Employees, executives and partners in Chicago who make elective deferrals to an employer-sponsored 401(k) retirement account are undeniably trying to save for retirement. Assuming the plan participant elects to put money into the plan, there will generally be two variables that will determine the size of the account balance upon the participant's retirement: the rate of return of the assets in which the account is invested, and the amount of fees and other deductions taken from the account. Quite naturally, the participant wants to maximize the return while minimizing the fees.
Fortunately plan fiduciaries, as defined in ERISA § 3(21), specifically are charged with exercising their duties regarding the plan in the sole interest of participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses. ERISA § 404(a). The employer must, therefore, try to pay only reasonable expenses, not excessive fees from plan assets. As with most issues of fiduciary responsibility in ERISA, it is less important what the ultimate result is and more important how the fiduciary arrived at it.
Many plan sponsors renegotiate their fee structures with service providers periodically. But if the sponsor is content with a service provider, the plan sponsor may renegotiate the service contract every few years, but be reluctant to change that service provider, for it does a good job. Some plan sponsors even retain a consultant to advise on the reasonableness of fees the sponsor allows the plan to pay for services. Certainly, this measure is more prudent than going it alone, though it comes at a cost to the employer. But is relying on a consultant's advice that fees are reasonable enough for the plan fiduciaries? A divided panel of judges on the United States Court of Appeals for the Seventh Circuit appear to demand more.
In George v. Kraft Foods Global Inc., No. 10-1469, at 26 (7th Cir. Apr. 11, 2011) (Slip Opinion), the court reversed a district court's entry of summary judgment in favor of the defendants. The class of plaintiffs in that case advanced a claim, among others, that the plan fiduciaries caused the plan to pay excessive fees to its recordkeeper, Hewitt. Hewitt had been the plan recordkeeper for 11 years before the lawsuit had been filed. While the evidence showed the defendants had renegotiated the plan's service agreement with Hewitt upon the conclusion of the term of each contract, there was no evidence that the plan fiduciaries ever solicited competitive bids for the recordkeeping service contract with the plan. The defendants stressed that they hired independent consultants who advised the fiduciaries that the fees they allowed the plan to pay Hewitt were reasonable.
The court reversed the district court's entry of summary judgment on this issue, stating "the fiduciaries were not necessarily prudent in relying on the advice of consultants in lieu of bids." Id. at 26. The plaintiffs offered the testimony of an expert on 401(k) plan fees who opined that the plan overpaid fees by at least $16 per participant per year. While this may seem like a paltry sum, the plans at issue had between 37,000 and 55,000 participants between 2000 and 2006. Id. at 3. That amount ranges between $592,000 and $880,000 per year in alleged excessive fees to one service provider.
If you are concerned your employer is not seeking bids from service providers for your 401(k) account, consult an experienced ERISA lawyer.