New 401(k) suit targets Vanguard fund fees

Advisers should consider whether collective trust funds and separate accounts offer lower expenses than their mutual fund counterparts

Jan 5, 2016 @ 4:53 pm

By Greg Iacurci

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Even Vanguard Group fund fees may be excessive when it comes to 401(k) plans.

A new class-action lawsuit is pitting participants in the Anthem Inc. 401(k) plan, a massive plan with more than $5 billion, against plan fiduciaries for an alleged fiduciary breach due to excessive investment management and administrative fees.

Anthem's fund lineup is predominantly made up of funds offered by Vanguard, widely recognized as a low-cost fund provider. Vanguard is also the plan's record keeper.

“Even so-called low cost might be too high cost,” said Marcia Wagner, principal of The Wagner Law Group.

The suit, Bell et al. v. Anthem Inc. et al., was filed Dec. 29 in the U.S. District Court for the Southern District of Indiana, Indianapolis division. Schlichter Bogard & Denton, a firm at the epicenter of several 401(k) fee suits over the past several years, is representing plaintiffs.

(You can read the full suit by clicking here)

Plaintiffs allege Anthem fiduciaries breached their duties under the Employee Retirement Income Security Act of 1974 by selecting “high-priced share classes of mutual funds rather than identical lower-cost share classes of those same mutual funds which were readily available to the plan,” according to the complaint.

As of December 2014, the Anthem 401(k) plan offered 11 Vanguard mutual funds (both Admiral and Institutional share classes), a suite of Vanguard target-date collective investment trust funds, an Anthem common stock fund, and two other funds offered by Artisan Partners and Touchstone Investments, respectively.


Each mutual fund in the plan charged fees “far in excess” of rates Anthem could have obtained elsewhere from comparable funds, the suit alleges.

“When you have a jumbo plan, you can command a lower cost rate than if you don't,” said Jerry Schlichter, managing partner at Schlichter Bogard & Denton. “These fund options have hundreds of millions of [plan] dollars in them, which makes them readily available for lower fees.”

Plaintiffs also allege excessive fees paid to Vanguard for record-keeping services. Over the period 2010-13, the plan paid approximately $80-$94 per participant for record keeping, both through hard-dollar and revenue-sharing fees; in September 2013, the expense was lowered to a flat annual $42 fee per participant. However, the “outside limit” of a reasonable fee for the plan would have been $30, according to the complaint.

A spokesperson from Anthem did not return a request for comment.


Overblown fund and administrative fees has been a familiar theme in 401(k) suits of late. Mr. Schlichter's firm filed a similar suit a few weeks ago against Insperity, Inc. and Reliance Trust Co., and has reached multimillion-dollar settlements in other such suits over the past several years. Mr. Schlichter got the largest such settlement, for $62 million, last year in a case against Lockheed Martin Corp.

Aside from fees, the Anthem suit alleges that the plan offered a money market fund yielding “microscopic” returns, as opposed to providing participants with a stable value fund.

401(k) suits such as this one are raising the fiduciary bar, and advisers must be especially prudent in their examinations of plan investments and other services, Ms. Wagner said. The Anthem suit is the first in which she's seen a Vanguard fund referred to as too expensive, she added.

“Don't take anything for granted. View things new and fresh with respect to evolving fiduciary standards, and have an open mind to things you may not have before, such as collective funds,” according to Ms. Wagner.


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