Fee Litigation Risks Still an Issue

The industry-wide focus on improving fee transparency and reasonability has not significantly reduced litigation risks for financial advisers and others acting as retirement plan fiduciaries, according to Dan Notto, senior retirement plan counsel at AllianceBernstein.

Notto, during a retirement solutions forum hosted by AllianceBernstein in New York, repeatedly warned that plaintiff lawyers continue to be “ready, willing and able to take financial service providers and plan sponsors to task” if fees are found unreasonable, even though average fee levels have started to decline in recent years.

“We have seen dozens of class action lawsuits filed against large plan sponsors, and against plan service providers who serve both large and small plans,” Notto said. “They are working their way through the court system as we speak.”

Notto pointed to seven class actions that have recently been settled regarding fee reasonableness and transparency to reinforce the point. Specifically, Notto detailed a $30 million settlement levied in early October against International Paper for mishandling of that company’s 401(k) plans.

Some of the transgressions alleged in the International Paper suit included accusations of excessive recordkeeping and investment management fees, as well as fraudulently reported performance histories for some of the plans’ funds.

“The average settlement amount of these lawsuits is $17 million,” Notto said. “That’s not chump change, even to the largest organizations that are the defendants in these lawsuits. One of these cases, which is currently up on appeal, resulted in a court award of $36 million after trial, along with millions and millions in legal fees on both sides.”

Notto also reminded forum attendees about the thousands of letters sent by Ian Ayres, a professor at Yale Law School, to plan sponsors claiming that their fees were too high. One version of the letter told the recipient Ayres intended to “publicize the results of [a] study in the spring of 2014” and to make the results “available to newspapers including The New York Times and Wall Street Journal, as well as disseminate the results via Twitter with a separate hashtag for your company.”

While Notto said he is not sure whether Ayres will make good on those claims, he warned that should Ayres do so, it could be potentially cause a wave of new litigation.  

“That’s scary stuff,” Notto said. “That means the plaintiff lawyers who are already out there trolling for cases will see the results of this study indicating by name that certain plans are high-cost plans. We all need to be aware this is out there.”

One other area of ongoing risk includes possible changes to the Employee Retirement Income Security Act (ERISA) rules governing revenue-sharing agreements in employer-sponsored retirement plans. Notto said he expects a July ruling by the U.S. Department of Labor (DOL) on whether certain revenue-sharing payments will continue to raise ERISA prohibited transaction concerns.