The 401(k) lawsuits against large companies comes to Indiana.
According to Groom Law Group, since 2007, there have been nearly 40 lawsuits about fees and expenses paid by employees in 401(k) plans. Law firm Schlichter, Bogard & Denton, LLP has been the lead plaintiffs’ counsel for many of these suits. On December 29, 2015, Anthem is now in the company of United Technologies, Unisys, Honda, Deere & Co., Lockheed Martin, International Paper, Boeing, General Dynamics, Kraft, Walmart and others that have faced similar lawsuits. Several of these lawsuits have led to settlements or adjudication amounts in the tens of millions of dollars.
About Anthem’s Plan
According to the complaint, Anthem’s 401(k) plan has approximately $5 billion, placing it in the top 0.08% of 401(k) plans, and covers over 59,000 participants. The Anthem plan, as of December 31, 2014 allowed participants to make investment choices from a menu of eleven Vanguard mutual funds, Vanguard Collective Trust target date funds, 2 non-Vanguard mutual funds and Anthem common stock. From information in the complaint, we calculated the weighted average investment expense of the investments in the plan, (other than common stock, to be approximately 0.25%. The alternative funds, that the plaintiff counsel identifies that should have been used, would have a weighted average expense of 0.15%. In dollar terms this would result in an annual savings of about $4,600,000 to participants. Of the funds identified five were index funds and eight were actively managed funds (target date funds count as one fund for these purposes).
The complaint suggests that, over the years, Anthem changed some of the funds to lower cost versions, but did not do so as soon as it could have.
What is the Anthem Lawsuit about?
The Anthem lawsuit includes five specific counts for which the plaintiffs seeking relief:
Unreasonable investment management fees: Retirement plan sponsors have a fiduciary duty to defray unreasonable expenses on behalf of participants. If lower cost versions of the same funds in the plan were utilized, it would have resulted in lower costs for participants. The complaint suggests that plans larger than $500 Million in assets have access to separately managed accounts (where fees can be lower) and plans larger than $100 Million in assets have the ability to utilize collective trusts (where fees can be lower than comparable mutual funds).
Unreasonable administrative fees paid to Vanguard, The complaint suggests that Vanguard was paid between $80 and $94 per participant for record keeping duties from 2010- 2013. These fees were from a hard dollar fee plus revenue sharing from the mutual funds which were based upon a percentage of assets. Since the plan grew by about 54% in assets from 2010 to 2014, Vanguard’s fee increased due to the increase in assets, not because it was doing more work. In 2013, the Vanguard fee was changed to $42 per participant. The complaint suggests that, because a competitive bidding process was not used to assess the reasonableness of Vanguard’s fees, the fiduciaries for the plan did not use a prudent process to oversee the fees paid by participants which therefore led to higher fees,
Failure to use a stable value fund instead of a money market fund: If the plan had used a stable value fund instead of a money market fund, participants would have gained $65 Million more in investment earnings. According to the complaint, there was no evidence that the fiduciaries considered offering a stable value fund in place of a money market fund.
Failure to monitor fiduciaries: The complaint suggests that the Board of Directors were the ultimate fiduciary and they had an obligation to select and monitor the plan fiduciaries; and.
Refusal to supply requested information: According to the complaint, a participant requested several documents from Anthem that Anthem failed to supply. There are provisions under the law that requires plan sponsors to provide certain information to a participant upon request by the participant.
The litigation process will ultimately determine if Anthem is to be held liable for any restitution to participants. Of the 40 fee and expense lawsuits filed since 2007, a few have actually been adjudicated through the courts, some have been dismissed and several have been settled out of court. For the lawsuits that have been settled or adjudicated, the amounts have been in the tens of millions, not to mention the legal fees that are incurred. Time will tell where Anthem will settle.
What should companies do?
Below are items that we believe are prudent processes that plan sponsors should follow:
There should be a clear governance structure that delineates who appoints retirement plan committee members and also a process to monitor the plan’s fiduciary committee.
Fiduciaries should look, at least annually, for lower cost investment options for the plan. The same investment option may have several ways it can charge fees which come with different requirements that can change over time. This makes the process of conducting a regular review so very important.
A regular review of the investment options and categories offered to participants should be conducted.
A review of service providers on a regular basis helps keep costs and services in line with industry changes.
Service provider fees should be benchmarked on a regular basis.
Requests for Proposals should be conducted at least every five years to make sure that fees and services are in line with industry standards.
Service providers should be skilled and have adequate experience in providing the needed services.
Service providers would include (but are not limited to) Recordkeepers, advisors, trustees, custodians, and plan auditors.
A 401(k) plan is a great vehicle to help employees prepare for retirement and, for most employees, it is one of the only vehicles available to them (other than social security). In my opinion, the 401(k) is one of the most successful wealth accumulation vehicles created in history. Americans have accumulated trillions of dollars toward retirement simply by taking money from their paychecks on a regular basis and putting it away for their retirement years.