Fighting Fiduciaries
Fighting Fiduciaries | Human Resource Executive Online
The court battle continues over the class-action lawsuit against Wal-Mart, alleging excessive fees and conflicts of interest by 401(k) plan fiduciaries. Heavy hitters are lining up on opposing sides: The DOL on behalf of the employees and three large business organizations on the other.
By Marlene A. Prost
Unable to bear today's bear market, many U.S. workers are blaming their employers for the sorry state of their tanking 401(k) plans.
More than a dozen class-action lawsuits have been filed against the country's biggest corporations alleging the payment of excessive fees to mutual funds, costing workers millions in retirement dollars.
One of the highest-profile cases was filed in 2008 against Wal-Mart Stores Inc., by employee Jeremy Braden on behalf of the chain's one million-plus workers. The suit alleges that Wal-Mart and its fiduciaries paid $60 million in excessive fees for its $9.89 billion 401(k) plan.
Although the Wal-Mart suit was dismissed last October by Judge Gary A. Fenner in the U.S. District Court in Missouri, it lives on in the U.S. 8th Circuit Court of Appeals. And, recently, prominent groups joined the fray with lengthy friend-of-the-court briefs: the U.S. Department of Labor in support of employees, and the trio of the ERISA Industry Committee (ERIC), the U.S. Chamber of Commerce and the American Benefits Council on the side of Wal-Mart.
The case is a simple one: The workers say that Wal-Mart, through plan trustee Merrill Lynch, offered participants 10 mutual funds with "retail class shares," which usually charge higher fees than the "institutional shares" that are also available to large retirement plans.
The plaintiffs also allege that the funds under-performed; that the fees were not disclosed to participants; and that Merrill Lynch engaged in undisclosed "revenue sharing" transactions or kickback payments to the company from funds selected as investment options.
At the lower-court level, Fenner dismissed all the charges. He found that Wal-Mart is not obligated to choose the cheapest funds available; that it did not act improperly in choosing the funds; and that Wal-Mart is not obligated to disclose information about fees and revenue sharing under ERISA.
He also dismissed the kickback allegations and said the plaintiffs failed to prove that the revenue-sharing payments were improper.
"Plaintiff's dissatisfaction with fees or earnings does nothing to establish a colorable claim that [Wal-Mart] did not properly investigate available options before making a decision," Fenner wrote. "... [P]articipants were free to make their own comparisons, to determine whether the fees were unreasonable, and to choose other options outside the plan."
Backing the judge's dismissal, ERIC, a Washington-based trade association that represents major employers, argues in its amicus brief in the appeal to the 8th Circuit that lawsuits like this one threaten the future of 401(k)s.
"[I]f the courts declare open season for baseless claims against 401(k) plan fiduciaries, the interests of plan participants seeking to save for retirement will be in jeopardy," says ERIC president Mark Ugoretz. The courts should not "entertain a barrage of armchair quarterbacks descending on the federal courts to second-guess fiduciary decisions."
However, it's likely that lawsuits like this one will continue, says Derek Loeser, of Keller Rohrback in Seattle, who is attorney for the plaintiffs in the Wal-Mart case.
"It's a very important case," he says. "It asks the fundamental question: If one of the largest corporations [in the country] shouldn't select [mutual funds] on their merits ... or [if it should select funds] based on who provides revenue sharing," which, he says, is an "industry term" for kickbacks.
Regardless of the outcome of the Wal-Mart suit and some 18 similar suits awaiting judgment throughout the court system, it's unlikely companies will stop offering retirement plans, experts agree.
"I think the employees have a valid complaint," says R. Brooks Hamilton, an ERISA attorney with Brooks Hamilton & Partners in Dallas. "The problem is that the fees are so complex and convoluted and skewed and hidden that the average person will not uncover them.
"The average person is actually a financial novice," he says. "They don't enjoy balancing their checkbook. They don't know a stock from a bond. But they're given a complex retirement strategy and program with 20 to 30 fund choices [and told] 'Here's your information kit. Take it home, fill out the forms and tell us what you want [to do].' "
With the "upheaval" in financial markets this year, we can expect more "unhappy" employees will sue for "redress" of their 401(k) losses, says Anthony Antognoli, an ERISA and employee benefits attorney with Hinshaw and Culbertson in Chicago.
Even so, companies won't pull back on their plans, he says. More likely, corporations will hire more 401(k) fee consultants, "which could result in improved disclosure of fees, a more carefully monitored mix of investment choices and possibly even lower fees overall."
Congress is also taking action. On April 22, the U.S. House Subcommittee on Health, Employment, Labor and Pensions began hearings on
H.R. 1984, the 401(k) Fair Disclosure for Retirement Security Act of 2009
. The bill requires a basic, easy-to-understand summary of fees charged by a company's 401(k) plan, to help employees do their own shopping.
"This legislation is an indication that many policymakers do not feel that fiduciaries are providing participants with enough information regarding the fees charged under their plans," says Antognoli.
It sounds nice, but will it help? asks Edward Fensholt, director of compliance services with the Lockton Benefit Group in Kansas City, Mo.
"Certainly more disclosure is better than less. The practical reality is, a sizable majority of employees don't read most of the disclosures they get. Most employees want employers to make the decisions for them. At some point, the utility of these disclosures diminish," says Fensholt.
Most employees are not equipped to make their own financial decisions and want help from their HR experts. And that's where HR departments "walk a very delicate tightrope," he says.
"On the one hand, you want to provide information to make a decision. On the other, you don't want to provide investment advice or risk being sued for bad advice," Fensholt says. "Most [HR departments] will provide general information and some online tools to [help employees] determine their own philosophy and risk tolerance."
This fine balance is addressed, he says, by the federal Pension Protection Act of 2006, which allows fiduciaries to provide investment advice under certain circumstances. This May, final regulations go into effect that "facilitate the provision of advice" by outside firms.
Hamilton has another suggestion: Instead of passing more disclosure laws, why not tackle excessive fees head on?
"[Lawmakers] are playing the wrong game, with the other fella's ball, on the other fella's ball field. ... They need to say, effective Monday, the maximum all-in fee paid by the participant is 1 percent," he says. "[That includes] trading costs, operating costs, the trustee's fee, mutual fund fee, record keeping ... We don't care what you call it. ... To pay over 1 percent, must be paid by the plan sponsor [the corporation]."
Hamilton also advises HR and corporate executives to outsource all their fiduciary decision-making to an independent fiduciary, as defined by ERISA, "who's capable of dealing with these myriad [401(k)] providers."
In addition to making sure the company carries fiduciary insurance -- including coverage for the decisions made by the plan fiduciaries when it comes to investment selection -- organizations should also consider hiring a 401(k) fee consultant to review the plan's investment options and "dig through the investment disclosures to tell you exactly what fees are being charged," says Antognoli.
"Either the employer or the consultant can then attempt to negotiate with the service provider for lower fees," he says.
April 30, 2009 Copyright 2009© LRP Publications
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