The message is clear for defined contribution (DC) plan sponsors: follow best practices established for plan fees or risk getting stuck in a costly and time-consuming lawsuit.

Nearly 40 401(k) fee lawsuits have been filed since 2006. The first gen-eration of lawsuits focused on revenue-sharing violations, failure to under-stand specific costs, and use of retail mutual funds in 401(k) lineups. Over time these lawsuits have expanded in scope, covering everything from the prudence of offering certain stable value funds to adherence to investment policy statements.

In addition to monetary payments, settlements have typically included requirements to:• Competitively bid plan recordkeeping services• Engage an outside consultant• Utilize institutional or retirement-share classes where possible• Add passively managed funds to the lineup• Comply with the Department of Labor’s participant disclosure regulation In this charticle, Callan describes select DC fee lawsuits. We suggest best practices to help plan sponsors keep their plan on the path to success.

Muddy Waters Recent fee lawsuits that reached settlementAmount of Settlement ($mm) vs. Duration of Lawsuit (years)

2 6 10 14$0

$10

$20

$30

Settl

emen

t ($m

m)

Years

Median = $15 Million

$120

$150

LAW

SU

IT

SP

OTL

IGH

T

Tibble v. EdisonIn May 2015, the U.S. Supreme Court reversed the Ninth Circuit Court of Appeals’ ruling that the 401(k) fee lawsuit of Tibble v. Edison Inter-national was time-barred, remanding the case back to the Ninth Circuit Court of Appeals. The case dates back to 2007, when participants in the Edison 401(k) Savings Plan sued plan fiduciaries for losses suffered due to breach of fiduciary duty relating to mutual funds in the plan’s lineup. Plaintiffs argued that Edison fiduciaries imprudently offered higher-priced retail-class mutual funds when materially identical, lower-priced institution-al-class mutual funds were available. However, the defendants argued that ERISA requires a breach of fiduciary duty complaint to be filed within six years, and the breach occurred when the funds in question had been initially added to the plan, which was more than six years before the com-plaint was filed. The District Court agreed that the complaint was untimely and the Ninth Circuit affirmed. The Supreme Court’s decision focused on the failure by the Ninth Circuit to consider fiduciaries’ ongoing obligation to monitor and remove imprudent investments. Fiduciaries must prudently select funds AND prudently revisit fund selection on an ongoing basis. For this reason, the Supreme Court remanded the case back to the Ninth Circuit to determine if a prudent review process had been in place. The Supreme Court expressed no view on the scope of respondents’ fiduciary duty, leaving it to the Ninth Circuit to make this determination.

Don’t get bogged down. Fee Lawsuits = Time + Money

Take action now. Path to Success = Benchmarking + Regular Documentation

Years Lost

Amount of largest fee lawsuit settlement

to dateMILLION

The minimum number of years taken to settle a fee lawsuit

DC plan sponsors that reduced

plan fees after reviewing them

No One is Immune: Lawsuits by Industry

Grocery 4.2%

Retail 4.2%Robotics 4.2%

Paper 4.2%

Utility 4.2%

I.T. 4.2%

Healthcare 4.2%

Energy 4.2%

Education 4.2%

Automotive 8.3%

DC plan fee lawsuits have popped up across a diverse array of industries, as illustrated in this chart.

Aerospace25.0%

Finance 16.7%

Construction12.5%

DC Plans and Fee Lawsuits

Stuck in the Mud or Road to Success?

Sources: 401(k) Fee Cases, Groom Law Group, Chartered. January 27, 2015; Callan 2015 DC Trends Survey

0% 20% 40% 60% 80% 100%

Change the way fees are paid

Conduct a recordkeeper search

Switch certain funds to lower-fee share classes

Renegotiate recordkeeper fees

Rebate participant fees/revenue sharing

Conduct a fee study 31.5% 20.2% 22.5% 25.8%

24.7% 11.8% 21.2% 42.4%

20.5% 23.9% 26.1% 29.5%

12.2% 34.4% 20.0% 33.3%

11.4% 11.4% 12.5% 64.8%

10.3% 13.8% 25.3% 50.6%

Very likely Somewhat likely Somewhat unlikely Very unlikely

0% 10% 20% 30% 40% 50% 60%

Customized survey ofmultiple recordkeepers

Customized survey ofother plan sponsors

Data from individualrecordkeeper’s database

General benchmarkingdata (such as from CIEBA)

Consultant database

20.0%

27.7%

43.1%

52.3%

26.2%

20.0%

27.7%

43.1%

52.3%

26.2%

What fee-related actions are you most likely to take in the next year?More than half of plan sponsors are either somewhat or very likely to conduct a fee study in 2015 (51.7%), an increase from 2014 (44.7%).

