07/08/2016
Excessive-fee Suits Target Smaller 401(k) Plans: A Harbinger for Small Business Owners?

Excessive-fee Suits Target Smaller 401(k) Plans: A Harbinger for Small Business Owners?

Despite the fact that a highly publicized class-action lawsuit that targeted excessive 401(k) fees in a $9 million plan was voluntarily dismissed, a “new frontier” for small business owners may still be in the cards.

The suit, Damberg et al v. LaMettry’s Collision Inc. et al, alleged that the business owners breached their duties under the Employee Retirement Income Security Act of 1974 (ERISA) by allowing excessive fees to be charged for investments, record keeping and administration.

Defendants, including the president and chief financial officer of Minnesota-based LaMettry’s, didn’t engage in a prudent process to evaluate service providers and assess reasonableness of fees, the complaint said. That ultimately resulted in plan participants overpaying hundreds of thousands of dollars, according to the suit, filed May 18 in the U.S. District Court for the District of Minnesota.

What is Changing

Whereas excessive-fee suits have traditionally targeted large 401(k) plans with billions of dollars, the LaMettry’s 401(k) plan is significantly smaller — it had $9.2 million in assets and 114 active participants as of 2014.

The fact that the suit was dropped is irrelevant. What matters is that a small 401(k) plan was sued by plan participants, and small- and mid-sized closely held companies with 401(k) plans – which is where the bulk of retirement assets reside – are now coming into the crosshairs of class action lawyers.

Plan sponsors, as fiduciaries, must keep a wary eye on investment fund fees so as to better serve participants and to lessen their risk of facing class-action lawsuits.

Key Points

The primary argument in Damberg v. LaMettry’s Collission Inc. was that LaMettry’s 401(k) plan used higher-priced retail class shares when lower-priced institutional class shares were available, exposing plan participants to excessive fees.

The Takeaway

According to Catherine Gonzalez, counsel at law firm Nixon Peabody in Chicago, “There are lessons to be learned from the unprecedented number of ERISA fiduciary breach class actions being filed.” Among these are:

  1. Have a formal, written process in place to make prudent decisions about plan investments and the retention of service providers. This process should be documented in the plan’s Investment Policy.

  2. Continuously monitor and assess the ongoing performance of the investments and the reasonableness of plan administrative and fund expenses and document the same in writing on a regular basis.

  3. Make any changes needed promptly and communicate them to participants.


Fiduciary Assessments from OptiFour Integrated Wealth Management

If you are concerned about managing your fiduciary liability in your firm’s 401(k) plan and meeting your fiduciary responsibilities, contact OptiFour Integrated Wealth Management for a Fiduciary Assessment.

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