What fiduciary liability? I already use a low-cost provider for my 401(k) plan.

Since the first 401(k) fee lawsuits hit the plan sponsor community over ten years ago, plaintiff attorneys have been honing their skills for uncovering potential fiduciary breaches. A recent article by Nevin E. Adams, Excessive Fee Suit Comes From a New Direction on NAPA-Net, references a recent lawsuit that will hopefully; open the eyes of many plan fiduciaries (http://www.napa-net.org/news/technical-competence/erisa/excessive-fee-suit-comes-from-a-new-direction). The article mentions the suit (Barrett v. Pioneer Natural Resources USA, Inc., D. Colo., No. 1:17 –cv-01579-WJM, filed 6/28/17), where participant William Barrett alleges that the $500,187,123 in assets (and 4,410 participants), gave the plan “tremendous bargaining power to demand low-cost administrative and investment management services and well-performing low cost investment funds”.   But, rather than use the Plan`s economies of scale, “the Pioneer Defendants chose inappropriate, higher cost mutual fund share classes and caused the Plan to pay unreasonable and excessive fees for recordkeeping and other administrative services.”

The rub.

The Pioneer defendants had selected Vanguard Group as the plan`s recordkeeper and investment platform while also utilizing Vanguard`s proprietary mutual funds as investment options. The plaintiffs argue that the plan`s fiduciaries did not take advantage of economies of scale and leverage the $500 million plus in plan assets to take advantage of a lower cost institutional share class. In addition, the plaintiffs argue that the plan`s fiduciaries should have used collective trust target date funds rather than higher cost mutual funds. So, not only is this an issue on the type of share class selected, but also, the type of underlying investment vehicle used.

In a similar excessive fee case, Bell v. Anthem, Inc. , a federal district judge has moved forward most of the plaintiffs claims. Specifically, the 401(k) plan had used high fee mutual funds and paid excessive fees to Vanguard. The argument is similar in that the $5.1 billion plan should have garnered the use of lower cost share classes. In addition, the plaintiffs argue that there should have been a process to investigate the potential benefits of using different types of investment vehicles (i.e., collective investment trusts).

It`s simple, plan fiduciaries have a duty to both select and monitor their service providers and investment options for costs and value. Vanguard has supplied the market with some of the lowest cost passive funds available. However, as a plan`s assets grow and the marketplace evolves, having a due diligence process to efficiently explore alternatives is an important part of a plan sponsor’s fiduciary duty. And yes, this due diligence process applies to those that even use Vanguard.