Lawsuits push 401(k) plan sponsors to cut fees

About 83% of plan sponsors reviewed their fees, and of those, 40% reduced overall fees, according to a new study

By Greg Iacurci

Jan 19, 2018 @ 12:07 pm EST

Employers are moving to reduce their 401(k) plan costs in greater numbers, largely in an attempt to avoid the fate of peers who've been sued for allegedly excessive fees in their defined-contribution plans, new research suggests.

"[Fee pressure] is really relentless," said Lori Lucas, defined contribution practice leader at Callan, a consulting firm. "[Plan sponsors] are so laser-focused on it because of all the lawsuits."

Roughly 83% of employers assessed their DC plan fees last year and, of those, more than 40% reduced their overall fees, according to a new study published by Callan that examines retirement plan trends. That's up nearly 10 percentage points over 2016.

Litigation attacking retirement plan fees burst on the scene in 2006, when attorney Jerry Schlichter sued several large corporations, such as Lockheed Martin Corp. and General Dynamics.

The prevalence of such lawsuits began increasing in 2015, as plaintiffs were able to win multimillion-dollar settlements and a few court cases, including a favorable judgment at the Supreme Court level in Tibble v. Edison.

Further, the Department of Labor issued its fiduciary rule in April 2016, and parts of the rule have since gone into effect, bringing the notion of fiduciary duty more into the public eye. Plan sponsors, in turn, have grown more aware of their fiduciary duties, which include ensuring participants pay reasonable costs.

Adviser fees have undergone a dramatic compression over the past few years, as have record-keeping fees. NEPC, a consulting firm, found that fees for record-keeping services have been cut by roughly a third since 2012.

Plan sponsors are also changing how they pay their administrative fees, turning more toward transparent forms of payment, such as per-participant dollar fees (a $50 annual fee, for example), instead of revenue sharing from participants' investments.

In its study, which primarily examines large plans with more than $100 million in assets, Callan found only 27% of plans used revenue sharing last year to pay all or a portion of plan administration, compared with 38% the prior year.

Conversely, 55% used per-participant dollar fees, which was up from 42%.

"That's a pretty major trend," Ms. Lucas said.

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