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Not All Excessive Fee Cases Are 401(k) Lawsuits

Held by schools and other tax-exempt organizations, 403(b)s used to be highly dissimilar to 401(k)s — with fewer rules and requirements. And by far, the majority of high-profile excessive-fee lawsuits have targeted 401(k)s. But a recent suit against Northeastern University’s 403(b) is a strong reminder that all retirement accounts mandated under ERISA to keep fees reasonable are at risk. 

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Retirement Plan Service Provider Faces ERISA Lawsuit

Mutual of America, an insurance company that also provides services in the small-plan marketplace, has found itself in the crosshairs of an ERISA lawsuit alleging a breach of its duties of loyalty and prudence to plan participants. The plaintiffs charge that they were subject to excessive fees as a result of the company’s adoption of its own proprietary closed-architecture recordkeeping platform. The system, they allege, caused participants to pay annual administrative fees roughly 10 times what they would have if the plan had researched and engaged a third-party recordkeeper to perform comparable (or even better) services.

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Fortune 500 Firm Neglected Fiduciary Duty

Food manufacturing powerhouse Kellogg was recently sued by a former employee, who alleges that the company failed to meet its fiduciary duty in administrating its 401(k) plan. The suit claims that, since at least 2016, Kellogg allowed excessive recordkeeping and managed account fees to accrue and did not take timely action to keep employee-covered fees reasonable. The lawsuit names the company, its board of directors and two separate committees that helped manage the company’s plan.

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Plan Fee Lawsuit Risks

Litigation over retirement plan fees has been on the rise in recent years. Since 2020, there have been more than 170 such suits, breaking previous records. And while these cases used to affect mostly larger plans, smaller plans with fewer assets have become targets of aggressive prosecutors. Defense costs for such cases often exceed several million dollars — with some lawyers insisting on retainers of up to $15 million. Settlements and damages awarded to plaintiffs can also easily reach the multimillion-dollar range.

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SCOTUS Hands Down Highly Anticipated Decision on Retirement Plan Fees Case

Over the last two years, approximately 150 ERISA lawsuits challenging purportedly excessive retirement plan fees have been filed in U.S. federal court. However, more than a dozen of those cases had been put on hold pending a recent Supreme Court case — Hughes v. Northwestern University — examining the plausibility of a breach of fiduciary duty claim by current and former university retirement plan participants. In January, SCOTUS delivered its opinion, ruling that the petitioners, originally dismissed by a district court and upheld by the U.S. Court of Appeals for the Seventh Circuit, did in fact plausibly state their claim. It vacated the Seventh Court ruling and remanded the case for further review.

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Callan 2022 Report Forecasts a Continued Focus on Fees

For more than 15 years, institutional investment consulting firm Callan has released an annual survey designed to uncover industry trends and help sponsors gauge their retirement plan offering relative to others. And while the organization offers numerous insights in its 2022 Defined Contribution Trends Survey, responses from more than 100 sponsors revealed that maintaining a sharp focus on fees will be the top priority for plans in the coming year.

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