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Do Higher Administrative Fees Mean A Breach Of ERISA? Not Always

March 16, 2023

North Carolina-based Old Dominion Freight Line, Inc. has been named as a defendant in a lawsuit involving the administration and pricing of its retirement plan offerings.

The lawsuit was filed by an employee in November 2022 in the federal Middle District of North Carolina. The plaintiff alleges the retirement plan administrators breached their fiduciary duty of prudence imposed by the Employee Retirement Income Security Act (ERISA).

The suit regarding the Old Dominion 401(k) Retirement Plan covers the period from November 18, 2016, to the present. According to the lawsuit, the 401(k)-plan held $2.02 billion in assets as of Dec. 31, 2021.

The plaintiff is requesting class action status that could cover as many as 24,033 plan participants. The plaintiff alleged the company breached its fiduciary duty of prudence by permitting Great-West Financial Retirement Plan Services, LLC, an affiliate of Empower Financial, which is the plan's recordkeeper, to charge excessive fees on investments. According to the lawsuit, the expense ratio was typically about one-tenth of a percent higher than similar options within the same fund.

The plaintiff alleged that defendant selected and retained for the plan high-priced investments when the identical investment was available to the plan at a fraction of the cost. The lawsuit claims the higher fees resulted in over three million dollars in reduced value during that time. "Old Dominion Freight Line faces 401(k) lawsuit" www.insurancenewsnet.com (Dec. 06, 2022).

 

Commentary

The plaintiff in the Old Dominion/Great-West suit alleged that "A prudent fiduciary conducting an impartial review of the plan's investments would have identified the prudent share classes available and selected those for the plan, instead of the identical, but higher-priced investments… Except for the extra fees, the share classes are/were identical."

However, despite the plaintiff’s allegations that a plan administrator’s job is to simply pick the cheapest option available, this oversimplifies the duty imposed on the administrator.

Keeping 401(k) fees “reasonable” is one of the most important fiduciary responsibilities because even small excessive fee amounts today can dramatically reduce a participant’s account balance decades later. However, although this responsibility is clear, the definition of “reasonable” is not.

ERISA does not define the word and government agencies only provide general guidance for evaluating 401(k) fees. The Department of Labor (DOL) suggests establishing an “objective process” to aid in the decision to choose a plan provider. The DOL suggests the process should include an understanding of the fees and expenses that will be charged and a review of those charges as they relate to the services to be provided and the investments being considered. An “objective process” is generally understood to mean benchmarking 401(k) fees vs. competing 401(k) providers or industry averages.

Under ERISA, merely alleging that a cheaper alternative investment exists is not a breach of the duty of prudence. ERISA does not require plan administrators to scour the market to find and offer the cheapest possible fund. Fiduciaries should not consider costs alone when establishing an investment menu for plan participants, but a prudent fiduciary must consider all relevant factors. It may be prudent, for example, to choose a fund with a higher fee, if that fund includes the potential for a higher return, a lower financial risk, more services offered, or greater management flexibility. Finally, the fact an investment underperforms in the market does not prove imprudence.

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