“Family owned and operated since 1976”, “started with a single location in their home”, “there’s no I in our team” sound familiar? How about “plaintiff in an ERISA fee lawsuit”? On May 18, 2016, a suit was filed in Minnesota, Damberg v. LaMettry’s Collision, Inc., that it is arguably one of the first of its kind. Previously, ERISA litigation cases had been a who’s who of large companies that are nationally known by name. The common school of thought has always been that ERISA attorneys only focused on the mega or large plans with over $100 million in assets because that’s who have the deepest pockets and can pay the largest fees. LaMettry Collision is what the financial world would consider a micro plan with assets under $10 million and only 114 participants in the plan. The suit filed against the president and chief financial officer claims that LaMettry Collision failed to engage in a prudent process to evaluate service providers and to assess the reasonableness of fees. The kicker is that according to the complaint, the employment records of the two individuals who filed the suit were 30 years and nearly 25 years; I think we would all agree these would be considered “loyal” employees be tenure standards. For all of you reading this who thought ERISA litigation could never happen to them, it may be time to think again.
Fiduciaries in the Crosshairs
While many things about this case are alarming, one of the first items that stands out to me is that neither the service provider (Voya) nor the financial advisor are named in the suit; only the employer fiduciaries to the plan. If you are fiduciary to your company’s 401(k) plan, then you should have a good understanding of how the parties that are servicing your plan are held responsible to perform functions for the plan. In other words, is your plan financial advisor currently serving in a co-fiduciary role and if not, what role are they serving? Please note that the recently passed fiduciary rule will have an impact on the fiduciary role of all advisors, but until the enforcement period commences, I would encourage you to make certain your advisor is sitting on the same side of the table as you are when it comes to fiduciary responsibility. Concerning the service provider, Voya, it is not necessarily the responsibility of the service provider to monitor fees; however, in a group annuity arrangement, the contract for the annuity may dictate the revenue collected from the investments and therefore have an impact on the fees of the plan. Additionally, many service providers place restrictions of the menu of available investments that a plan can select from and the lowest share class option may not always be available. Regardless, most service providers are not named fiduciaries. Finally, there are certain notices and plan design options that can offer plan sponsors and fiduciaries a safe harbor from litigation; if you are not aware of what these notices are, try to become familiar with them as soon as possible.
It Is All about the Process
Note the filing in this case does not say that “the best performing funds were not chosen” or “my employer intentionally did me harm”, it says “a prudent process was not followed.” If you take nothing else away from reading this article, it should be that as a committee or a fiduciary to your retirement plan, you must document how and why you came to the decisions that you made pertaining to the 401(k) plan. Everything from the selection of investments to the naming of committee members (or conversely why you choose to not have a committee) to how you selected your service providers needs to be clearly documented. We tell the committees that we work with that you can argue until you’re blue in the face about the best investments, but as long as why can show how we came to the choices that we did, we believe the plan should be above reproach. Also, if the committee does not keep written documentation of the decisions, it is like the process never happened. Simply having good intentions or trying your best is not sufficient for running the 401(k) plan.
Create the Definition of Reasonable
Along with failing to follow a prudent process, the complaint also references the lack of understanding concerning the reasonableness of fees. There are currently no specific parameters that state what is and is not reasonable concerning retirement plan fees, so it is up to the fiduciaries of the plan to document what is reasonable for their plan. To do this, we recommend benchmarking your plan against plan’s of similar asset size and participant size at least every 3 years for not only fees, but also services provided. By doing this exercise, the committee will now have a viable understanding of what other similar plans are paying and will then be able to determine if what your plan is paying is in line with industry averages. A couple of notes on this process. There is currently nothing that states your plan has to be the cheapest plan, but rather there must be a clear understanding of the fee arrangement. I firmly believe that cost is only an issue in the absence of value; therefore, if the services you are receiving are superior, the cost may and can reflect that. Also, take into consideration the internal expenses of the investments in your plan and how they impact what your service providers are being paid. Upon reviewing the LaMettry 401(k) 5500 filing from 2014, you can see that the plan was using a share class of investments that is labeled R3; typically that share class may pay the financial advisor on the plan 50 basis points (0.50%) and the service provider 15 basis points (0.15%). These fees that are included to in the investment’s total cost may play a large role in the overall expense of the plan. Finally, be aware of the asset requirements to access lower expense share classes of the investments in your plans. As your 401(k) plan grows in asset value, lower expense options may become available and it is the responsibility of the plan fiduciaries to monitor and document why the share class being used is being used.
While it is far too early to assume that the case against LaMettry will hold up in the courts or whether any monetary judgment will be levied, I think that we can all agree that the time, effort, and money that LaMettry Collision will have to put up in the legal process could be better spent growing their automotive business; not to mention that this is probably not the way that a family owned business in northern Minnesota wanted to become nationally known! Hopefully, their case can be a learning experience for other plan sponsors and fiduciaries out there who sponsor small or micro plans that think this could never happen to them to sit down and reevaluate the 401(k) and how it is being operated. If you are one of those plan fiduciaries who would like to review your processes and procedures, please contact me at 205-970-9088 or email@example.com.
Jamie Kertis, AIF®, QKA
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162