A new 401(k) class-action lawsuit alleging a fiduciary breach in part for excessive Vanguard Group fund fees could, ironically, support the position of actively managed investment funds in retirement plans.
“This case, whether it sticks or not, bodes well for active management,” said Jason Roberts, chief executive of the Pension Resource Institute.
The 401(k) industry over the last several years has seen fees for plan investments pushing lower, helped along by fee-disclosure regulation the Labor Department handed down in 2012 and a barrage of 401(k) litigation centered on excessive investment management and record-keeping fees.
An overriding theme of lawsuits attacking 401(k) plan fees is that they generally view the cheapest investment as being the most prudent investment choice fiduciaries can make for plan participants, according to Brad Campbell, counsel at Drinker Biddle & Reath and former head of the Employee Benefits Security Administration.
That, Mr. Campbell said, is inconsistent with a fiduciary's obligations under the Employee Retirement Income Security Act of 1974, which indicates fees must be reasonable rather than the most inexpensive. According to the text of the new suit's complaint, “investment costs are of paramount importance to prudent investment selection,” which Mr. Campbell said is “an inaccurate statement of the law.”
The suit, Bell et al. v. Anthem Inc. et al., is interesting, ERISA attorneys said, because it calls out fiduciaries of the Anthem 401(k) plan for choosing several funds offered by Vanguard, known widely as a low-cost fund provider.
“In this litigation, we've probably seen the furthest refinement yet of the misinterpretation that fees are the paramount factor to consider,” Mr. Campbell said.
It's this extreme that leads Mr. Roberts to believe active management could be looked upon more favorably in light of the Anthem suit, by raising the discussion around the importance of value rather than simply looking at fees in a vacuum.
“ERISA doesn't require you to go low cost at all costs. We're talking about Vanguard funds, for crying out loud,” Mr. Roberts said. One of the funds in question in the suit, the Vanguard Institutional Index Fund (VINIX), costs 4 basis points.
Money management fees aren't the issue with litigators so much as excessive revenue sharing — 12b-1 and sub-transfer agency fees — paid through mutual funds for plan services such as record keeping, administration, custody, trust and advisory, Mr. Roberts said.
Fiduciaries can “defend actively managed, higher-share-class funds all day” if revenue sharing paid by these funds is reasonable for the level of service provided to the 401(k) plan, and if paying for certain plan services via revenue sharing is deemed most appropriate for a plan when compared with other mechanisms, he added. Fiduciaries can also set up an expense-recapture account that debits excess revenue sharing back to the plan.
Rarely do litigators attack the alpha or risk-reward profiles of actively managed mutual funds on a 401(k) menu, but rather the reasonableness of revenue sharing, Mr. Roberts said.
For fiduciaries, it's a matter of finding an investment that's best for participants and beneficiaries after weighing all relevant factors, not just fees, said David Levine, principal at Groom Law Group. Some clients like a high degree of personal touch from vendors such as record keepers, via on-site seminars, for example, Mr. Levine said, which could justify using a fund with a higher revenue-sharing arrangement to pay for the higher associated cost of that service.
“To say there's one magic number for record keeping ignores the fact that record keeping involves a number of services, different levels of service, and each employer and its structure are unique,” Mr. Levine said.
Ultimately, a case such as Anthem's comes down to fiduciary process, and whether fiduciaries appropriately documented their rationale for offering certain funds in the 401(k) plan, according to Thomas Clark Jr., attorney at The Wagner Law Group.
The suit was filed Dec. 29 in the U.S. District Court for the Southern District of Indiana, Indianapolis division.