How Long Can You Hold Your Breath?
Excessive fees and all the matters attendant to them are topics that should be brought to a retirement plan committee to address. In “How Long Can You Hold Your Breath?,” a column by David J. Witz that appeared in the Summer 2015 issue of Plan Consultant, Witz argues that the statute of limitations under ERISA Section 413 (29 U.S.C. §1113) provides a way to establish a documented process that a retirement plan committee can use to defend their decisions and mitigate the risk of litigation over claims for excessive fees. “Documentation goes a long way in establishing proof that a thoughtful, procedurally prudent process exists,” writes Witz.
Witz posits that the issues that cause excessive fees to continue to be a hot topic for retirement plan committees include the following:
- determining which share class to use;
- the amount of revenue sharing paid by each investment;
- how much of the plan expense should be allocated to plan assets versus paid by the plan sponsor;
- whether or not a covered service provider should be paid fees based on a percentage of assets; and
- how fees should be allocated among participants.
So what does ERISA Section 413 do? Witz notes that it “limits the time frame during which a plaintiff can bring a fiduciary breach claim for excessive and unreasonable fees to 6 years or an alternative 3 years if certain requirements are met.” He also says that according to Section 413, “the 6-year statute of limitations provides a plaintiff 6 years to file a fiduciary breach claim. If a fiduciary engages in a breach that occurred more than 6 years ago, a plaintiff’s claim will be dismissed assuming a claim of fraud, concealment, conflicts and/or self-dealing cannot be proved.”
Witz adds that “It is important to note that fraud, concealment, conflicts of interest and self-dealing can nullify the statute’s protection or at least delay the start date of the limitations period until fraud, concealment, conflicts or self-dealing is discovered.”
“If the fiduciary is proactive and adopts a full disclosure approach, a fiduciary can limit the time frame during which a plaintiff can file suit to 3 years if the fiduciary can prove the plaintiff had actual knowledge of the breach. Herein lies the question, “How do the courts interpret ‘actual knowledge’?” writes Witz. But he adds a note of caution, saying, “Based on a cursory review of case law, it appears the courts are not completely aligned in their interpretation of ‘actual knowledge.’ This creates uncertainty for fiduciaries implementing risk mitigation strategies built around the 3-year statute.”
To maximize the potential of the 3-year statute to mitigate risk, Witz suggests that a fiduciary consider distributing or at least making available to participants the 408(b)(2) disclosures, Form 5500, meeting minutes and a customized one-page report that includes the following information:
- plan sponsor and name of plan;
- name of the responsible plan fiduciary which is most likely the plan administrator;
- as-of date (issuing this report annually is recommended);
- breakdown of fees paid by the employer versus the plan in dollars per head, as a percentage of assets and annualized total dollars;
- breakdown of fees by service category;
- benchmarking of fees; and
- statement of reasonableness by the fiduciary.
Not only that, reminds Witz, “Every email or disclosure to participants provides additional documented proof the responsible plan fiduciaries provided participants actual knowledge to claim the 3-year statute thus minimizing litigation risk and monetary damages.”
And Witz suggests remembering the importance of third party administrators and record keepers, who he says “are the gate keepers for the majority of this information.” He adds, “It seems logical they will become the go-to solution for this risk mitigation strategy. To improve efficiencies in delivery and the effectiveness of the strategy it will be important to link the record keeper’s technology platform to an independent benchmarking data base.”