Retirement plan sponsors and other fiduciaries are required by ERISA to discharge their duties with the “care, skill, prudence, and diligence” under the circumstances as would a prudent man. This means, among other things, fiduciaries should ensure that all fees paid by the plan for recordkeeping and investment management services are competitive and reasonable. Because such fees were often hidden historically and difficult to ascertain, plan sponsors did not always do a very good job in fulfilling this fiduciary function. As a result, plaintiff lawyers began bringing excessive fee claims against plan fiduciaries about 15 years ago and the number of claims have steadily increased over the years. Until recently, these claims were primarily filed by national plaintiff law firms against large publicly-traded companies with billions of dollars in plan assets which made for potentially large recoveries.
But in recent years as local plaintiff law firms have become aware of these claims, we have seen more claims filed against smaller employers such as privately held businesses, universities, colleges, hospitals and not for profit organizations. These cases have alleged a variety of fiduciary breaches including failure to use the least expensive mutual fund share class available, conflicts of interest, investment underperformance, the offering of too few investment options and others claiming the plan offered too many investment options.
To avoid these types of claims which at a minimum can be very costly to defend, plan sponsors and fiduciaries should develop a process to regularly determine whether the recordkeeping and investment management fees paid by the plan are reasonable and whether investment performance is competitive. Courts have held that the prudence standard is processed based and not outcome based. The process may involve consulting legal counsel and financial experts and periodically placing these services out for bid through an RFP process. Fiduciaries should be aware of exactly what fees are being paid and any revenue sharing arrangements between the investment companies and service providers. Finally, fiduciaries should not be hesitant to proactively negotiate with and seek cost reductions from retirement plan providers.