Chris Tobe, CFA, CAIA

Somehow some judges are buying this fallacy that participants get better recordkeeping by paying substantially more for it.  They are accepting this myth without proof and are actually blocking the transparency which would expose this truth by denying discovery. 

Low-Cost recordkeeper Employee Fiduciary says “There are few industries where the phrase “you get what you pay for” is less applicable than the 401(k) industry. That’s because equally competent 401(k) providers can charge dramatically different fees for comparable administration services and investments.[i]   Employee Fiduciary comes out with an example weekly on huge savings in recordkeeping. [ii]

There are no material differences in quality of recordkeeping services    Fidelity at $30 a head is same service as Fidelity at $90 a head.  There are really no material differences that a participant can tell between any recordkeepers, they get statements and have access to a web site.    –

Smug articles gloat on how courts have blocked transparency of discovery for so called differences in record keeping quality that no participants or anyone in the industry can even measure. [iii]  As attorney James Watkins says “Requiring a plaintiff to plead specific information known only to the defendant, without an opportunity to discover such specifics, is obviously just an attempt to protect plans.”

In this absurd insult to justice and transparency, some judges are putting the initial burden of proof on participants where the plan is deliberately hiding the critical information needed to fulfill that burden.

In addition, revenue sharing is an another way to help hide excessive recordkeeping fees, as some judges ignore these obvious issues. A 2021 study by experts from the Federal Reserve and leading universities says higher fees are not associated with better performance; to the contrary, “The future performance of revenue-sharing funds is weaker than that of non-sharing funds.  The bulk of the under-performance is driven by higher fees, though revenue sharing funds display lower performance even after accounting for fees.”[iv]

Revenue sharing does not hold up during discovery and this has been confirmed by the fiduciary liability insurance industry, which put much higher litigation risk on plans with revenue sharing and either denying coverage or raising rates significantly. [v]

There are some instances of additional administrative services couched as education that can, in fact, be harmful to participants.   Especially insurance providers, and especially in hospitals which are known to provide commissioned salespeople who actually try to push participants into higher fee funds and cross-sell them on imprudent outside investments as well.

Competitive recordkeeping costs have been established at $30 to $50 per heard for plans over $200 million in assets.   There are no material differences in the quality of recordkeeping.  Judges are dismissing fees double to such fees for identical services. The fact that such fees are largely ignored because they are non-transparent in no way reduces the  significant harm they cause to participants.

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[i] https://www.employeefiduciary.com/knowledge-center/dont-let-your-401k-provider-hide-the-cost-of-your-plan

[ii] https://www.employeefiduciary.com/sample-fee-comparisons/

[iii] https://www.natlawreview.com/article/light-dark-seventh-circuit-helps-clarify-new-pleading-standards-401k-fee-cases

[iv] Pool, Sialm, and Stefanescu, Mutual Fund Revenue Sharing in 401(k) Plans, May 14, 2021,  available at: https://ssrn.com/abstract=3752296

[v] https://www.plansponsor.com/factors-can-cut-cost-fiduciary-liability-insurance/