Compliance September 3, 2024

Salesforce Settles a Pair of 401(k) Excessive Fee Suits

The $1.3 million settlement pertains to litigation from 2020 and 2024 against the $5 billion retirement plan.

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Salesforce Inc. has settled for $1.35 million a pair of outstanding 401(k) lawsuits alleging excessive retirement plan fees. The settlement requires court approval.

The agreement brings to a close about four years of litigation across two separate lawsuits, according to a motion filed August 23 in U.S. District Court for the Northern District of California to Senior District Judge Maxine M. Chesney.

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Plaintiffs had alleged in separate suits, both filed in 2020, that Salesforce’s retirement plan committee and executives overseeing the $5 billion 401(k) plan had violated their fiduciary duty by allowing relatively high fees for certain investments and retaining some poor-performing investments. Miguel et al. v. Salesforce.com Inc. et al., filed in March 2020, and Simonelli et al. v. Salesforce.com Inc. et al. (initially filed as Villareal et al. v Salesforce.com, Inc et al.), filed in February 2024, were consolidated into one suit, as they alleged similar charges.

The class action settlement will go to more than 50,000 participants and their beneficiaries, and represents 13.5% of plaintiff’s “maximum recoverable losses as calculated by plaintiffs,” according to the filing.

“The Parties agreed to the Settlement after four years of litigation and arm’s-length negotiations by experienced counsel,” attorneys wrote in the motion. “Resolving the action at this juncture allows the parties to avoid continued and costly litigation.”

The plaintiffs in both cases are represented by attorneys with the law firm Capozzi Adler PC. Salesforce is represented in both cases by attorneys with the law firm Steptoe LLP.

Chesney still needs to approve the settlement.

Plaintiffs in the consolidated lawsuits had alleged that plan managers violated the Employee Retirement Income Security Act in part by failing to select lower-cost investments, did not consider cheaper options such as collective investment trusts, and charged relatively high recordkeeping fees for the size of the plan, among other allegations.

Salesforce had countered that it met its obligations under ERISA by following prudent processes for plan decisions and administration.

Miguel was initially dismissed, but the 9th Circuit Court of Appeals revived it in 2022, arguing that the plaintiffs had grounds for the lawsuit. After further litigation in U.S. District Court for the Northern District of California, it had been scheduled to go to trial this May, but the sides announced a settlement agreement was being worked out before it reached trial.

The Salesforce 401(k) Plan held $5.696 billion in retirement assets for 50,288 retirement plan participants, as of the latest Form 5500 filing.

Administration September 3, 2024

Smaller Plans, Larger Costs

While 401(k) plan fees are a bigger ask for small plans, the savings benefits to participants still tend to be worth the price.

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Art by Pete Ryan

While fee compression has broadly pushed down the costs of retirement benefits, basic math still puts smaller plans at a disadvantage. Larger plans benefit from economies of scale, even if they have higher total costs, while fixed costs mean smaller plans pay more per participant.

Total bundled costs, including investment and recordkeeping and administration fees, average 4.16% for plans with 10 participants and $100,000 in assets, compared with 1.62% for plans with 500 participants and $5 million in assets, according to the 2024 edition of the “401(k) Averages Book.”

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“If you have a small plan with 10 or 20 employees, you still have to do the testing and all that,” says Mark Alley, national market president for Alerus. “It doesn’t take much more to test a large plan than a small plan.”

In addition, providers may be more willing to lower variable costs for larger plans, or for plans with fewer participants and higher balances, since they see a greater potential to cross-sell and realize other revenue opportunities.

There are, of course, other options for small businesses, such as a SIMPLE 401(k) and a SEP individual retirement account. At some providers, there is no cost to set up those plans for the employer. But for smaller businesses that may not have an adviser, parsing the fee nuances can be a challenge.

“We see a general confusion and folks are overwhelmed because there are a number of different options available,” says Roger Morrissette, vice president of small business retirement products at Fidelity.

To help, Fidelity has created a “Plan Selector” tool that employers can use to understand how their plan options differ from each other.

SECURE Impact

For plan sponsors looking at a 401(k), experts say that 2019’s Setting Every Community Up for Retirement Enhancement Act and the SECURE 2.0 Act of 2022 have helped reduce the cost burden via both tax credits for new plans and support for pooled employer plans, which allow even smaller employers to take advantage of economies of scale, while also outsourcing some of the fiduciary risk and time required to run a plan.

For the first three years of a new plan, employers with fewer than 100 employees can get a tax credit of up to $5,000 per year, with an additional $500 for setting up automatic enrollment and a $1,000-per-employee credit for matching contributions made to non-highly-compensated employees.

“Some of the more successful PEPs are leveraging that tax credit to allow small employers to maybe start up a plan with no cost at all,” says Ted Schmelzle, assistant vice president of retirement plan services at The Standard.

From the plan participant perspective, higher fees for small plans take a larger bite out of savings, but experts say these fees remain small relative to the post-tax savings and potential future benefits of investing in the plan.

“You’re talking about investment growth of multiple, full percentage points and fees that are basis points,” says Sean Jordan, head of small- and mid-market segments at Principal Financial Group. “They’re different scales.”

Benefits Over Time

For participants, any employer match can further offset costs, and there are other benefits to encourage participants to save in a workplace plan, despite fees.

“There are things that participants can get from a plan, such as the possibility to take a loan or make a hardship withdrawal: That might not be available in an if that’s the alternative,” says Joe Valletta, the principal owner of HR Investment Consultants and co-author of the “401k Averages Book.”

Another factor in favor of plan participation despite higher fees is that, as both the plan and participant assets grow over time, the cost of the plan should start to decline, especially in a PEP that is quickly expanding. So even if tax benefits do not pan out in the first year, those savings compound over time.

“Generally, as a plan gets bigger, the cost per participant will get lower,” says Schmelzle. “The benefits to all of us, as individuals, of saving and starting early far outweigh the risk of not doing so, even if you compared it to a similarly situated non-tax-qualified vehicle like a brokerage account, where trying to invest those dollars are generally more expensive.”

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