Fee benchmarking: How is it accomplished? Plan sponsors often use multiple data sources to benchmark fees. 2015 survey respon-dents indicate a consultant database is the most frequently used resource.

Staying on the Right PathTips for Plan Sponsors and Fiduciaries Navigating DC Plan Fees

ERISA regulation 408(b)(2) requires plan sponsors to obtain dis-closures of all direct and indirect compensation associated with the DC plan. Still, according to Callan’s 2015 DC Trends Survey, only about half of plan sponsors both calculate and benchmark plan fees. This indicates that many others are on a perilous path. Callan recommends calculating and benchmarking fees on an annual basis alongside other best practices:

Rigorously adhere to Section 408(b)(2) requirements—this responsibility falls to the plan sponsor, not the vendor

Diligently avoid prohibited transactions, such as subsidizing other benefits through the 401(k) plan

Faithfully comply with the language of the investment policy statement and review it regularly

Carefully document fee monitoring efforts

Annually examine and benchmark all plan fees

George v. Kraft FoodsIn this case, first filed in October 2006, the allegation was that Kraft had violated its ERISA fiduciary duties by allowing exces-sive fees, holding excessive cash within the plan’s company stock funds, and offering imprudent funds as investment options. A district court had initially dismissed the lawsuit (“Kraft I”), but it came back to life on appeal (“Kraft II”). In February 2012, after more than five years of litigation, the parties agreed to a settle-ment of both the “Kraft I” and “Kraft II” lawsuits, and it was ap-proved in June 2012. The settlement called for Kraft to pay $9.5 million into a settlement fund.

Tussey v. ABBThis lawsuit, filed in December 2006, originally alleged a number of breaches of fiduciary duties under ERISA. The District Court in Missouri originally ruled against fiduciaries for (i) failing to monitor or negotiate recordkeeping costs and (ii) paying its recordkeeper, Fidelity, excessive fees in order to subsidize the cor-porate services provided to ABB by Fidelity. The Court also found that ABB en-gaged in a prohibited transaction by replacing an existing plan investment with a Fidelity fund. The Eighth Circuit Court of Appeals vacated much of the judgment, but did affirm the judgment of breach of fiduciary duty under ERISA by ABB for failing to monitor or negotiate recordkeeping costs, and for paying Fidelity exces-sive fees. The case has been sent back to the District Court. Prior to the Eighth Circuit’s decision, ABB had been ordered to pay $35 million in penalties.

LAWSUITSPOTLIGHT

LAWSUIT SPOTLIGHT

Callan’s 2015 DC Trends SurveyCallan’s annual survey of DC plan sponsors covers a wide range of topics. The following two charts use survey data to illustrate plan sponsors’ actions around plan fees.

LAWSUIT SPOTLIGHT

Braden v. Wal-Mart Stores This lawsuit, filed in March 2008, claimed that millions of dollars of Wal-Mart employ-ees’ retirement savings were squandered on overpriced mutual funds. The case was settled in March 2012, under which terms the defendants were expected to pay a total of $13.5 million. The settlement also describes several potential changes that should be made to the plan’s investment op-tions, investment education programs, and participant disclosures. The case had more than 560,000 pages of documentation and six to eight depositions for each fiduciary. It took four years to settle at a cost of $13.5 million.

Million

Years Lost

San Francisco Atlanta Chicago800.227.3288 800.522.9782 800.999.3536

Denver New Jersey 855.864.3377 800.274.5878

May 2015 | © 2015 Callan Associates Inc.

This report is for informational purposes only and should not be construed as legal or tax advice on any matter. Any investment decision you make on the basis of this report is your sole responsibility.

For more information, please visit www.callan.com, email institute@callan.com, or contact your Callan consultant.

Sources: 401(k) Fee Cases, Groom Law Group, Chartered. January 27, 2015; Callan 2015 DC Trends Survey