November 9, 2021
“Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present.”
– Marcus Aurelius
Over the past several years, blockbuster settlements, and trial awards have demonstrated the importance of transparency in 401(k) plans governed by ERISA. Notably, ERISA sets forth the type and level of information that must be disclosed in writing to a plan fiduciary and information that the plan fiduciary must make available to participants in the plan. With respect to disclosure of fees, not only is the plan fiduciary required to demand these disclosures, but it is also generally understood and accepted that fiduciaries also have a legal duty to understand, evaluate, and determine whether the cost of services is reasonable.
401(k) suits have cost financial companies over $430M alone in recent years, with no sign of slowing. In many instances, plaintiffs’ early courtroom victories have led to multimillion-dollar settlements: Reliance Trust Co. and McKinsey & Co. each signed deals worth nearly $40 million, while SunTrust Banks Inc., Fidelity, BB&T Corp., and Deutsche Bank have reached settlements valued at more than $20 million each. In more than two dozen cases, settlements range from $3 million to nearly $40 million, with an average deal of about $15 million.
More than 90 class-action lawsuits challenging 401(k) fees were successfully launched in 2020 with most firms agreeing to multi-million-dollar settlements in response to proposed class-action lawsuits.[1] One oft cited reason for this trend is as follows:
“Previously, it was challenging to uncover the fee levels associated with retirement plans… now [lawyers] have access to innovative tools that reduce the information asymmetry to help them lodge potent complaints with higher merits.”
– Forbes.com, Brian Menickella, Jul 25, 2021
One area where risk managers and defense firms are advising plan fiduciaries to focus is on the fee structure of the plan, with particular attention to the expense ratio (i.e., fund’s operating expenses divided by average total dollar value of all assets in the fund). Anything higher than .20% is indicative of “revenue sharing” which is a no-no in ERISA 401k land (funny enough, not in ERISA health plan land). Revenue sharing is defined as a deliberate overcharge at the expense ratio level used to pay the vendors of the plan, such as a third-party administrator, recordkeepers, brokers, or financial advisors. These hidden overcharges come in the form of eroded returns and have been at the heart of a great deal of these 401k lawsuits.
So why is this healthcare thought leader spending so much time talking about 401ks and ERISA liability?
To put it bluntly, when I speak about accountability, oversight, and fiduciary obligations of employer sponsored health plans it falls flat. “I don’t have time for this… that’s HR’s job… my carrier/broker handles that….” is often the response. I assume that almost a decade ago, any discussion of 401k fiduciary liability was also met with a certain “meh, we’ll worry about that next quarter…” But now we are on notice. If self-funded employers do not pay attention, history will repeat itself much to the benefit of ERISA class action lawyers around the county. But this time, the dollars at stake will be greater, the liabilities steeper and there will be no D&O policy in place large enough to begin to cover our collective exposure.
Good news – there is a path forward.
Not only will this path save companies from an onslaught of lawsuits, but it may also begin to right the ship of runaway healthcare costs that are devastating the US economy and the American workforce.
ERISA’s fee disclosure rules now apply to group health plans! These rules are largely modeled after the retirement plan fee disclosure rules and apply to any service provider that is expected to receive, directly or indirectly, over $1000 or more in compensation from the health plan. Savvy plan sponsors should already be asking brokers, consultants, third party administrators, and all other covered service providers to provide a robust fee disclosure whenever they enter a new contract for a group health plan. Evaluation of the reasonableness of these fees is also incumbent upon the plan fiduciary, and there are those non-conflicted entities that are prepared to assist in this financial oversight and accountability.
“The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane.”
– Marcus Aurelius
I quote Marcus Aurelius not because Gladiator is a phenomenal movie (which it absolutely is), but because charting this course takes leadership and fortitude. We can learn from the past, position ourselves to deal with the future, and hopefully find ourselves on the right side of the future when it comes to protecting our companies, shareholders, and members.
[1] Lewis, J., 2021. Class Actions Challenging 401(k) Plan Fees Increase Sharply. [online] The National Law Review. Available at: <https://www.natlawreview.com/article/class-actions-challenging-401k-plan-fees-increase-sharply> [Accessed 9 November 2021].
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