Data & Research October 25, 2024

Many Plan Sponsors Appear to Be Overpaying DC Plan Fees

Abernathy Daley 401k Consultants found that 80% of companies were spending more than efficient pricing for 401(k) and 403(b) plans.

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Abernathy Daley 401k Consultants, an affiliate of the Abernathy Group II LLC family office, has reported that nearly 80% of companies with at least 100 employees are overpaying on administrative fees for their 401(k) and 403(b) plans. Out of 6,566 companies surveyed, 5,241 were found to be paying more than the most efficient pricing available, based on a review of Form 5500 filings conducted by the firm.

The data suggest that companies have not performed independent benchmarks on their corporate retirement plans, leaving them exposed to excessive costs and potential compliance risks. Over the last three years, retirement plan fees have decreased, yet a significant portion of organizations have not realigned their pricing structures accordingly.

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Administrative fee pricing typically depends on the number of employees and the total assets managed under the plan. Abernathy Daley’s report advised that companies paying more than 0.3% in administrative costs, based on total assets, are likely overpaying by tens of thousands to hundreds of thousands of dollars annually. This overpayment can severely impact both the employer and employees’ retirement savings.

The lack of regular compliance-related benchmarking has also raised concerns about legal exposure and best practices adherence, according to the New York-based consultancy, which provides advice on 401(k)-plan administration and employee education. 

Benchmarking

Abernathy Daley recommended that companies conduct annual third-party benchmarking of their retirement plans. Such evaluations should be performed by legal fiduciaries to ensure fees are aligned with best practices and that companies remain compliant with regulatory requirements. Organizations that proactively review their plans can reduce excessive fees, mitigate legal risks and improve retirement outcomes for employees.

According to Abernathy Daley’s analyses, there are several compliance risks for firms associated with overpaying administrative fees. Companies are not complying with the Employee Retirement Income Security Act reporting requirements, which mandate clear disclosures on fees and investment options. This non-compliance can lead to penalties, lawsuits or other legal repercussions, especially if companies are overcharging employees, the firm noted.

Other Issues

Additionally, Abernathy Daley found, many plans suffer from poor design, particularly those with profit-sharing components, leading to operational and legal issues. Internal governance misalignments were also identified, particularly related to employee eligibility for participation based on full-time or part-time status. Further complicating matters, companies with alternative plan structures, such as cash balance plans, often fail to properly manage complex compliance testing, increasing their risk of non-compliance.

Matt Daley, president of Abernathy Daley 401k Consultants, says independent third-party consultants can help employers conduct an objective evaluation of corporate retirement plans, such as 401(k) and 403(b) options.

“During these assessments, the consultant analyzes plan fees, administrative services and investment options, comparing them against industry benchmarks and ensuring regulatory compliance,” he says. “Consultants can thus help employers uncover potential overpayments for administrative or investment services and identify opportunities to enhance the plan, ultimately benefiting their employees.”

Meanwhile, plan sponsors should also be making sure their plan advisers are doing their best work, periodically conducting requests for proposals for their plan adviser requirements. According to PLANSPONSOR’s Defined Contribution Plan Benchmarking Survey, drawing on 2,100 plan sponsors, 60.5% of firms have not initiated an RFP in at least four years. PLANSPONSOR is a sister publication of PLANADVISER.

Compliance October 24, 2024

Pfizer Gets 401(k) Plan Fee Lawsuit Tossed

A federal judge dismissed allegations made by a former Pfizer employee that the pharmaceutical company charged unreasonable recordkeeping and administrative fees.

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The U.S. District Court for the Western District of Michigan granted Pfizer Inc.’s motion to dismiss a lawsuit that alleged “unreasonable” recordkeeping and administrative fees. In dismissing the complaint, U.S. District Judge Paul Maloney ruled that the plaintiff, former Pfizer employee Matthew Miller, failed to state a claim and presented his case with a “flawed methodology.”

In a joint agreement between the parties, Miller waived his right to appeal the dismissal and Pfizer waived its right to hold Miller responsible for the company’s attorneys’ fees and costs.

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In June 2023, Miller, represented by Walcheske & Luzi LLC and the Haney Law Office PC, filed a complaint alleging that Pfizer’s retirement plan committee violated its fiduciary duty of prudence by engaging a vendor that charged plan participants excessive recordkeeping and administrative fees. The complaint also accused Pfizer and its board of directors of failing to monitor the committee’s oversight of the plan’s total recordkeeping fees. Miller alleged that Pfizer’s fiduciary decisions were unreasonable under the Employee Retirement Income Security Act.

Pfizer works with Fidelity Investments as its recordkeeper. The complaint argued that plan participants should have received better rates for recordkeeping because of the plan’s large size. The Pfizer Savings Plan has more than $19 billion in assets and serves 56,648 participants, according to its latest Form 5500 filing.

The complaint alleged that plan participants paid, on average, $24 more in recordkeeping fees than they should have each year between 2017 and 2021.

Pfizer argued in its motion for dismissal that Miller did not use a proper methodology to establish his claims—specifically, the complaint compared average fees paid over several years to just one year of a plan’s fees. Maloney wrote in his order that the plaintiff’s apples-to-oranges comparison warranted dismissal of the case, as it was used by the plaintiff to “cherry-pick” data and prevent the court from finding a plausible claim.

Pfizer’s motion to dismiss also argued that the plaintiff failed to allege that the plan fees were excessive relative to the service provided.

However, Maloney agreed with the plaintiff’s argument that recordkeeping services are fungible, that the market is highly competitive and that many recordkeeping services are standardized and bundled. Miller had argued that only the cost associated with each plan matters and that the services are identical across the board.

In addition, Pfizer argued that Miller failed to identify a single comparable 401(k) plan that paid lower recordkeeping fees and that the six comparator funds Miller offered were too unlike those in which Pfizer’s plan invested. The court agreed that the inconsistency of the plaintiff’s data, as well as a lack of proper comparator plans, made the recordkeeping claim less plausible.

While Miller argued that larger plans, like Pfizer’s, should pay less in recordkeeping fees, Maloney found that some of the data presented in the plaintiff’s case contradicted his argument, as some of the larger comparator funds paid more than the smaller ones.

The court also found that the plaintiff’s “blanket assertions” that Pfizer acted imprudently because the company failed to successfully solicit bids from recordkeepers failed to state a claim.

Pfizer was represented by law firms Sidley Austin LLP and McShane & Bowie PLC in the case. The law firms representing Miller did not immediately respond to a question of whether they plan to appeal the dismissal.

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