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.
negotiators targeted in DC plan suits