Advisors and consultants are fielding questions from plan sponsors about potential liability for excessive fees. For example, recently a plan sponsor’s CFO told us their fiduciary insurance carrier included a new questionnaire with their renewal application. It was titled “Fiduciary Liability Insurance Excessive Fee Questionnaire.” The document very specifically addressed areas in which plan sponsors might be exposed to an excessive fee lawsuit.
The questionnaire asked if the plan sponsor has explored the availability of less expensive investment vehicles—such as collective investment trusts—as potential replacements for each of the plan’s mutual funds.
Another question asked if the plan sponsor has received any inquiries from specific law firms that have brought these lawsuits against 401(k) plans. Because of litigation over investor fees, the cost of defending and/or settling these cases has skyrocketed, putting pressure on fiduciary insurance companies that have defended plan sponsors. In response, fiduciary insurance carriers are raising premiums, increasing deductibles, reducing liability limits, and/or specifically capping class action exposure.
Advisors and consultants are key allies for plan fiduciaries seeking to limit plan costs—and to maintain fiduciary liability coverage. In some plans, the use of collective investment trusts (CITs) may be helpful for both purposes.
Low-cost mutual fund solutions
While there certainly are 401(k) plans that fail to closely monitor all plan expenses, the focus of this article is low-cost investment management. Some might suggest that the best way to protect a plan against excessive fee lawsuits is to offer only low-cost index funds in the 401(k) menu, although this clearly is not a requirement under either ERISA statutes or DOL regulations.
Almost all investment vehicles available to qualified retirement plans have multiple share classes, with the only difference being the expense ratios of each class. Historically, higher expense shares have provided revenue sharing to compensate plan recordkeepers or advisors. While revenue sharing credits to service providers may have appeared to reduce plan expenses paid directly by the sponsor, this approach tends to generate higher expenses (paid indirectly by plan participants…this is the point of the lawsuits) over time as plan assets grow.