The Wall Street Journal (subscription required) today has this article: “Mutual-Fund Suit On Marketing Fees Clears Hurdle.” The article reports that “[a] lawsuit accusing a mutual fund of charging investors excessive fees has cleared a legal hurdle and could spell a new round of legal woes for fund companies.” According to the article, “[t]he suit questions how it could be reasonable for the firm to collect twice as much money from shareholders for marketing the fund after it was shut to new investors as it was collecting when the fund was still open and looking for new shareholders.”
The article predicts that the outcome of the lawsuit could prove worrisome to other fund companies because the fees it targets are commonplace in the industry, and quotes John Freeman, a professor at the University of South Carolina Law School and a critic of mutual fund fees, as saying: “Plaintiffs lawyers are going to start teeing up 12b-1 fees and taking a hard look at the logic of how that money is being spent.”
The thought that came to my mind when reading the article, however, was that the litigation could have an impact on ERISA fiduciaries. For years, lawyers have been predicting lawsuits against fiduciaries based upon excessive fees in retirement plans. Moreover, the DOL has been concerned about excessive fees as well, as indicated in this statement on their web page devoted to retirement plan fees:
Plan fees and expenses are important considerations for all types of retirement plans. As a plan fiduciary, you have an obligation under ERISA to prudently select and monitor plan investments, investment options made available to the plan’s participants and beneficiaries, and the persons providing services to your plan. Understanding and evaluating plan fees and expenses associated with plan investments, investment options, and services are an important part of a fiduciary’s responsibility. This responsibility is ongoing. After careful evaluation during the initial selection, you will want to monitor plan fees and expenses to determine whether they continue to be reasonable in light of the services provided.In recent years, there has been a dramatic increase in the number of investment options, as well as level and types of services, offered to and by plans in which participants have individual accounts. In determining the number of investment options and the level and type of services for your plan, it is important to understand the fees and expenses for the services you decide to offer. The cumulative effect of fees and expenses on retirement savings can be substantial.
The DOL in this July 28, 1998 Information Letter stated:
In choosing among potential service providers, as well as in monitoring and deciding whether to retain a service provider, the trustees must objectively assess the qualifications of the service provider, the quality of the work product, and the reasonableness of the fees charged in light of the services provided.
See also Advisory Opinion 97-16A dated May 22, 1997 which addresses 12b-1 fees received by a non-fiduciary service provider. The DOL outlines in the Opinion Letter the duties and responsibilities of the “responsible Plan fiduciaries” for the plan as follows:
Finally, it should be noted that ERISA’s general standards of fiduciary conduct also would apply to the proposed arrangement. Under section 404(a)(1) of ERISA, the responsible Plan fiduciaries must act prudently and solely in the interest of the Plan participants and beneficiaries both in deciding whether to enter into, or continue, the above-described arrangement with [the provider], and in determining which investment options to utilize or make available to Plan participants and beneficiaries. In this regard, the responsible Plan fiduciaries must assure that the compensation paid directly or indirectly by the Plan to [the provider] is reasonable, taking into account the services provided to the Plan as well as any other fees or compensation received by [the provider] in connection with the investment of Plan assets. The responsible Plan fiduciaries therefore must obtain sufficient information regarding any fees or other compensation that [the provider] receives with respect to the Plan’s investments in each Unrelated Fund to make an informed decision whether [the provider’s] compensation for services is no more than reasonable.
Sounds like the same sort of determination being made in the recent non-ERISA lawsuit. According to the WSJ article, for plaintiffs to prevail, they will have to demonstrate that the fees were “so disproportionately large that they bore no reasonable relationship to the services actually provided.”
The bottom line is that plan fiduciaries should understand what fees are being charged to the plan and make a determination that they are reasonable in light of the services rendered.
Helpful links on the subject:
(Section 404(a) of the ERISA provides: “[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and – (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan . . . “)