ERISA Class Action Watch

CIGNA has moved to dismiss the suit against it for excessive 401(k) fees. It argues that Schlichter’s complaint demonstrates its complete compliance with ERISA Section 404(c), and that therefore there cannot have been a breach of fiduciary duty. It is fairly unlikely that this motion will succeed, but it does raise an argument that defendants in all the fee cases will surely make: If aggregate fees are disclosed to participants, why should it matter how the fees are divided up between investment advisors and service providers? It’s an obvious argument — probably a little obvious to be right.

The problem is that 401(k) plans fiduciaries have a duty to select prudent investment options. If a investment option entails excessive fees, it shouldn’t matter that those fees were fully disclosed to participants; e.g., it is doubtful that fiduciaries would be fully shielded by ERISA 404(c) if they selected a 200 bps S&P 500 index fund for a large 401(k) plan. Moreover, to bring some behavorial economics into this, participants have a tendancy to assume that they get what they pay for: A more expensive fund should have better (or at least more active) management. Aggregate fee tallies (such as expense ratios) don’t let participants see that some of their management fees are paying for plan administration, rather than investment management. Participants might choose differently if they knew exactly what they were paying for.

That raises another issue which will probably be raised as fee litigation continues: Does it matter if some 401(k) plan participants subsidize others by choosing investment options that pay lots of revenue sharing? As it stands, many 401(k) participants (e.g, those who invest only in index funds without revenue sharing) may pay nothing towards plan administration. Is it permissible to let these participants “free ride” on revenue sharing paid by other participants?