Recordkeeper Benchmarking: It’s About More Than Fees

This month’s article starts with some litigation context, then moves into practical recordkeeper benchmarking perspectives that will serve your fiduciaries and participants well. As you’ll see, there are many reasons to undertake a benchmarking exercise, and the recent litigation developments help to reiterate those reasons.

Surviving a Motion to Dismiss. The most significant battle in retirement plan fee litigation does not turn on a substantive topic. Instead, it involves a core procedural question: can the plaintiffs (the participants) survive the defendants’ (the fiduciaries’) motion to dismiss? If the court grants the defendants’ motion to dismiss, the defendants win (unless the plaintiffs are able to refine and refile their claims). If the court denies the motion to dismiss, the parties move toward discovery, which triggers costly, time-intensive, distracting, and potentially costly depositions, interrogatories, and requests for production. The fiduciaries’ desire to avoid discovery provides greater leverage to the participants, which increases the participants’ odds of exacting a favorable settlement. Thus, the court’s ruling on the motion to dismiss is commonly the most important ruling during any stage of retirement plan fee litigation.

Recent Litigation: Pleading Standards. A plaintiff’s ability to survive a motion to dismiss turns on whether the initial pleading meets certain legal standards. In overly general terms, it’s not enough for plaintiffs to say “the committee members breached their fiduciary duties because the recordkeeping fees were too expensive.” Instead, the plaintiffs must complement such a claim with sufficient facts that – taken as true – would support the argument of a fiduciary breach. When it comes to allegations of expensive recordkeeping fees, courts are all over the map in their standards for the types, specificity, and breadth of supporting facts a plaintiff must allege. Last month’s newsletter highlighted the variety and randomness of courts’ standards.

Is 3 Greater Than 15? When participants have challenged recordkeeping expenses through recently filed lawsuits, some have gone to great lengths to contrast a plan’s recordkeeping expenses with various other plans with similar participants and asset levels. In one such case, the participants’ complaint contrasted their plan’s expenses with 15 similarly sized plans and highlighted that their plan’s cost structure was more than double the average structure in those other plans. But that wasn’t enough for the participants to advance. In granting the fiduciaries’ motion to dismiss, the court admonished the participants for merely alleging – without more factual support – “that mega plans receive nearly identical recordkeeping services and that any difference in services is immaterial to the price of those services”. However, in a different case in which the participants contrasted their plan’s fees with only three other similarly sized plans, the court denied the plaintiffs’ motion to dismiss on the grounds that “recordkeeping expenses are [commoditized] and fungible” and that the dollar figures alone were sufficient to indicate excessive fees.

What Does This Mean? Many recent Federal court decisions in retirement plan fee lawsuits are inconsistent and irreconcilable. On the one hand – the one primarily concerned with risk – that could be frustrating. On the other hand – the one focused on responsibility to participants and the opportunity to improve their prospects of a dignified retirement – this trend should help fiduciaries to revisit the motivations for benchmarking their recordkeeping expenses.

For nearly a decade, we’ve insisted on two core recordkeeper benchmarking principles. First, one frequently should not conduct the exercise with the assumption that a change will be necessary. Instead, fiduciaries should perform the exercise with the intent of receiving better pricing, better service, or a combination of the two. Second, there are four complementary reasons to benchmark those services:

  1. To do the best possible for an organization’s employees;
  2. Because recordkeepers have innovated and responded to participants’ demands to a degree that more is now available for less;
  3. To comply with the DOL 408(b)(2) regulation’s requirements that fees be reasonable; and
  4. Because the courts expect that it occur regularly (perhaps as frequently as every three years).

Are recordkeeping services a commodity? Some might be. But many are not. Given the four reasons outlined above, plan fiduciaries would do well to challenge their current recordkeeper and its competitors to demonstrate that their services indeed are not commodities. Please join us for this month’s Fiduciary 15 webinar in which we’ll expand on the four reasons identified above and identify various areas in which recordkeepers may distinguish themselves in a competitive process.

– Matthew Eickman, J.D., AIF®