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Checksmart Excessive Fee Suit Requires Closer Look at Fund Performance
Last Updated: August 25, 2016
A recently filed lawsuit attempts to hold plan fiduciaries to what has been an unprecedented standard until now. Previous lawsuits accused plan fiduciaries (with a slight amount of industry knowledge) of what could be considered “a no brainer”: don’t pay too much. If there is an identical or nearly identical investment option offered at a lower cost, choose the lowest cost option. If it is not feasible to switch to the lowest cost option, retain the fund but rebate revenue sharing. Simple, provided you know what you’re looking for. This new lawsuit requires fiduciaries to put more thought into the plan’s fund lineup, particularly with respect to fund expenses relative to fund performance.
Participants of the Checksmart Plan (a plan with over $25 million in assets and over 1,700 participants) brought the suit. Defendants named in the case include the plan’s retirement committee and Cetera, the plan’s investment advisor and 3(21) co-fiduciary.
The Plan offered over 50 pre-selected mutual funds and two different ways for participants to invest. Participants could choose to build their own investment portfolio or allow an “expert” to do so. For participants choosing to take a “less hands on” approach, the “lifestyle portfolio” options were available and contained more actively managed funds with higher expense ratios. Available portfolios types included highly aggressive to highly conservative.
Allegations
The participants’ complaint stated plan fiduciaries had the duty to offer investments with reasonable expense ratios and to offer diverse investment options to participants. The complaint stated the Plan failed to offer an adequate and appropriate number of passively managed, less expensive investment options. As an example, the complaint took seven actively managed funds held by the plan and stated the average expense ratio for these funds was 104 basis points with a range of 88 to 111 basis points. The allegations didn’t stop there. One unique aspect of this suit is that the allegations contain a performance analysis that goes further than prior suits. Not only did the complaint allege fees were too high, but also that fees were too high in light of fund performance. While this was always part of the embedded reasoning for evaluating fees, this suit more explicitly articulates this hybrid consideration and requires a more highly detail-oriented evaluation of plan fees, particularly with regard to investments.
The complaint also noted a lack of passively managed, less expensive Vanguard index funds, stating the Plan contained the S&P 500 index fund with an expense ratio of 60 basis points. The complaint stated the Vanguard S&P 500 index fund had an expense ratio of 16 basis points and, as an example, was far preferable to the 60 basis points option contained by the plan. Monitoring each individual fund offered by a Plan for both fees and performance is not an insignificant task. Add to this the need to keep the plan’s overall funds in constant focus to offer participants sufficient diversity, and the task of plan management becomes overwhelming.
Retirement plan management can be daunting, particularly given the highly technical nature of plan management AND that the associated tasks of properly evaluating fees typically fall outside of the plan sponsor’s primary business. However, there are ways to help avoid lawsuits like the one filed against the Checksmart Plan. Here are just a few of them.
- Make the retirement plan committee complete with multiple members, bylaws, and proper delegation and acceptance forms.
- Have a committee meeting at least annually.
- Have the committee thoroughly discuss each fund offered by the plan, evaluating each fund’s expense ratio and individual fund performance in light of the plan’s investment policy statement.
- If the retirement committee does not have members who are investment experts, hire an independent expert. This expert can help evaluate and assess the fund line-up, keeping both fund expenses and performance in mind.
- Summarize discussions and decisions in committee meeting minutes.
- Monitor and review (or hire an expert) the plan’s payments to all service providers and how the plan expense account is maintained.
- Have the committee use this information to decide whether to retain funds, service providers, and how best to pay for plan expenses.
- Determine if services are necessary and fees are reasonable.
