Thoughts on Costs and Fees in 401(k) Plans

In my last post, I mentioned a seminar I gave recently on insurance coverage issues and commented on one of the themes of my presentation. Another theme I emphasized in that talk was the fact that modern insurance coverage law is basically 20 years old, with its fountainhead being the development of the law of insurance coverage to account for the complexities and size of the asbestos exposures that confronted much of American industry at that point; from that development of the case law would come further refinement and expansion of the relevant doctrines as the courts, insurance companies and industry subsequently struggled to allocate financial responsibility for the surge in environmental clean up actions. Insurance coverage law before then was essentially a backwater of random, not necessarily sophisticated decisional authority; since then, it has become a complex weave of interdependent theories and doctrines.

I mention this because I am reminded of it by the current state of the law concerning fee and cost issues in 401(k) plans. To some, it may be a weird correlation, but not to me. I have written before about how the Seventh Circuit’s decision in Hecker provides a broad range of issues that warrant review and thought, some of which I have touched on in my posts and others of which I have not. I suspect there will come a time in which we will think of the law on this particular subject as being divided into two eras: before Hecker and after Hecker. And by that, I do not necessarily mean that the case law will start to follow Hecker and reform or solidify the landscape on this issue as a result. That might happen, but I am skeptical, at least in the longer or middle term. There are many issues in Hecker that were not played out fully in that decision or in the record underlying it in my view, and I suspect they will be in later cases, or by legislation or regulation, in ways that will change how we think about this type of issue, both from what existed before Hecker and from what Hecker itself suggests.

I am thinking in particular today of the court’s treatment of the amount and lack of transparency of the fees and costs in the plan before it as essentially not important, for all intents and purposes, either to participants, or, seemingly, to the court’s analysis of the plan’s obligations. A deeper look at the role of costs and fees, along with their impact, I suspect, might suggest an entirely different outcome to excessive fee cases such as Hecker, and it would not surprise me if at least some other courts in the future engage in such a closer examination and come to a different conclusion as a result. What has me thinking about this today? It is this excellent post by Ryan Alfred of BrightScope on the range of fees and costs in funds, a fiduciary’s obligations to understand all of them, and the lack of transparency as to exactly what plans are actually paying in fees and costs. Moreover, he points out the systemic differences among how different knowledgeable parties - experts may be a fair statement - calculate such fees and costs. This analysis suggests that fees and costs are nowhere near as simple to interpret and analyze as the Hecker court’s analysis assumes them to be, given that the court analyzed them on a motion to dismiss without detailed factual development of the evidence on the fees and costs in question. My educated guess, using Ryan’s analysis as a backdrop, is that a court may reach an entirely different understanding of fiduciary obligations in this regard if it first engages in a thorough factual development of the record on this issue before ruling, which the Hecker court did not.