Fiduciaries at three large employers may have preferred fruitcake or coal in their stockings instead of the holiday presents they received last month – a series of three 401(k) fee lawsuits. These three suits continue with some of the same themes we’ve seen: reliance on revenue sharing, expensive share classes, and the failure to follow a prudent process. These continue to provide cautionary lessons to plan sponsors. Below is a brief summary of these three cases, which we’ll address more completely through a February 8th webinar.
Creamer v. Starwood Hotels & Resorts Worldwide, Inc. The Starwood fiduciaries demonstrated a heavy reliance on revenue sharing, and the plaintiffs have taken issue with two related aspects: (1) the absence of disclosure; and (2) the ulterior motivations behind the selection of funds that pay high revenue sharing amounts. The complaint hits hard at the motivations: “revenue sharing can easily become kickbacks or ‘pay to play’ payments for including a fund within the plan’s menu of investment choices if the revenue sharing payments are in excess of reasonable compensation for the administrative services rendered.” As a result, “funds are selected for inclusion in the menu of investment options not because of their intrinsic merit, but due to the kickbacks.”
Johnson v. Delta Air Lines, Inc. This complaint includes some similar allegations, including a couple of charts demonstrating the cost difference between the share class used and the cheapest available. But more importantly, it strongly emphasizes the practical result of a core funds list driven by the need to generate revenue to pay the Plan’s expenses: participants end up choosing from poor funds. The complaint notes:
- “Strikingly, studies have shown that high expenses are not correlated with superior investment management. To the contrary, funds with high fees perform worse on average than similar funds with lower fees, even before the fees are taken into account.”
- “Essentially, high fees are apparently more likely to indicate bad funds than good ones.”
Morin v. Essentia Health. The employer sponsored two plans and allegedly failed to leverage the combined size of those plans. The plaintiffs’ complaint explores the degree to which the recordkeeper was paid through revenue sharing, which, according to the complaint, caused the recordkeeping fees to exceed a reasonable amount by more than 50%.
Closing Thoughts. These three lawsuits remind us that plans relying heavily on revenue sharing present significant risks for plan sponsors and for your employees. Those risks exist because those plans feature expensive investment options, lead to excessive recordkeeping fees, and result in inferior investment performance. Fiduciaries have a responsibility to make decisions in the interests of participants, and it is difficult to imagine how a revenue-sharing-dependent lineup could be viewed to satisfy that responsibility.
 Case 2:16-cv-09321-DSF-MRW (C.D. Cal. Dec. 16, 2016).
 Case 1:16-cv-01275-UNA (D. Del. Dec. 20, 2016).
 Case 0:16-cv-04397-RHK-LIB (D. Minn. Dec. 29, 2016).
Matthew loves to write. He also loves to think, though he’s probably a better writer than a thinker. He does not like to be on camera or in videos. This blog will allow him to write, challenge his ability to think, and, from time to time, test him with video blog entries.
He has a unique blend of legal and practical experience that helps us to serve our clients well. On the one hand, he has more than 12 years of private legal practice experience focusing exclusively on employee benefits, including time as a partner in an employee benefits boutique where he has represented clients in front of the DOL and IRS. On the other hand, he holds his FINRA Series 7 and 66 registrations and serves as the Director of ERISA Services for Qualified Plan Advisors.
Matthew likes to stay active. He provides fiduciary training, Investment Policy Statement design, and vendor oversight to our clients. He is an active member of the Employee Benefits Committee of the American Bar Association Tax Section, serving as Chair of the Defined Contribution Plans Subcommittee. He also has been appointed to the IRS TE/GE Gulf States Council and is a frequent speaker on regulatory developments, fiduciary responsibilities, and retirement readiness.
Most importantly, he stays active with his family. His wife, Laura, is the founder of REbeL, Inc., a not-for-profit organization. His three young boys are mixed up in far too many sports, and they enjoy traveling, watching college football, running with Dad, and rooting for the Huskers.
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