Low 401(k) fees aren’t a legal cure-all

Fees that participants pay must be the lowest possible if the sponsors are to avoid potential lawsuits

The class action lawsuit filed against Anthem Inc. over the fees paid by participants in its 401(k) plan is a warning to companies sponsoring such plans, and those advising them, that low fees aren’t enough to protect against such suits.

Fees that participants pay must be the lowest possible if the sponsors are to avoid potential lawsuits.

In the Anthem suit, plaintiffs allege that although the company gave employees choices of funds from Vanguard Inc., widely recognized as a low-cost manager, it did not always give them the lowest-cost share class of those funds. In addition, the suit claims the fees paid for record keeping were too high.

The merits of the case should be decided in a courtroom, but in most such cases so far the defendant companies have settled rather than wage an expensive and distracting legal battle. For example, Boeing Co. settled a 401(k) fee suit for $57 million, and Wal-Mart settled a similar class action suit for $13.5 million.

NOT TESTED IN COURT

The fact that many companies prefer to settle rather than fight a long battle in court over what for them are relatively trivial amounts compared with their earnings means the claims are not tested in court.

It also means law firms might see such suits as a relatively quick and easy way to generate income for themselves.

While so far these class action suits have targeted large businesses with deep pockets, that might not always be the case. Advisers who provide guidance to companies with 401(k) plans must monitor those plans and alert company management to the necessity of carefully choosing the low-cost share classes of mutual funds offered in the plans. They also should negotiate record-keeping fees to be as low as possible.