A Minneapolis law firm recently filed a class action complaint against Lamettry’s Collision, Inc. and the Trustees of its 401(k) Plan, CFO Stephen Daniel and President Joan Lamettry for various breaches of fiduciary duty with respect to fees charged to Plan participants’ accounts in the Company’s 401(k) Plan. Specific allegations include: (a) failure to assess the reasonableness of the investment fees; (b) selecting inappropriate and imprudent mutual fund classes when lower cost institutional share classes were available; and (c) selecting investment options that were unnecessarily expensive relative to industry benchmarks and standards. In addition, the Plaintiffs allege that the Trustees failed to have a process for monitoring the Plan record-keeper and investment providers, the fees that they charged, the investment classes and the investment options.
The Plan Sponsor, Lamettry’s Collision, Inc. is a Minnesota corporation that owns and operates auto body and repair shops throughout the Twin Cities. Lamettrey’s sponsors a 401(k) plan with approximately 114 participants and just under $10 million in total assets. The Plan is funded in a bundled record-keeping and investment platform operated by Voya Retirement Insurance and Annuity Company (formerly ING Life Insurance and Annuity Company). The financial advisors to the Plan are a related entity, Voya Financial Advisors, Inc. which receives commissions and 12(b)(1) fees from the Plan’s retail mutual funds.
We learned in Tibble v. Edison International, http://benefitsnotes.com/2015/05/supreme-court-401k-plan-fiduciaries-have-an-ongoing-duty-to-monitor-2/ that a failure to monitor mutual fund share classes following initial selection of the mutual fund to determine whether a lower institutional share class is available can be a breach of fiduciary duty under ERISA. If what the Plaintiffs allege in the complaint is true, the advisors and inside fiduciaries for this Plan were not aware of the Tibble case or the duty of plan fiduciaries to monitor service provider fees. The Plaintiffs allege that among the 11 mutual funds offered under the Voya platform, the Trustees approved the selection of retail mutual funds when institutional share classes were available for every fund, given the size of the total assets in the Plan. The complaint lays out a schedule for each fund showing the applicable investment management fee and the lowest available institutional share class fee. According to the compiled table, the fee differential charged to the plan ranged from 160% to 2,028% higher than the institutional share option. Funds included in the investment array can be found in many employer-sponsored 401(k) plans, including the Columbia Midcap Value Fund, American Funds Growth Fund of America, the Columbia Midcap Fund and the Eaton Vance Large Cap Value Fund.
The complaint also alleges a breach of fiduciary duty with respect to the annual account record-keeping fees charged by Voya. The record-keeping fees which were negotiated as a percentage of assets, equated to an $886 per capita charge for record-keeping services. The Plaintiffs allege the record-keeping fees should not have exceeded $18 per capita, 4900% less.
Finally, the Plaintiffs allege that the revenue sharing payments which were retained by Voya and its affiliates (a) were not disclosed to Participants and (b) were not evaluated by the Trustees for their reasonableness with respect to the services being provided.
The main allegation of the class action complaint is that the in-house plan fiduciaries failed to have a formal process for evaluating these fees (investment fees and record-keeping fees) and failed to conduct periodic RFPs to establish their own benchmarks. In my experience, independent investment advisors to retirement plans will, as part of their co-fiduciary duty, (a) assist in-house fiduciaries in establishing an investment policy; (b) ensure that in-house fiduciaries are receiving ERISA §408 required fee disclosures from all service providers receiving compensation from the Plan’s assets; (c) ensure that Participants are receiving required annual fee disclosures under ERISA § 404 and (d) routinely assist plan sponsors in either benchmarking their existing fee arrangements and/or conducting periodic RFPs. Since the Tibble case, independent investment advisors are routinely asking investment managers whether lower cost share classes are available based on asset size or by waivers of minimum requirements.
We do not know what the ultimate resolution of the Lemettry case will be. However, we do know that the cost of defending a class action of this nature will be significant in time and expense for the Plan Sponsor and the individuals involved. The main thing that this case demonstrates is that excessive fee actions are no longer only a concern for the “large plans” with multimillion or billions of dollars in assets. Fiduciaries of relatively small company plans have the same general fiduciary obligations of the largest 401(k) plans in the country and can be subject to the same types of lawsuits.