Excessive Fee Suits: An Ounce of Prevention

John Iekel

An ounce of prevention is worth a pound of cure, it is said. The prescription, says a recent blog entry, is to avoid risk factors in the first place. 

In its Fid Guru Blog, Euclid Specialty argues that even a diligent process for selecting a plan administrator and for monitoring the administrator and investments will not prevent being sued for excessive fees. Far more effective, they suggest, is to examine such lawsuits to get a look at the risk factors to result in those cases—and make changes to avoid those pitfalls. 

The risk of an excessive fee lawsuit for a plan with assets of more than $100 million or with more than 2,500 participants is especially high, says Euclid, if the plan:

• has retail share class investment options despite the availability of institutional share classes; 
• has active target-date investments; and 
• has recordkeeping fees on a percentage-of-asset basis with revenue sharing that is not capped.

Beyond avoiding those risk factors, Euclid suggests providing a list of considerations to all fiduciaries on the plan committee and asking the plan consultant how the plan addresses those factors. These include: 

• Does the plan sponsor pay recordkeeping fees? 
• Is the recordkeeping fee on a low, flat fee per participant? 
• Has revenue sharing been eliminated or capped? 
• Is the lowest possible institutional share class being used for every investment option? 
• Are index funds being used for every investment category? 
• Is the QDIA in a low-cost index fund? 
• Are target-date funds in a low-cost index fund? 
• Are investment options connected to the plan recordkeeper? 
• Are managed account fees being benchmarked? If so, how?
• Is investment performance being monitored? If so, how? 
• Are you eliminating underperforming investment options?

They add a reminder that while documentation alone is not a protection from litigation, nonetheless documenting decision-making for all plan decisions is an important fiduciary duty.