Ruling on 401(k) Fees a Relief to Plan Sponsors

By Staff Report

Mar. 27, 2007

As Congress, regulators and the plaintiffs bar increase their scrutiny of 401(k) fees, plan sponsors received a bit of good news late last month when a judge threw out part of a class-action lawsuit against Chicago-based Exelon.

The suit was one of a dozen similar class-action lawsuits filed by St. Louis-based law firm Schlichter, Bogard & Denton, alleging that companies violated pension laws by allowing 401(k) participants to be overcharged by the managers of the plans.

Other companies named in the suits include Lockheed Martin, Northrop Grum­man, Boeing, General Dynamics, United Technologies, Bechtel Group, Caterpillar and International Paper.

In several of these suits, including the complaint against Exelon, plaintiffs claim that since the companies violated their fiduciary duties under the Employee Retirement Income Security Act, the employers should be liable for all investment losses that 401(k) participants realized.

But on February 21, U.S. District Judge John Darrah in Chicago dismissed that part of the complaint, questioning the causal relationship between excessive fees and investment losses.

The judge’s dismissal came much to the relief of 401(k) plan sponsors, says Michael Crowley, associate general counsel at the National Futures Association, a Chicago-based organization for the futures industry with 249 employees and a $51 million 401(k) plan.

“If this had gone the other way, it would have been really bad for small plans with expenses much greater than ours because it would have meant employers were now insurers for their participants,” Crowley says.

The judge’s dismissal comes at a time when 401(k) fees are top of mind on Capitol Hill.

On March 6 the House Committee on Education and Labor held its first hearing on the topic, and the Department of Labor has said that it will issue guidance next year to address fee disclosure. The issue, experts say, is that often employers don’t know what they are paying service providers to oversee their 401(k) plans.

But to say that high fees result in investment losses is taking the argument a little too far, says Don Stone, president of Plan Sponsor Advisors, a Chicago-based 401(k) consultant.

“If the fees are high, then the fees are high, but that has nothing to do with investment losses,” he says, noting that employers can’t be held accountable for how the stock market performs.

While the judge’s dismissal was good news for 401(k) plan sponsors, the issue isn’t dead yet, says David Wolfe, a partner in the benefits practice of Drinker Biddle & Reath.

Schlichter Bogard, the plaintiffs’ firm, can still revamp the complaint to better prove a causal relationship between fees and losses, he says. “Higher fees clearly reduce the rate of return on an investment, but the issue becomes whether that reduced rate of return is enough to show an actual loss,” he says.

Jerome Schlichter, a partner at Schlichter Bogard, did not return calls seeking comment.

—Jessica Marquez


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