Risk Management

Fees Under Fire

Companies are being sued by employees who say that 401(k) fees are too high and not being properly disclosed—and the courts are giving their blessing.
Kate PlourdOctober 16, 2007

Even as Congress examines
current 401(k) plan fee
structures, companies may
have plenty of incentive to
revisit the issue now rather
than wait for any resulting
legislative changes. That
incentive comes in the form of
class-action lawsuits
launched against a number of
large companies, including Lockheed Martin, General Dynamics, Bechtel
Group, and nearly a dozen others.

The suits, which were launched last fall, allege that the companies
violated their fiduciary responsibilities by not properly informing
employees about various fees, that the fees were too high, and that plan
sponsors did not adequately assess the structure of the fees.

In August, Lockheed lost a motion to dismiss. The company had argued
that the complaint was too broad, but a U.S. District Court judge in
Illinois disagreed. While a suit against Deere & Co. was dismissed,
most others have cleared that hurdle and are moving toward trial.

Companies have long borne some responsibility for understanding fees,
notes David Gensler, president of Madison Pension Services. But he says
that, given the current climate, companies should diligently document
every detail of their plans, including adviser fees, and review the
manner in which that information is provided to employees.

That push for better paperwork may receive a further legal impetus: a
recent ruling from the U.S. Court of Appeals for the Third Circuit said
that employees can still be considered participants (and bring legal
actions) even if they have already cashed (or rolled) out of a plan.
John Nixon, compensation and benefits partner at law firm
WolfBlock, says the ruling means companies will
need to maintain records even after employees
are no longer active participants, a requirement
that may not be easy to meet if companies have
changed providers. “A previous provider, which
has likely been fired, probably won’t be willing”
to help out on such recordkeeping, Nixon says.
He recommends that companies make this a
requirement in future contracts.