Why Everyone Should Review Their 401(k) Fees and Investment Charges (Yes, You Too!)

February 12, 2007

Class action suits have been filed against large companies alleging that their 401(k) plan fees are too high.  Although the initial waves of lawsuits were filed against large companies, the legal theories and facts asserted in the cases could apply to any 401(k) plan.  The bottom line is that the blood is in the water, and the sharks appear to be circling.  Now’s the time to ask the following questions:

• Have participant fees and investment charges been renegotiated within the past 2 years?

• Did the Company and plan fiduciaries use the Department of Labor’s self-help tools or an independent consultant to fully understand the investment charges and participant fees when it selected the current 401(k) provider? 

• Did the Company and plan fiduciaries compare the current provider’s fees to other 401(k) providers, with a full understanding of how the fees compared?

If the answer to any of these questions is no, you should consult with your employee benefits counsel about hiring an independent consultant to evaluate your plan’s investment and participant fees based on current market conditions.  Fees are often hidden and difficult to fully understand.  All 401(k) plans that utilize mutual funds are paying some fees, either investment fees built into the mutual funds only or both participant fees and the mutual fund fees.  The 401(k) plan fiduciaries have an obligation not just to select 401(k) providers and funds based upon a full understanding of the fees being charged and the reasonableness of the fees, but also to monitor whether those fees continue to be reasonable over time.  Accordingly, now may be the time to review those fees again.

Benefits of reviewing the plan’s current participant fee and investment fee structure include:

• Identifying an opportunity to negotiate a better fee structure, or confirming that your plan fees are reasonable based on the current market;

• Reducing legal exposure by documenting the process the plan’s fiduciaries followed to monitor fees and to insure that the fees are reasonable; and

• Being able to assure plan participants and Company officials concerned about the 401(k) fee litigation trend that you’re on top of the issue.

To reap the full benefits of a fee review, you should work with independent benefits professionals who understand the fiduciary duty owed to plan participants, know how to document and conduct a vendor search, and have an in-depth knowledge of how the 401(k) industry structures fees.  If there is a question about whether your current plan fees and investment charges are reasonable or whether your past 401(k) vendor selection included a full and informed analysis of participant and investment fees, you should consult with counsel. 

Want to learn more?  We think this issue is so important that we are holding a seminar this spring in both Raleigh and Charlotte that will focus on fee analysis, as well as other best practice fiduciary procedures.  We will invite our email alert recipients to join us, and will send an invitation to you soon.

If you have any questions regarding this alert or other Employee Benefits Law related issues, please contact one of our Employee Benefits attorneys.

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