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3 Lessons For Advisers From 401(K) And 403(B) Class Action Settlements

Retirement plan committees and financial advisers need to pay attention to class-action litigation and settlements to better manage their fiduciary risks. Some of the claims in those lawsuits are obvious; others foreshadow emerging issues that warrant attention and, at the least, an analysis of plan practices.

Committees often rely on their advisers to keep them informed of new developments related to 401(k) and 403(b) plans, including advice about risk management. To help advisers fulfill those expectations, this article discusses the recent settlements in the Anthem 401(k) and Vanderbilt 403(b) cases. Law firm Schlichter Bogard & Denton represented the plaintiffs/participants in both cases. And both cases involved significant monetary settlements — $23.7 million and $14.5 million, respectively.

However, the real lessons are in the nonmonetary terms of the settlement agreements. Following are some of those terms and my thoughts about the lessons plan committees should learn.

Both settlement agreements say the retirement plan committees must conduct a request for proposals for record-keeping services and the
responding record keepers must quote their fees on a per-participant basis.

Comment: The Schlichter lawyers believe that it is inappropriate to charge record-keeping fees as a percent of assets. In their view, the cost of record keeping is primarily driven by the number of participants and therefore costs should be calculated on that basis. However, that does not mean that recordkeeping costs need to be passed through to participants on a per capita basis. It is left to the plan committees to decide how those costs will be charged to participant accounts.

In both cases, the committees must engage independent and experienced investment consultants, who will review the plans’ investments and make recommendations about retaining or replacing the investments. And, in both cases, the investment consultants and committees must consider the lowest cost available share class of mutual funds.

In the Anthem case, the investment consultant and committee must also consider “the availability of revenue sharing rebates on any share class available to the Plan … for any mutual fund considered for inclusion in the Plan; and … the availability of collective trusts and/or separately managed accounts.”

Comment: The emphasis on lowest-cost share classes should not be a surprise. However, it may be a surprise that the Anthem plan consisted primarily of Vanguard index funds; the disagreement was over the share classes of those funds, in some cases with cost differences of as little as 3 basis points. While not entirely clear, the consideration of “revenue sharing rebates” suggests that Schlichter accepts the concept of “lowest net cost share classes,” that is, a higher cost share class could be selected if revenue sharing from the funds is rebated to the accounts of participants who held those shares and that produces a lower net cost.

However, this part of the settlement agreement went beyond mutual funds; the consultant and committee are required to consider similarly managed collective trusts and separately managed accounts, if available to the plan. This is an indication of claims in future litigation. Advisers should include these options in their analysis.

The Vanderbilt settlement contained a unique provision; it required the committee to prohibit the recordkeeper “from using information about Plan participants acquired in the course of providing record-keeping services to the Plan to market or sell products unrelated to the Plan to Plan participants” unless a participant requested that information.

Comment: This may be an emerging issue for plan fiduciaries. While another trial court has held that participant data is not a plan asset, this settlement suggests that the Schlichter attorneys see it differently. In my view, it is almost certain that there will be future litigation on this issue. Advisers should inform committee members of that potential, and committees should consult with their legal counsel about the risk and the steps that can be taken to minimize that risk.

At this point, there is no easy answer. But one obvious step would be for committees to ask representatives of the record keepers to attend meetings and explain how participant data are collected, protected and used. Then the committee, in consultation with its attorneys, can make a decision about the best course of action.

Lessons learned: These three settlement issues — per-participant record-keeping pricing, collective trusts and separately managed accounts, and use of participant data — should be on committee agendas this year. Advisers should make sure of that.

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About this Author

Fred Reish, Drinker Biddle Law Firm, Los Angeles, Labor and Employment Law Attorney
Partner

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

Fred works with both private and public sector entities and their plans and fiduciaries and represents plans, employers and fiduciaries before federal agencies such as the DOL and IRS. He consults with banks, trust companies, insurance companies and mutual fund management companies on 401(k) recordkeeping services, investment products and...

(310) 203-4047