Are Your 401(k) Fees Too High?
I was looking at my 401(k) balance this week and it struck me that I have no idea how fees and costs are allocated to our plan. My first reaction was that this seems to be a confirmation that lawyers are their own worst clients. But as I thought about it more, it struck me that, after LaRue (which is still the hot topic in benefits' circles), someone might be interested in 401(k) fees.
The Employee Benefits Security Administration has a site called "A Look at 401(k) Fees." It provides a nice summary of the fees and costs associated with plan administration and also an explanation of how the various fees and expenses are calculated and how participants could compare fees and expenses. What is missing is an explanation of how those fees and costs are set and how they are monitored. There is also no clear cut statement of how expenses can or should be shared by the participants and the plan sponsor.
In 1998, a document titled "Study of 401(k) Plan Fees and Expenses," the Pension and Welfare Benefit Administration concluded that fees and expenses were being increasingly born by participants. In December of 2006, the Department of Labor issued rules detailing the information plan sponsors must share with participants about how fees are calculated and allocated. Today, I suspect that more and more of the total cost of plan administration is being allocated to participants. And therein lies the rub.
Participants don't have the ability to negotiate fees with service providers, cannot monitor fees and expenses on an ongoing basis and very likely could not understand how costs would be attributed to their individual accounts. They would also not have the ability to conduct audits of service providers without assistance from plan sponsor. On the other had, the plan sponsor gets to make all the decisions about how costs will be allocated, what service provider to retain, what level of monitoring is appropriate and when an audit might be appropriate. In other words, the sponsor holds all the card.
So how long before participants start making claims against plan sponsors for not protecting them against excessive fees and costs? How long before participants start making claims for breaches of fiduciary duty against plan sponsors for retaining service providers that charge too much? How long before participants can bring claims against employers for not bearing 100% of the costs of plan administration instead of sharing it with participants? As it turns out, not long at all.
In January of 2008, a federal judge in Indiana declined to dismiss a lawsuit brought by participants claiming that the "transfer charge" levied when the plan changed administrators was excessive. This follows cases filed in New York, Connecticut, Illinois, California and Missouri, all alleging company breached fiduciary duties by allowing service providers to overcharge the plans and failure to adequately protect participants from excessive fees. These types of actions can only gain momentum after LaRue and I expect to see many more filed.
What should plan sponsors do? Lately I have been suggesting an independent outside audit of the plan. I am also recommending that plan sponsors seek our proposals from other plan service providers to competitively bid plan administration services. I think ultimately plan sponsors should consider bearing 100% of the costs of plan administration directly and not spread any of those costs across participant accounts. That might seem a bit excessive, but it would certainly keep participants from crying about excessive fees and costs and it would seem to be a pretty good insulation against claims of this nature.
