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.

Upcoming Webinar

For more information on this topic, please join our webinar, Fiduciary Fee Reasonableness: Breaking Down Litigation Teachings on March 24th at 12pm ET.

Register Now »

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

Print PDF

Related Articles

March 23, 2017

Webinar: Economic Expectations vs. Economic Reality

In recent months, there has been a marked improvement in economic expectation surveys of both consumers and businesses. How do we put these surging expectations into proper context considering where the United States is in the economic cycle? Managing Director of Quantitative Strategies, Christopher Petrosino, and Portfolio Strategist, Colby Feane, discuss moving forward.

March 08, 2017

Converge, Volume 13: Breaking Down CITs

CITs are not broadly understood, but the DOL’s Fiduciary Rule has put them in the spotlight. Our new post addresses common misconceptions and answers some frequently asked questions.

March 07, 2017

March 2017 Perspective

Two of the first pieces of national economic news released each month are the Institute for Supply Management (ISM) Reports on Business. The first report covers the manufacturing sector, which is followed by a release covering non-manufacturing activity. These surveys can have a meaningful influence on investor and business confidence...

March 02, 2017

Stocks Surge and Uncertainty Looms Following President Trump’s Address

In his first major speech since inauguration, President Donald Trump addressed his laundry list of outstanding campaign promises with a more conciliatory tone. Many political commentators approved of his more measured approach, but specifics remain absent...