While most employer-sponsored 401(k) and 403(b) retirement savings plans are well managed, some fall through the cracks. When that happens, participants have the right to bring lawsuits on behalf of the plan for violating the Employee Retirement Income Security Act of 1974 (“ERISA”). ERISA “imposes a ‘prudent person’ standard by which to measure fiduciaries’ investment decisions and disposition of assets.” Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2467 (2014).
Participants in the Marathon Petroleum Company Thrift Plan (“Plan”) recently filed an ERISA class action alleging that Marathon Petroleum Company, its Board of Directors, and its Investment Committee breached their fiduciary duties by failing to adequately monitor and control the Plan’s recordkeeping expenses. These excessive fees wasted their retirement savings. A copy of the Class Action Complaint can be found here.
What does the Complaint allege?
The Complaint alleges that as of year-end 2020, the Plan had net assets of more than $6 billion. This gave the Plan had substantial bargaining power regarding the fees and expenses that were charged against participants’ investments. The Plan’s fiduciaries failed to use this bargaining power to the Plan’s advantage. Instead, Plan participants were saddled with above-market recordkeeping and administrative fees. The per-participant recordkeeping fees for the Plan averaged $65.37 during the Class Period. Plaintiffs allege that comparable 401(k) plans paid no more than $20 to $35 per participant during this time period.
In addition, the Plan’s fiduciaries failed to prudently select and monitor each of the Plan’s investment offerings. As a result, the Plan retained at least one underperforming fund — the DFA Emerging Markets Value I Fund — from 2015 to 2020. The Plaintiffs allege that this mutual fund underperformed its benchmark index over the critical 3-, 5-, and 10-year periods as of September 30, 2021. A prudent fiduciary should have been aware of better-performing lower-cost alternatives and replaced the DFA Emerging Markets Value I Fund with a lower-cost, better-performing alternative.
Excessive fees have long been a problem for 401(k) plans
There’s no question that ERISA plans are complicated to manage. Financial advisors, recordkeepers, third-party administrators, and custodians all want a piece of the financial pie for their services. It is only fair, after all, that they are compensated reasonably for their efforts – but not to excess.
Plan fiduciaries have an obligation to monitor and control recordkeeping fees in order to ensure that such fees remain reasonable. Recordkeeping expenses can either be paid directly from plan assets or indirectly by the plan’s investments through revenue sharing (or a combination of both). Revenue sharing payments are made by investments within the plan, typically mutual funds, to the plan’s recordkeeper.
The problem with revenue sharing arrangements is that without “tight control, the growth of your plan’s assets over time may lead to higher than reasonable amounts getting paid to service providers. This is because most revenue sharing is asset-based. If a recordkeeper’s workload is about the same this year as last, why should they get more compensation just because the market had a big year and inflated the asset base? In a large plan, this phenomenon can lead to six figure comp bloat over time. That’s bad for plan participants…” Jim Phillips, (b)est Practices: What Do You Know About Revenue Sharing? PLANSPONSOR.com (June 14, 2014).
How do I find out if my 401(k) plan is wasting my retirement savings?
The recent lawsuits over excessive fees, including the Marathon Petroleum Company case, indicate that many companies are still missing the mark. If you believe that your retirement savings are being mismanaged by your employer’s failure to keep watch over your ERISA plan, it may be time to explore your legal options. Contact Edelson Lechtzin LLP for a free consultation.