Author: jfortenberry@fortenberrylaw.com

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:

• 401(k) Plan Fee Disclosure Form
• Study of 401(k) Plan Fees and Expenses

(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 . . . “)

This is a great article by Gardner Carton & Douglas–“Integrating the HR Role with the New SEC Accelerated 8-K Filing Requirement.” The article discusses the new SEC Form 8-K filing requirements which became effective on August 23, 2004 and the impact they will have on HR professionals. As stated in the article:

In the past, SERPs, deferred compensation and similar-type plans and awards would ordinarily be disclosed with the company’s next following Form 10-K or 10-Q. Now, adoption or amendments to these enhanced retirement-type vehicles for executive officers must be reported as the decisions are being made and approved by the board of directors. This may change the board of director’ approval process, because with the immediate disclosure, individual arrangements may now receive increased scrutiny from not only the SEC but from the public and media as well.

The article further notes that “HR professionals should anticipate that the board of directors will likely want (on a going forward basis) more information than [was] required in the past, including adequately documented reasoning behind the structure and size of the compensatory arrangement being considered” and that such information “will need to be assembled and available at the time the plan is being approved or amended.”

(You can access the new rules here.)

The Financial Times today (from Benefitslink.com) has an article–“Washington put on pensions alert“–reporting on an interview with Bradley Belt, executive director of the PBGC, who discusses the administration’s concerns over the pension funding crises. Here is a part of what he had to say when asked about whether U.S. taxpayers might eventually be required to pick up the bill for employers’ abandoned pension funding commitments:

“The challenges are multi-faceted and profound,” he said in an interview with the Financial Times. “They go from the narrow role of administering the insurance [program], to the future of the defined benefits system as a whole, to the wider issue of retirement security.”

He called for the rules to be tightened for weak companies with underfunded plans and simplified for those that are healthy to encourage them to stay in the system. There also needed to be a change to the premium structure that funds the PBGC.

“The level received by the PBGC is simply inadequate to cover financial claims. The deficit will get larger.”

Mr. Belt wants to strengthen the agency’s status in bankruptcies, to “enhance our ability to recover on our claims, so we are looking at our current priority and how we might classify pension contributions as administrative expenses”.

ASPA has posted on their website some very interesting testimony presented to the 2004 ERISA Advisory Council on Employee Welfare and Pension Benefit Plans Working Group on Health and Welfare Form 5500 Requirements. The testimony was given by Janice M. Wegesin, President of JMW Consulting. Dittos on this statement from her testimony regarding how many employers fail to meet ERISA documentation requirements pertaining to their medical, dental, and life plans:

Engagement of my firm often starts with a compliance review. The client delivers to me all of the benefits communication materials that are normally provided to its new employees and, from that, a list of plans subject to ERISA is developed. The next step in the review involves collection of the plan documents, summary plan descriptions, and Form 5500 filings for those plans. A client typically has no difficulty presenting the documentation and filings relating to its qualified retirement plans; however, it is frequently an entirely different story for its welfare benefit plans. Although a §125 cafeteria plan document may exist, the “documents” for the medical, dental, and life plans may consist solely of the employee booklet issued by the insurance carrier. For some benefits, the only “document” may be the information presented in the employee handbook.

Besides the documentation probems, she goes on to note how, in addition, few clients fulfill ERISA filing requirements with respect to such plans:

Many tax form preparers do not have the skills necessary to properly advise the plan sponsor about welfare plan reporting, so merely continue to prepare only those Form 5500 filings that the plan sponsor has historically filed. Large employers often prepare Form 5500 filings for welfare plans (but not qualified retirement plans) in-house and, again, the SALY (same as last year) principal applies. No thought is given to changing circumstances and benefit structures and the impact on Form 5500 reporting.

Labor and employment lawyers are having a fun time, I’m sure, trying to educate clients on the new FLSA regulations which went into effect today. Michael Fox has found the cheat sheet for understanding the new regulations. Congrats to Ogletree Deakins for attempting to simplify something that appears so complicated. (Hey, I didn’t think lawyers could boil anything down to a “yes” and “no” answer. Where’s the “It depends” answer?)

For a real treat, visit Lawrence Lessig’s blog–lessig blog–and read posts by Judge Richard Posner who is featured as a guest blogger for the week. As many of you may recall, it was predicted that Judge Posner might end up being one of the judges who will decide the appeal in Cooper et al. v. IBM Personal Pension Plan et al. since the case will go to the Seventh Circuit on appeal. (Read about it here and here.) While his blogging will focus on the “social and legal impact of technology,” he also tells what his favorite movie is.

After the Sixth Circuit’s decision in Rhiel v. Adams rocked the benefits and bankruptcy world late last year, most of us figured that it was a far-gone conclusion that participants’ interests in 403(b) plans would, for the most part, be henceforth included in the bankruptcy estate, at least in states governed by the Sixth Circuit (i.e. Michigan, Ohio, Kentucky and Tennessee), unless the case were somehow overturned by the Supreme Court. (You can read about the case in this previous post–403(b) Plans Take a Turn for the Worst in the Sixth Circuit and More on the Sixth Circuit’s Bankruptcy Decision.) However, there is some disturbing,albeit predictable, news from the bankruptcy trenches—I have received word from bankruptcy attorneys that, even in states not governed by the Sixth Circuit, bankruptcy trustees are taking the Rhiel v. Adams decision to heart and trying to rely on the Rhiel case to include 403(b) plan assets as part of the bankruptcy estate. As you may recall, the Rhiel case held that a husband and wife’s interests in 403(b) plans were included in the bankruptcy estate and not exempt under section 542(c)(2) of the Bankruptcy Code. The case was a departure from the general rule that participants can exclude their interests in “ERISA qualified plans” from the bankruptcy estate in a bankruptcy proceeding.