One detail that ought to worry outside plan sponsors and officials is that the Anthem plan had recently taken direct action to reduce its expenses—but it simply didn’t go far enough in its push for better pricing, according to the complaint. Most of the "imprudent" funds cited by name are provided by Vanguard, widely known for transparency and affordability, and are actually quite cheap from an industry-wide perspective, below 25 bps in annual fees. One fund cited has just a 4 bps annual fee, but according to the compliant an otherwise identical 2 bps version could have been obtained by an investor with the size and sophistication of the Anthem plan. Therefore an alleged breach occurred when Anthem continued offering the 4 bps version.

NEXT: Weak negotiators targeted in DC plan suits