As more companies switch from defined-benefit to defined-contribution retirement plans, such as 401(k) plans, employees are paying closer attention to administrative costs that eat into their total retirement investment. This case involves a class action suit concerning 401(k) plan fee and revenue-sharing arrangements. The plaintiffs alleged that the plan sponsor failed to provide investment choices with lower fees and to provide information that would have allowed them to make informed investment comparisons. The trial court held that the sponsor had complied with all applicable disclosure requirements, and that it fell within a safe harbor provision that protects against suits like this.
The NAM, the ERISA Industry Committee and the American Benefits Council filed an amicus brief in the Seventh Circuit on 5/9/08 explaining that the administrative costs of 401(k) plans are increasingly paid by the plan rather than the employer, and are under increasing scrutiny by the Executive and Legislative branches. We argued that suits alleging fiduciary breaches should be carefully scrutinized under stricter pleading requirements recently upheld by the Supreme Court, to prevent unnecessary, complex and costly ERISA litigation. The law firm in this case, for example, has filed 14 other class actions alleging substantially identical, barebones claims of fiduciary breach by major manufacturing companies, and have embarked on wide-ranging and expensive discovery to try to find wrongdoing.
The brief also noted that the total fees for each investment option were disclosed to plan participants, and that ERISA does not require even more detailed disclosure about amounts paid from these total fees as revenue sharing to defray the costs of plan service providers. Instead, whether such a detailed disclosure requirement should be adopted is a topic being considered by the Department of Labor and by Congress.
On Feb. 12, 2009, the court ruled that the allegations in the complaint did not state a valid claim for breach of fiduciary duty. It also ruled that the safe harbor in ERISA Section 404(c) applied because the plans allowed participants to make their own investment choices among a broad range of diverse investment options. This is a significant victory for plan administrators and companies that try to set up efficient and effective retirement benefit plans.