Converge, Volume 13: Fiduciary Fee Reasonableness

Lessons Learned from Litigation

March 08, 2017 | Retirement Plans

Shelby George

Senior Vice President, Advisor Services

Fee reasonableness is a fundamental and widely discussed fiduciary topic. Despite the importance of the topic, the Department of Labor (DOL) hasn’t given much insight or guidance as to what is considered a reasonable fee. As a result, much of the interpretation of what is and is not reasonable has come from the courts. As a fiduciary, it is important to turn to litigation for guidance, acknowledge how excessive fee allegations have evolved, and most importantly, to appropriately manage this risk in the future.

There is no shortage of legal activity surrounding fee reasonableness. Fiduciaries can draw a variety of lessons from the alleged breaches, complaints filed, settlements, and court decisions. Below is an overview of the most frequently litigated issues relating to fees, and the corresponding lessons that fiduciaries should learn.

Selecting a Capital Preservation Option

There are current alleged breaches by fiduciaries which involve Money Market and Stable Value funds. In the cases involving Insperity Inc. (Dec 2015), Anthem Inc. (Dec 2015), and Chevron Corp. (Jan 2016), fiduciaries are accused of imprudently retaining a Money Market option on the plan menu as opposed to a Stable Value option, which would have been in the participants’ best interest given today’s low rate environment. These cases may lead fiduciaries to believe that Stable Value is the better option, yet another case alleged the opposite.

In the case of Ellis et al v. Fidelity Management Trust Co. (Dec 2015), a discretionary Stable Value manager is accused of making imprudent investment decisions, which resulted in what Plaintiffs call a “risky and underperforming fund.”

The lesson learned from the aforementioned alleged breaches is that there are no “right” decisions, only “right” reasons. No single investment strategy or fund is the correct option for every plan. The best way for fiduciaries to manage their risk when selecting investments is to develop a process. That process should be designed to identify participants’ best interest and serve as the roadmap for selecting the manager(s) that further those interests. The process should be repeatable, documented, followed and revisited regularly to ensure the end result was guided by the participants’ best interest.

Acting in the Clients’ Best Interest

In the case of Troudt v. Oracle (Jan 2016), the complaint alleges that plan participants were forced to pay excessive recordkeeping fees and invest in inferior funds. The complaint further alleges that the reason the fiduciary selected the recordkeeper was not that it was in the best interest of participants, but because the recordkeeper was the employers’ sixth largest shareholder.

The lesson for fiduciaries again is the need to develop a thoughtful process. Just as with the selection of investment options, fiduciaries need a documented process for selecting service providers that begins and ends with the participant’s interests. Without that documentation, fiduciaries are exposed to greater risk of being accused of imprudent selection or even a prohibited transaction.

Assessing Expense Ratios

In the case of New York Life (Mainstay) (July 2016), Plaintiffs allege that the fiduciaries breached their duties by selecting a passive target date provider when there was a less expensive alternative for the same investment strategy. The complaint earned a lot of publicity, in part because it debunked the myth that passive investment options sheltered fiduciaries from litigation risk.

The lesson here is that no specific strategy, active or passive, can absolve fiduciary liability. However, fiduciaries can go a long way in mitigating their risk by documenting that the selected strategy is the best option for their participants, and that the fiduciaries selected the least expensive vehicle and share class available for the selected strategy.

Outsourcing Fiduciary Responsibilities

Plaintiffs in Bernaola v. Checksmart Financial LLC (July 2016) allege that the employer, the plan committee, and the plan investment advisor all breached fiduciary duties by imprudently selecting expensive and unsuitable investment options. This suit is notable for two reasons: First, this is one of the first allegations against a small employer. Second, the suit was brought against the plan investment advisor as a co-fiduciary even though it was not clear from client agreements that the advisor intended to take fiduciary responsibility. Plaintiffs allege that because the investment advisor was a functional co-fiduciary and knowingly participated but did not take action to remedy the situation, the advisor is equally liable.

The lesson fiduciaries should take from this claim is the importance of distinguishing between the plan service providers, fiduciaries, and co-fiduciaries. Each role has different responsibilities and levels of liability. Fiduciary status is determined by what one does as well as what one says. It is not just enough for a fiduciary or a co-fiduciary to be aware of all decisions made, but to ensure the decisions that are being carried out are continually in the best interest of the participant.

Monitoring Selections

In a unanimous ruling Tibble v. Edison International (May 2015), the United States Supreme Court found that fiduciaries have the ongoing duty to monitor. This case stresses the importance for fiduciaries to revisit the process as participant needs, markets, and pricing change so the decision is still in the best interest of participants. The decision teaches fiduciaries that fiduciary responsibilities do not end after selection. If a decision or selection is no longer in the best interest of participants, then it needs to be updated to be so.

The variety in the alleged breaches go beyond documentation and shed light on how fiduciaries can mitigate risk with a documented process. Fee reasonableness assessments should consider decision-makers’ fiduciary status, pricing, value, and ongoing monitoring.

Recent Webinar

For more information on this topic, watch a replay of our webinar, Fiduciary Fee Reasonableness: Breaking Down Litigation Teachings.

Watch Now »

The information in this paper is not intended as legal or tax advice.

Print PDF

Related Articles

August 09, 2017

Webinar: How to Transform Your Practice Using LinkedIn

LinkedIn can help financial advisors build relationships and reinforce their status as a trusted resource. Our recent webinar provided tips for advisors looking to harness the power of social selling.

August 08, 2017

August 2017 Perspective

After surging to overly optimistic levels following the U.S. presidential election, business and consumer confidence now appear to be normalizing after generating no major shift to the economic trajectory of the U.S.

July 27, 2017

Webinar: New Era Menu Design

Behavioral insights have helped 401(k) fiduciaries design plans and select investment defaults that best meet the needs of the majority of participants. With new fiduciary scrutiny, an increase in litigation, and a potential shift in participant behaviors, we are entering a new era of menu design that addresses the needs of all participants.

July 20, 2017

Second Quarter 2017 International Perspective

Rising corporate profits, a generally improved global economic backdrop, and continued support from central banks sent equities higher across the globe during the second quarter. International equity markets delivered another strong quarter of returns during the April through June period, and have generated approximately 14% year-to-date.