The Realities of Plan Fees - Or Why They Are Not Excessive Just Because They Exist

Amidst all the commentary and lawsuits over excessive fees – or allegedly excessive fees – on 401(k) investment options comes this article pointing out all that advisors do to earn that money, and raising questions, at least implicitly, as to whether courts and critics are asking the wrong question when they inquire into the reasonableness of fees; perhaps the better question, suggests the author, is whether the administration of the plan involves more than enough effort to justify the fees that are being paid. I like the article, and found it both entertaining and thought provoking.

I thought I would point out three things that the article brings to my mind. First, the author points out that determining whether fees are reasonable by comparison to industry benchmarks isn’t really a good test, because all it is showing you is that everyone of similar size and shape looks the same. As the author points out, if everyone in the industry suddenly raised their fees substantially, would all their fees still be reasonable? They would be if the relevant test was to benchmark against the industry as a whole, since their fees would all still be reasonable in comparison to each other. This harkens back to a problem with the Seventh Circuit’s analysis in Hecker, in which the Court indicated that fees in a particular plan are reasonable if they are consistent with the retail market as a whole. As the author of the commentary suggests, doesn’t this just beg the question, which is whether the fees charged across the overall market as a whole are reasonable? I know that the Seventh Circuit answered that question in Hecker by concluding that the omniscient power of the marketplace will guarantee that the answer to the question that is begged is yes, but I can’t say that the panel, in its ruling in that case, provided much empirical support for that assumption. The tribal myth of marketplace discipline, divorced from empirical support establishing that market forces actually force the fees to a level that would be found reasonable if the fees were independently analyzed without regard to the existence or not of those marketplace forces, really should not be enough support for the creation of a legal rule.

Second, the author’s point makes clear why that sort of benchmarking is not the test, or should not be, and that instead the proper test of the reasonableness of fees should be more of a two step test, of whether the fees are realistic in relation to the marketplace as a whole and whether the process of establishing the fees was prudent; this is essentially what occurred in Tibble, and circumvents the problem the author identifies with relying on benchmarking to determine whether or not fees are reasonable and, in turn, whether a fiduciary breach has occurred with regard to charging those fees.

And third and finally, the author brings us back to a fundamental issue when it comes to fees, and also to revenue sharing claims, which is that administration of a plan costs money, and someone has to pay for it. You can’t avoid it, and liability theories premised on excessive fees or on the existence of revenue sharing have to account for this fact; fees have to be paid somewhere in the system, and at a level that pays for the work needed to run a plan.