Several courts have recently held that fiduciaries breached their duties with respect to fees paid from plan investments.1 From the perspective of these courts, plan fiduciaries should take the following steps:
- Follow the plan’s investment policy.
- Take “float” into account2.
- Ask an independent investment consultant to regularly evaluate the reasonableness of fees paid, compared to fees paid by similar plans with similar investments. Document the reasoned basis for any exception.
- Consider alternative investment structures (which have varying fee structures), for example, mutual funds (including institutional share classes, if available), bank collective trusts and separate accounts.
For individual account plans, if the plan has revenue sharing, fiduciaries should ask an independent investment consultant to advise on the following:
- Consideration of whether revenue sharing is in participants’ best interests, and alternatives, e.g., instead charging a per capita fee.
- Overall reasonableness of total compensation paid (i.e., amount of revenue sharing plus any other compensation, such as hard dollar fees), compared to that paid by similar plans with similar recordkeeping needs.
One of these courts recently faulted plan fiduciaries for following an investment consultant’s recommendation without first making certain that the expert’s advice was reasonably justified under the circumstances.3 This seems to recommend that investment fiduciaries probe the consultant’s qualifications, and ensure that the investment consultant discloses the basis for its recommendations (for example, fees, performance compared to peers and to benchmark for various periods, fund management, alternatives considered, etc.).
In addition to these cases, regulations issued in the last few years under ERISA §§ 404 and 408 underscore the DOL’s ongoing concern with investment-related fees and expenses. With that in mind, fiduciaries are taking the following steps:
- Consider indexed funds, and document the basis for selecting actively managed funds.
- Review covered service providers’ ERISA Section 408 compensation disclosures to ensure they are consistent with contracts and actual fees paid.
The fiduciaries’ process, considerations, and receipt of expert investment consultant advice in evaluating reasonableness of fees should be thoroughly documented.
Not intended as legal advice.
- See, e.g., Tussey v. ABB, Inc., 2012 WL 1113291 (W.D. Mo. 2012). The DOL also occasionally submits briefs at the Circuit Court level, generally supporting a finding of fiduciary breachSee, e.g., Tibble v. Edison Int’l, 729 F.3d 1110, 1138 (9th Cir. 2013).
- “Float” is the amount earned on uninvested assets, such as uncashed checks or contributions pending investment. The DOL has issued instruction on proper handling of float.
- Tibble, 729 F.3d at 1138 (citing Howard v. Shay, 100 F.3d 1484, 1489-90 (9th Cir.1996)).