I recently wrote about the legal risks regarding plan fees that
should be considered by Canadian employers who sponsor group
registered retirement savings plans and defined contribution
pension plans (that article can be found
here). These risks have been emphasized by several
lawsuits filed against U.S. employers in the last few months.
The following is a brief update on litigation activity in the U.S.
which should give pause to Canadian employers who sponsor capital
accumulation plans for their employees.
This week, no fewer than seven high-profile
U.S. universities were sued regarding fees charged in their defined
contribution retirement plans. Plaintiffs are seeking
class-action status against these U.S. educational institutions
alleging, among other things, that their employers acted
imprudently by selecting high-cost funds for the plans when
lower-cost alternatives were available. These lawsuits are
part of a trend that has emerged in the last decade: claims against
large and small U.S. employers which allege that fees haven't
been adequately disclosed, service providers are being paid
unreasonable fees for the services they provide, and insufficient
diligence has been carried out to properly select reasonably-priced
funds and monitor whether fees remain competitive for years after
funds are selected.
Some commentators have referred to this trend as a gold rush for
lawyers. Several very large, respected U.S. companies have settled
claims for tens of millions of dollars, while at the same time
asserting that they have acted prudently in charging plan fees for
administration, record-keeping and investment services.
The spate of U.S. litigation should prompt Canadian employers to
mull over the following obvious questions: Do plan fees hold up
against a benchmark of fees charged by other plans? Could the
same services be provided at a lower price? Has the employer
conducted, and kept records of, regular reviews of fee
options? Was expert advice obtained in selecting funds and
negotiating with service providers and investment managers?
Consider this wording in a very recent claim against a small U.S.
"Defendants had a flawed process – or no process
at all – for soliciting competitive bids, evaluating
proposals with respect to services offered and reasonableness of
fees for those services, actively monitoring the reasonableness of
fees assessed to Plan participants, and choosing a service provider
on a periodic, competitive basis."
Could all Canadian employers defend such allegations –
especially those who have not paid attention to the fees charged in
their plans for a few years? They may mistakenly think that their
trusted service provider will inform them if fees could be
reduced. That may not be the legal obligation of a service
provider. And it may not be in the financial best interests
of service providers to do so.
The Ontario pension regulator has formally encouraged pension
plan administrators to shine a light on fees. It stated in a 2016
guideline that it expects employers who sponsor defined
contribution pension plans to give "due consideration" to
including wording in statements of investment policies and
procedures that sets out "expectations, ranges, or limits on
total plan expenses and fees; and guidelines for monitoring
expenses and fees". Good advice, especially in light of the
litigation on this topic in the U.S.
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