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Diane Wasser, CPA
Partner-In-Charge


Denise Richebacher, CPA
Supervisor

Until recently, defendants in lawsuits typically included plan sponsors, trustees, plan committees, various company officers, directors and employees, who allegedly acted as fiduciaries in the administration of the plan or made investment related decisions. As if that were not enough to worry about, lately, the course of action involves asset custodians and service providers now being named as defendants in many lawsuits as well. This situation has been elevated in part due to allegations that they are the ones who benefited the most from the receipt of excessive fees. Given the way certain investment related fees are charged (certain fees are netted in with fund performance), it can be very difficult to determine exactly how much a particular service provider receives for services. Essentially there is a lack of transparency in the area.

Types of Services and Fees
Plan fees and expenses can be summarized into categories of plan administration fees (day to day operation of a plan), investment fees (the largest expense of a plan for managing plan investments) and individual service fees (for optional plan features).

The types of services related to claims of excessive fees include trustee services, recordkeeping, administration, investment management and advisory services, and brokerage and consulting services. Excessive fee claims include both direct and indirect payments to service providers. Indirect fees include "revenue sharing" or the transfer of asset-based compensation from brokers, investment management providers or asset custodians to administrative service providers who perform recordkeeping functions and even to plan sponsors. Oftentimes, the issue with revenue sharing might not be that it exists, but rather that it was not disclosed.

Allegations
Allegations take many forms, all with the ultimate result of plans and participants wanting restoration for funds no longer set aside for retirement including for lost earnings on those funds. Examples of allegations include fiduciaries choosing mutual funds with higher expense ratios and plans paying mutual fund fees at an actively managed fund level to a fund behaving more like a less expensive passive fund and thus getting no service for the related fee. In addition, employer stock funds in plans are a target, with allegations that management fees were erroneously charged to such funds as not fund management was required if the only investment in a fund was employer stock. This is in addition to charges that the employer stock should have been removed as an investment option given an employer's known deteriorating financial condition.

What Expenses Can Be Charged to a Plan?
Currently, ERISA permits certain expenses incurred in connection with the administration or operation of a plan to be paid with plan assets. Generally what is referred to as settler expenses must be paid by the employer/plan sponsor and may not be paid with plan assets. These include expenses to establish a plan (legal fees etc.), to determine benefit and/or allocation changes or to pay late filing penalties. Fees generally allowed to be paid with plan assets include fees to obtain a determination letter, actuarial fees, appraisal fees, auditing fees, investment management fees, and fees to amend a plan to adopt a change required by law and fidelity bond premiums. In all cases, expenses charged to a plan must be in compliance with what the plan document allows.

Looking Forward
The government bodies charged with securing employees' retirement realize the process must be more transparent. The United States Government Accountability Office ("GAO") issued a study in November 2006 entitled, "Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees." This study found the information on fees required to be disclosed is limited and does not provide an easy comparison among investment options. The GAO study recommends that Congress should consider amending ERISA to require this disclosure and offer examples including disclosing expense ratios, historical performance and risk on a single document that is communicated at least annually. Other recommendations include requiring 401(k) service providers to disclose the compensation that providers receive from other service providers, and requiring plan sponsors to report a summary of all fees paid out of the plan assets by type. The Department of Labor ("DOL") responded to the study issued by the GAO and is considering amending ERISA to help ensure plan fiduciaries have sufficient information regarding compensation paid to service providers and revenue sharing agreements, so the fiduciaries can assess if compensation is reasonable and deal with any possible conflicts of interest. In addition, the DOL is addressing a number of changes to Form 5500, which include expanding the information reported on Schedule C, Service Provider Information. The expanded information would include reporting not only compensation paid directly from a plan, but indirect compensation as well. This change will expand the amounts to be reported as it includes contract administrators, brokers, consultants, custodians, insurance agents and brokers, investment advisors, investment managers, money managers, recordkeepers, trustees and appraisers.

What Can You Do?
Stay on top of current lawsuits in the news! Most importantly, be sure to follow a prudent process that will ensure expenses charged to your plan are tracked, reviewed, reasonable based on services provided, allowed to be charged to the plan per the plan document and disclosed to participants as noted herein.