The fact that fees dropped and investment performance improved after the corporate merger that produced the successor LEHarris Plan certainly looks bad in retrospect. The named plaintiffs seek to represent 52,000 participants in the Master Plan between 2015 and 2019.Failure to control the plan’s administrative and recordkeeping costs
During the years at issue, the Master Plan always had at least $4.5 billion in assets under management and was one of the largest in the country. A plan of that size generally has substantial bargaining power regarding the fees and expenses that are charged. The Complaint alleges, however, that the fiduciaries made no efforts to negotiate these lower fees.
The Master Plan stayed with the same recordkeeper over those years and paid the same relative amount in recordkeeping and administration fees. This suggests that there was no regular process for reviewing whether it could obtain better pricing from other service providers. When compared with the per participant administrative and recordkeeping fees of similar plans, the costs were, in the words of the Complaint, “astronomical.”
The Master Plan, like most modern employer sponsored retirement plans, is a defined contribution plan. Participants make contributions from what they would otherwise receive as salary, may have the option for employer matching money, and choose among investment options for that money. What they have at retirement is the sum of what they have saved and what they have made by investing. The employer is under no obligation to make up any kind of shortfall from poor investment performance. The risk of loss falls entirely on the worker/investor.
This is why it is critically important for plan fiduciaries to monitor investment fees and options. Only they have the opportunity to do this, and this is almost their only job.
Additional fees of as little as two tenths of a percent can have an outsized effect on a participant’s investment results over time. The beneficiary not only pays more, but also loses the opportunity to invest that money. It’s a double whammy that can ultimately cost plan participants substantial retirement savings.
Insufficient review of investment options’ cost
In addition, fiduciaries of the Master Plan allegedly chose unreasonably expensive funds for the plan. Investment options have a fee for investment management and other services. With regard to investments like mutual funds, retirement plan participants pay for these costs via the fund’s expense ratio.
For example, an expense ratio of .75 percent means that the plan participant will pay $7.50 annually for every $1,000 in assets. However, the expense ratio also reduces the participant’s return and the compounding effect of that return also reduces a participant’s retirement savings. That, according to the Complaint, is why it is prudent for a plan fiduciary to consider the effect that expense ratios have on investment returns.
In 2019, for example, the majority of funds in the Master Plan had expense ratios well above the median and average expense ratios for similarly sized plans. In some cases, expense ratios were up to 71 percent. Identical investment options were allegedly available with a far lower expense ratio.
Retention of poorly performing investment options in the plan
Finally, the Complaint also notes that the fiduciaries failed to include lower-cost collective trusts in the investment options offered to participants. Similarly, they seem to have ignored the cost benefits of passively-managed investment funds, preferring instead to offer an array of more expensive actively-managed funds.
ERISA requires prudent plan management
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In the context of a defined contribution 401k plan, the legal inquiry focuses on the selection of a portfolio of potential investment options and the careful monitoring of administrative fees. As with other similar ERISA lawsuits, the court must now weigh into the fact-specific question of whether particular practices met the standard of prudence required.