Plaintiffs have not prevailed in 401(k) plan fee decisions issued on the merits -- up to now. A recent decision by the Court of Appeals for the Eighth Circuit has overturned the dismissal of challenges to fees paid by the WAL-MART 401(k) Plan (PDF), one of the largest in the U.S. Coming after a recent agreement by Caterpillar Inc. to settle similar claims (PDF) against it, the WAL-Mart decision is sending shock waves through the U.S. investment and fiduciary communities.
Past cases include the highly-publicized Court of Appeals for the Seventh Circuit decision, dismissing claims against John Deere and Fidelity Investments, and a recent decision by the Court of Appeals for the Second Circuit upholding the dismissal of claims against United Technologies (PDF).
In the past, plaintiffs have argued unsuccessfully that 401(k) plan fees are excessive and that revenue sharing should be disclosed to participants. (Revenue sharing is a common U.S. practice in which plan service providers receive part of the fees paid to other parties, such as the adviser to mutual funds in which the plan participants invest, as payments towards the recordkeeping, custodial or administrative fees paid by the plan.). Plaintiffs also contended that revenue sharing is a form of “kickback” for selecting particular funds under the U.S. prohibited transaction rules, rather than permissible compensation for services rendered. Plan fiduciaries who were initially concerned about their exposure may have become complacent as decisions in favor of defendants were released.
The WAL-MART appeal found that the following were viable claims to be decided by the trial court:
- Whether WAL-MART should have negotiated to use institutional mutual funds instead of retail funds, which typically have higher fees.
- Whether WAL-MART should have avoided funds with 12b-1 fees, which allegedly benefit the fund companies, not the participants.
- Whether WAL-MART was required to disclose its fund selection process and revenue sharing to participants, and whether revenue sharing is an improper kickback.
Other fee cases are also headed to trial, including a major case against Nationwide Financial Services by a class of trustees of 24,000 plans, making the law still highly unsettled regarding permissible fees and the obligations of fiduciaries. In the meantime, plan fiduciaries would be well-advised to pay more attention to this aspect of fund selection, retaining independent advisers if they lack the expertise to make this evaluation themselves and taking care to disclose all direct and indirect fees in communications to plan participants.