Is Retirement Industry's Focus on Costs Too Much?

“Cost is not dispositive of prudence,” says Eugene Maloney with Federated Investors.

Retirement plan fee litigation over the past decade, in addition to fee disclosure rules, has some plan sponsors placing too much importance on cost when deciding what investment decisions are prudent, asserted Eugene F. Maloney, executive vice president at Federated Investors, Inc. in Pittsburgh, Pennsylvania.

One of the things plan sponsors fear most is a notice from the Department of Labor (DOL) about a plan investigation, but process and documentation should protect them. “Committee minutes are very important,” Maloney told attendees of the American Retirement Association’s 2016 ASPPA Annual Conference.

He pointed out that in its decision in Tibble v. Edison International, the U.S. Supreme Court noted that the Employee Retirement Income Security Act (ERISA) was based on then decades-old trust law. “Cost is the sixth factor to consider in determining whether something is prudent, based on trust law,” Maloney said. “Cost is not dispositive of prudence.”

Yet, many of the excessive fee lawsuits that have been filed have been lost or settled. Maloney believes this is because ERISA attorneys are only ERISA attorneys and may not be as familiar with trust law. “And they don’t bother to ask their trust law counterparts about the definition of prudent, or reasonableness or best interest,” he added.

While the industry is focused on lowering fees for retirement plan participants, Maloney contended that focusing too much on low fees could lead to overlooking better performing funds for participants.

On another note about prudence with retirement plan investing, Maloney pointed out that there is no absolute duty to divest underperforming funds in retirement plans. “If you have a prudent process in place dealing with the treatment of underperforming investments, you are covered; the law will protect you,” he said.