Excessive Fees Claims and 401(k) Plans "... a huge mess on [advisers'] hands."?

July 24, 2013

Last week, Investment News reported (here) that 6,000 401(k) sponsors received a letter - purportedly from a professor at Yale Law School - claiming that 401(k) plans are too expensive and suggesting that the fees charged may be tantamount to a breach of fiduciary duty. The letter has, according to the article, sent advisers into a full damage control blitz. One of the advisers' concerns: that plan fiduciaries will feel that it is their fiduciary obligation to challenge alleged "excessive fees" charged to 401(k) plans through litigation or otherwise.

The article observes: "[A]dvisers working with the plans that have received the letters have a huge mess on their hands."

The letter, which was purportedly written by Professor Ian Ayres of Yale, assails “'the relative costs to 401(k) participants of menu limitations, excess fees and investor allocation mistakes.'” Although Professor Ayres did not comment on the letter to the Investment News, Yale issued a statement that "'The letter was motivated by a desire to inform the recipient about the results of his scholarship and analysis of historical data regarding these plans.'"

But according to Investment News, advisers are treating the letter more like a threat than a helpful tip. The article also notes that one lawyer who advises the mutual fund industry "added that the kerfuffle around the letters likely will attract the attention of plaintiff's attorneys." ... and the Department of Labor or the Securities & Exchange Commission.

If this sounds familiar - a university professor drawing attention to mutual fund industry practices - it may be because the crack down on market timing in mutual funds started in a similar way. You would need spot-on Google search-terms and a good memory to find the name of Eric Zitewitz of Stanford University in the reams of material on the market timing enforcement actions, litigation, and settlements of 2003 - 2005. But Professor Zitewitz, like Professor Ayres, had years of industry research and primary sources to back up a claim that investors in international mutual funds could lose 1% to 2% of their assets a year due to market timing. NY Attorney General Eliot Spitzer, federal & state regulators, and plaintiffs' lawyers relied on that research in market timing complaints against advisers.

The concern over 401(k) fees seems to be further evidence of a trend that we first reported on in our Investment Company Institute Conference 2013 Recap & Analysis (here) on excessive fees litigation. (401(k) plans and ERISA exposures were also a hot topic at the ICI 2013 conference). It is also consistent with an increased interest in ERISA/401(k)-plan exposures for advisers: some FI brokers and underwriters have noticed a real uptick in interest in and procurement of ERISA coverage by advisers. Not just university professors, but the plaintiffs bar, the SEC, and DOL may be interested in liability & damages related to alleged "excessive fees" charged to 401(k) plans.

For more information on this issue or Bowditch & Dewey's insurance litigation practice, please contact Mary-Pat Cormier at mcormier@bowditch.com or 617-757-6527.