Actuary and blogger John Lowell has a strong post today on the latest high profile excessive fee case filed involving a 401(k) plan, Bell v. Anthem. I will let you read it yourself for the details, but he asks some interesting questions. In one of them, John discusses the borderline nature, at least as it appears at this point, of the claim that the plan could have and should have used lower cost investments. John’s view is that the allegations depict only a minimal difference between the fees actually charged and what, in a perfect world, the fiduciaries might have obtained. John asks if that should be enough to charge the plan’s fiduciaries with a fiduciary breach, asking whether the fiduciaries, even on the allegations, were so close in keeping a lid on fees that they should not be liable for failing to have been, in effect, actually perfect in putting together the investment options for the plan. And the answer to John’s question is that, in fact, the fiduciaries should not be found liable for a fiduciary breach if their process was strong, the plan was well run, the investment options were well investigated, but nonetheless the plan ended up with some investment choices that were marginally more expensive than, in a perfect world, they might have been. As in most things, though, the devil is in the details: to avoid fiduciary liability based on even a relatively small bump up in expense above what was optimal (and remember that, in such a large plan, even a small amount of excess fees, multiplied across the entire plan, add up quickly), the fiduciaries will have to prove those points on the actual record, and we don’t know yet whether they can.
But this in turn leads to another problem for the fiduciaries (or perhaps more realistically, from a realpolitik perspective, for the plan sponsor and/or the plan’s insurers), which is whether the total amount at risk, given the size of the plan, is simply too much for the fiduciaries to ever risk a summary judgment ruling or, even more so, a trial, either one of which could be the final step before an assessment of damages if the plaintiffs are able to demonstrate a fiduciary breach (i.e., that the process had some flaws which resulted in higher than necessary fees) at either the summary judgment stage or a trial. I have discussed elsewhere that some of the large dollar excessive fee settlements that we have seen to date reflect simply defendants buying out the risk of having a large verdict imposed after trial for only a few cents on the dollar, even if those cents add up to millions in settlement. In essence, for a very large plan, the potential exposure if fees are found to be excessive is so large that a settlement that looks large on paper is worth paying to avoid that possible large exposure. And that will be the issue in the Anthem case as well: is the exposure too big to risk a liability finding at some point in the case, requiring that the exposure instead be bought out for tens of millions of dollars, no matter how strong the argument that the fiduciaries did not commit a fiduciary breach?