Recently there has been an increased focus on fees associated with 401(K) plans. Many believe that Tussey et al v ABB will become a landmark case in 401(K) litigation. In March 2012, the court ruled that ABB plan participants would receive $36.9 million in addition to $50 million in legal fees and court costs for excessive fees in employees’ 401(K) plans. This ruling serves as a warning to plan sponsors to analyze plans thoroughly in order to provide reasonable record-keeping investment and administrative fees.
Consider this hypothetical situation offered by the Department of Labor (DoL): Two workers put $25,000 into a retirement plan which averages a 7% return with 35 years left until retirement. If one worker pays a 0.5% management fee while the other worker pays a 1.5% management fee, the low fee plan will yield $227,000 while the higher fee plan will only amount to $163,000. In this case, the 1% difference in the fee amounted to a $64,000 difference in the employee’s retirement nest egg.
A survey conducted by BrightScope revealed that these fee levels are not uncommon. According to the survey, the 30 largest 401(K) plans with more than $1 billion in assets had an average expense ratio of only 0.29% while plans with under $10 million in assets typically had a fee of 1.45%. In addition, some plans use over-sized fees to pay for plan services such as specialized senior management, non-qualified plans that most employees did not receive, despite the fact that they helped pay for them.
According to Millennium Investment and Retirement Advisors’ director of business development, James Holland, “The vast majority of 401(K) funds are at risk of lawsuits over excessive fees.” He goes on to say that this is because plan management has traditionally been outsourced to brokers who do not have the same fiduciary responsibility to clients, usually delivering product-driven advice. Because of this conflict of interest, Holland says “there’s the absolute assurance that fees will sooner or later become excessive.”
Now that the DoL’s new disclosure rules have gone into effect, employees are finally able to determine whether their plan sponsors are fulfilling their fiduciary duty to ensure reasonable fees and, if not, receive compensation in 401(K) litigation.