United States: Investing Wisely: Employers Need To Monitor 401(k) Plan Fees

Last Updated: September 29 2015
Article by Summer Austin Davis

Costly lawsuits filed by employees against their employers come in several varieties, including lawsuits alleging liability because of an employer's handling of its employee benefit plans. Earlier this year, the U.S. Supreme Court unanimously held that employers have a continuing duty under the Employment Retirement Income Security Act (ERISA) to monitor and, if necessary, remove imprudent investments of a retirement plan. The stated goal of the lawsuits alleging ERISA violations based on companies' handling of their retirement plans is to improve 401(k) plans that will probably be the sole source of income for millions of retirees. Apparently, improvement in this area does not come cheaply.

In Spano, et al. v The Boeing Company, et al., The Boeing Company (Boeing) recently provisionally settled a nine-year-old class action lawsuit pending in the U.S. District Court for the Southern District of Illinois. In the lawsuit, current and former employees (plan participants) claimed that Boeing mishandled its $44 billion 401(k) plan, the second-largest plan in the United States. The ERISA class-action lawsuit asserted breach of fiduciary duty against Boeing, its Benefits Plan Committee, its Employee Benefits Investment Committee, and the individual employed as Boeing's Director of Benefits Delivery. The thrust of the plan participants' complaint was that Boeing breached its fiduciary duty to ensure that the fees for administrative, record keeping, investment management, and similar services are reasonable, not excessive, and incurred solely for the benefit of the plan participants. The class sought monetary and injunctive relief.

The structure of Boeing's 401(k) plan appears favorable at first blush: Boeing offered automatic enrollment and immediate access to its 75 percent match of employee contributions, for up to 8 percent of pay. In fact, less than a week before Boeing settled the massive ERISA class action, Bloomberg ranked Boeing second on its list of best 401(k) plans offered by the top 50 companies in the S&P 500. Despite the fact that Boeing provided generous contribution matching to its employees, the class action ERISA lawsuit alleged that Boeing failed to uphold its fiduciary duties to employees by making poor 401(k) investment decisions. The plaintiffs claimed that while administering the 401(k) plan, Boeing made decisions to benefit vendors instead of employees, permitted excessive 401(k) fees to accrue, and selected higher-priced mutual funds over lower-priced options. In the complaint, the plaintiffs described the administrative fees and expenses assessed against employee 401(k) account balances as "a consistent, albeit rarely discussed, force reducing 401(k) accounts' earnings."

Throughout the litigation, Boeing denied plaintiffs' claims and defended its 401(k) practices. Boeing asserted several arguments in their defense against plaintiffs' claims, including the fact that the 401(k) plan offered investment alternatives for plan participants who actively exercised control over their individual 401(k) accounts, that reductions in the 401(k) accounts' returns may have resulted from market fluctuations, and that Boeing did not receive any benefits nor engage in any prohibited transactions within the meaning of ERISA. Boeing admitted, however, that all plan expenses and fees were allocated among the plan participants' 401(k) accounts, that ERISA fiduciaries have statutory duties in connection with the selection of investment options for the plan, and that large institutional investors can obtain lower prices for investment services than a retail investor can.

Rather than test its luck at trial, Boeing reached a settlement with the plaintiffs on the day the bench trial was set to begin and less than two weeks after the court made the following statement:

This weekend, the Court intends to delve into the recent filings and begin reviewing the parties' pretrial submissions in preparation for trial. Next week, the Court will cancel all settings on its docket (with the exception of criminal matters which cannot be avoided) for August 26-28 and the weeks of August 31, September 14, September 21, and September 28. This case, filed nine years ago, is the oldest on the undersigned's docket. A vast amount of court resources, beyond what has already been expended, will be spent preparing for and conducting this bench trial. The court has strongly encouraged the parties to resolve the matter to bring an end to this litigation but understands that nine years of litigation has resulted in deep antagonism and hostile posturing that makes settlement discussions difficult. The parties should consider the extensive costs to their clients of trial preparation, trial, and the inevitable second trip to the Court of Appeals. If settlement is to occur, it must occur soon. To address the Court's concern that any settlement proposal occurring after trial begins may be inadequate or tainted by collusion, and to ensure the Court is meeting its obligations to class members, the Court is committed to hearing all the evidence in this trial once it begins .... Accordingly, the Court will not consider any proposed settlement once trial begins. If a proposed settlement occurs, the Court will consider it only in light of all the evidence presented. Once the trial begins, the parties are to keep any proposed settlement confidential and disclose it only upon inquiry by the Court.

The parties have not disclosed the terms of the provisional settlement, but one can surmise that Boeing agreed to pay a substantial amount of money to make the case, which was filed on behalf of 190,000 Boeing employees and retirees, go away. (In December 2014, Lockheed Martin Corporation paid a $62 million settlement to resolve a similar lawsuit the week its trial was set to begin, and Lockheed Martin's 401(k) plan is not as large as Boeing's.) During a telephonic status conference scheduled for September 24, 2015, the Southern District Court of Illinois will set deadlines for preliminary approval of the parties' proposed settlement.

While your company's plan might not be as large as Boeing's, if your company is the plan administrator of a retirement plan offered to employees, you owe a fiduciary duty and must demonstrate the utmost loyalty and fidelity to the employees who are plan participants. This means your company is obligated to make investment choices (including reigning in and controlling fees and expenses) that are beneficial to employees, not the financial or investment vendors or other service providers that peddle their investment wares. An employer's failure to fulfill its fiduciary obligations to its employees can result in protracted litigation, mammoth attorneys' fees, and a contentious legal battle with your employees—the very people on whom you depend to make your company succeed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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