From the June 2009 issue of Treasury & Risk magazine

401(k) Fees Showdown

Companies that sponsor 401(k) plans prevailed this year in a couple of lawsuits filed by participants unhappy about plan fees. In the most important decision, the 7th Circuit Court of Appeals upheld a lower court's dismissal of a class action lawsuit against Deere & Co. The case, Hecker v. Deere, is one of a number of suits filed against big companies by a St. Louis law firm, Schlichter Bogard & Denton, arguing plan sponsors breached their fiduciary duties by offering overly expensive investment choices or failing to disclose revenue-sharing arrangements.

In Hecker, the courts said Erisa does not require plans to disclose revenue sharing and rejected the argument that the investments were too expensive, noting participants could access more than 2,500 mutual funds through the plan's brokerage window.

"The Deere case is very important because it's an appellate-level decision," says Andrew Oringer, head of the New York Erisa and executive compensation practice at Ropes & Gray.

While the decision lessens the chances for a wave of similar lawsuits, plan sponsors can't sit back and put their feet up. "What the court basically said in Hecker is that there is nothing that mandates disclosure of revenue-sharing," says Sherwin Kaplan, counsel with law firm Thelen LLP. "That is going to change within a couple of months, either through congressional action or Department of Labor regulation."

The Labor Department is already working on fee disclosure regulations, Kaplan says. Once Labor's political appointees--including Phyllis Borzi, nominated to head the Employee Benefits Security Administration--have been confirmed, "This is one of the first things they'll look at," he says.

Steve Saxon, head of the fiduciary practice at Groom Law Group, says court rulings in 401(k) fee cases could influence events on Capitol Hill, where George Miller (D-Calif.), chairman of the House Education and Labor Committee, has proposed fee disclosure legislation.

"If Miller sees that the federal courts are not going to act, he's going to get his colleagues in Congress to enact legislation," he says. "While the decision in Hecker v. Deere is favorable from the perspective of plan sponsors and service providers, that will not be the end of the story."

Kaplan says mandates for fuller fee disclosure, whether from Labor or Congress, mean sponsors must understand plan costs and revenue sharing. "Even in many of the large corporations, if you talk to the 401(k) fiduciaries, they often have no idea what the true costs of the plan they're administering are," he says. "Once disclosure goes through, they'll have the raw data and they'll have to do something about it."


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