As we approach the end of the year, 2017 is turning out to be significant in the ever-evolving world of litigation over 401(k) plan fees.  Since 2006, plaintiffs’ firms have brought hundreds of lawsuits across the country on behalf of employees alleging excessive plan fees and breaches of fiduciary duties to maintain proper investments. While these lawsuits initially targeted larger, multi-billion dollar plans, these cases have expanded downward in recent years.  Decisions in two recent cases will have significant effect on the retirement plan fee landscape.

On October 25, 2017, I will dive into these issues in much greater depth in Charleston, at a breakfast briefing hosted by Nexsen Pruet. You will find the invitation here.

Brotherston v. Putnam Investments

One important ruling in 2017 that will have a significant effect on the fee litigation landscape is Brotherston v. Putnam Investments, LLC, decided by Judge William G. Young of the U.S. District Court for the District of Massachusetts.  In that case, employees of Putnam Investments brought a class action lawsuit against their employer, alleging breach of fiduciary duties and duties of loyalty and prudence.  This case is complicated by the fact that, as an investment fund itself, Putnam offered its own funds to its employees, with net expense ratios of up to 1.65 percent. 

While acknowledging that the employer defendant bears the burden of proof on the reasonableness of challenged fees, the Court emphasized that it also was “beside the point” that the plan could have found investments with lower expense ratios.  Citing precedent, the Court found that “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems).” 

This ruling is important because, over the past 10 years, when a group of employees alleges excessive retirement plan fees, the group typically uses the fees of passively managed Vanguard funds as a benchmark to claim unreasonable fees.  In fact, plaintiffs will typically cite to the applicable Vanguard fund fees for the period at issue in the Complaint.  Importantly, with respect to the Vanguard funds, the Court found that a comparison of the actively managed Putnam funds and the passively managed Vanguard funds “compares apples to oranges.”  Vanguard funds are generally regarded as low-cost funds that operate “at-cost.” In essence, the Court acknowledged that the reasonableness of plan fees requires a more complex analysis than a simple comparison to low-cost investment alternatives.

Sweda v. University of Pennsylvania

In recent years, universities have been plagued with similar excessive fee litigation in the 403(b) retirement plan context.  On September 21, 2017, the University of Pennsylvania became the first to have a federal court dismiss a proposed class action lawsuit regarding excessive fees of its retirement plan.  In that case, with respect to claims of unreasonable and excessive management fee, the Court first noted that the majority of the claims must fail because the plan offered a mix and range of fee options, with fees as low as 0.04 percent.  The Court rejected the plaintiff’s assertion that “fiduciaries must maintain a myopic focus on the singular goal of lower fees,” and, instead, must balance “providing benefits to participants” with “defraying reasonably expenses” in the plan. 

Another common argument in these types of cases is that the employer failed to negotiate lower-priced institutional shares and, instead, settled for the higher-priced retail shares.  Institutional funds generally are available only to larger businesses based on their increased bargaining power.  In rejecting the plaintiffs’ claim that the failure to offer institutional funds was a breach of fiduciary duty, the Court actually acknowledged that those funds also have a downside.  In addition to the initial minimum investment hurdle, the Court noted that many institutional funds do not allow withdrawal of funds without fees, which leads to decreased liquidity.

Takeaways

While many of the fee litigation cases filed over the past 10 years have settled out of court, these cases reflect that the courts are wrestling with issues of fee reasonableness in light of a complex and ever-evolving marketplace.  The cases cited above are important for their perspective on the general arguments raised by plaintiffs with respect to excessive fees.  They also demonstrate that there are often reasonable and supportable fiduciary decisions that may lead to a higher, but more productive, fee class.