Art by J. CiardielloIn the old days—before Carfax—you would go into a new car dealer and “negotiate” a price. The dealer had all the relevant information—you had very little. The situation was, as they say, asymmetric. Not anymore. Carfax has gone a long way towards eliminating the information advantage new car dealers once had.

I believe we are about to see a similar change in 401(k) investment services. Right now, sponsor fiduciaries negotiating fees are generally at an information disadvantage. The result: they don’t always get the lowest available price, and they sometimes wind up paying for things their participants don’t really need—like that guy in movie Fargo who gets manipulated into paying for the TruCoat. You betcha.

Part of the problem is the sponsor fiduciary has no direct stake in the transaction. When a sponsor fiduciary overpays for 401(k) services, it’s the participants who lose money. So it’s taking a while—and a deluge of lawsuits—for sponsors to get the message. Let me spell it out: when a lawyer can prove that a plan fiduciary paid more for the identical service that some other fiduciary—better informed or better at negotiating—paid less for, that first fiduciary gets sued.

The point is simple, even if—given the history and culture of investment sales—a little crazy: it’s time for sponsors to insist on transparent pricing of these services. And at some point, if enough sponsors lose enough lawsuits, fiduciaries will (finally) start insisting that a financial services provider’s first price be her best price.

Three areas where this sort of litigation-driven change in market practice is inevitable: retail vs. institutional share classes; passive investments; and recordkeeping services.

Here’s a semi-astonishing fact: plaintiffs in the complaint recently filed against Anthem 401(k) plan fiduciaries claim that the fiduciaries violated the Employee Retirement Income Security Act (ERISA) by including in the fund menu a fund (the Vanguard Institutional Index Fund (VINIX)) with an expense ratio of only 4 basis points. They claim that that fee is too high. Plaintiffs’ theory is that there was another, “identical lower-cost mutual fund” available, carrying a 2-basis-points expense ratio.

For a long time now, there has been a meta-trend in our industry of replacing higher-fee actively managed funds with lower-fee passive funds. The thought has been lower-fee equals safe-from-being-sued. That thinking is being proved hopelessly naïve.

To me, the recently-filed Anthem case is the most obvious development in 401(k) fee litigation. These cases have always been about proof: how do you prove that a fee is too high? With actively managed funds—no matter how expensive or how bad their performance—the proof hurdle is high. The fund manager can always say “my services are unique—you can’t get them anywhere else—and that’s why my fees are so high.”

With a passive fund—classically (as in the Anthem case) an S&P 500 fund—the manager can’t say that. The fund is intended to produce generic performance: to perform (as nearly as possible) in the identical way the S&P 500 does. That makes the A vs. B comparison super-easy for the plaintiffs’ litigator on the prowl: “I don’t care how low your fees were. You paid 2 basis points more than you had to for the identical performance.”

All of this is, of course, very easy when you are dealing with different share classes of the same investment fund (e.g., as in Tibble v. Edison, retail vs. institutional). But the Anthem plaintiffs go further, asserting that it’s a fiduciary breach not to use different investment structures—like collective trusts or separate accounts—if they carry lower fees than the lowest fee mutual funds.

Many are characterizing this as a “race to the bottom.” Uh, yeah. What did you expect? Index funds are generic products: they are commodities. The only difference is price. And if you (the plan fiduciary) don’t get the lowest price available for your plan, then your participants are getting screwed.

Getting the lowest fee for an investment service isn’t something anyone does easily or intuitively. Sellers—whether they are selling cars or investment services—generally prefer it that way. But participants and their lawyers are going to make you do this. So you better get with it.

A similar litigation strategy has worked with respect to recordkeeping services. In ABB v. Tussey, the plaintiffs succeeded with a claim that the ABB plan’s (revenue-sharing based) fees were too high and used as their comparator the fees paid by the 401(k) plan for Texas state employees. The Anthem plaintiffs (represented by the same law firm as the ABB plaintiffs) make a similar argument.

I know that many recordkeepers like to think their services are unique. But in the current environment, if your plan is paying more than it has to for recordkeeping, you had better be able to demonstrate that those higher fees translate into some tangible benefit to participants—like, say, better participant choices. And that whatever add-ons you’re paying for aren’t just another type of TruCoat—something participants wouldn’t want if that actually had to pay for it. Because they are paying for it, even if the way your pricing “bundle” works it isn’t always clear how or how much.

In this regard, revenue sharing that pays for recordkeeping based on assets-under-management is particularly vulnerable to attack—revenue sharing fees for recordkeeping featured in both the ABB decision and the Anthem complaint.

If you as a plan fiduciary don’t figure all this out, then plaintiffs’ lawyers will do the math for you.

Finally, let’s all get one thing clear: in all these cases, the person who gets sued (and shamed) is the plan fiduciary, not the mutual fund company. So you (the plan fiduciary) had better be asking yourself: am I getting the best deal? These mutual fund companies are sellers. And (under current rules at least), they typically aren’t ERISA fiduciaries. It’s not their job to give you a good deal: it’s their job (within legal and ethical bounds) to maximize their company’s profits.

Your job, as plan fiduciary, is to get the best price available on any purchase of services for your plan. Or have a really good explanation why you didn’t.

Michael Barry is president of the Plan Advisory Services Group, a consulting group that helps financial services corporations with the regulatory issues facing their plan sponsor clients. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.