Art by JCiardielloIn reviewing recent lawsuits filed against 401(k) fiduciaries claiming that fees are too high—for recordkeeping and administrative services, investment management, brokerage window investments, investment advice and even the sweep in a company stock fund—I’m struck by how resourceful and relentless plaintiffs’ lawyers have been on this issue. The payouts (in the cases that have gone to trial at least) have not been tobacco-litigation sized, but they have been substantial.
Obviously, the law firms involved (in truth, mostly just one firm) see this as a promising area for continuing litigation. Speculating as to why, I would say that the plaintiffs’ lawyers see the structural alignment-of-interests problem endemic to defined contribution (DC) plans—typically, the sponsor is choosing which funds to offer and what recordkeeper to retain, but participants are paying the bill—has led, and still leads, some sponsors to under-do their duty to get the best deal for participants.
In this circumstance, you can see why the average employer-plan sponsor would simply turn to the attorney in the room and ask: “What do I have to do to not get sued?” Unfortunately, while the lawyer can tell you what you have to do—get the lowest fee/best deal for plan participants—she can’t tell you how to do it. For that, you need somebody who knows a lot about how the services the plan pays for are priced and how those prices can be reduced without compromising quality.
For which purpose I propose we create the position of DC plan Chief Fee Officer: an individual whose job it is to get the lowest fee for any given plan service, and whose compensation/bonus is determined by how effective he is at that job. Given how much litigation has become a driver of DC plan policy, and the cost—in judgments, settlements and damage to reputation—of that litigation, it seems to me that the appointment of someone whose interests are directly aligned with participants would go a long way to dealing with fee issues before they turn into lawsuits.NEXT: The role of a Chief Fee Officer