The new 401(k) lawsuit against Ford Motor Company contains a remarkably simple lesson:
A low recordkeeping fee does not necessarily mean low recordkeeper compensation.
According to the complaint in Fuller v. Ford Motor Co., Ford negotiated recordkeeping with Alight for approximately $20 per participant.
That looks excellent.
But plaintiffs allege Alight received millions of dollars of additional compensation through other relationships associated with the plans, including payments connected with Financial Engines’ managed-account services and rollover activity.
Published accounts of the complaint put Alight’s alleged total compensation as high as approximately $57 per participant.
So the apparent $20 recordkeeping fee may have been closer to a $57 economic relationship.
Ford is important.
But Ford is also a mega-plan.
The potentially much bigger story is what happens farther down the 401(k) food chain.
The $100 Million to $1 Billion Plans
There are hundreds—potentially thousands—of mid-sized 401(k) and 403(b) plans where the Form 5500 appears to show remarkably inexpensive recordkeeping.
I have reviewed many plans in the $100 million to $1 billion range where an insurance-company recordkeeper reports compensation that appears to be:
$20 per participant.
$25 per participant.
Under $30 per participant.
Look only at the Form 5500 and the plan can appear extraordinarily well managed.
But that number can be dangerously incomplete.
Insurance-company recordkeepers can occupy several economic positions simultaneously.
They may be:
recordkeeper + investment provider + stable-value provider + annuity provider + asset manager + managed-account partner + rollover provider.
The visible recordkeeping fee can therefore be one of the least interesting numbers in the relationship.
Ford Shows the Problem. Insurance Companies Can Supercharge It.
Ford’s alleged economics are relatively easy to understand.
The recordkeeping contract says approximately $20.
Then plaintiffs identify additional payments connected with other services.
Add them together and plaintiffs contend the economic compensation was substantially higher.
With an insurance-company recordkeeper, the economics can be considerably harder to reconstruct.
Consider a hypothetical $500 million plan.
Its Form 5500 shows:
10,000 participants
$250,000 recordkeeping compensation
or:
$25 per participant.
A conventional fee-benchmarking exercise may give that plan an A.
But suppose the same insurance company also has $75 million of participant assets in its general-account fixed annuity or stable-value product.
The insurance company doesn’t necessarily receive an explicit 50-basis-point management fee.
Instead, it invests the $75 million.
Suppose the underlying portfolio earns 5.5%.
Participants receive 3.0%.
The difference is:
250 basis points.
On $75 million:
$1.875 million annually.
That dwarfs the $250,000 visible recordkeeping fee.
The economics potentially become:
| Compensation source | Illustrative amount |
| Reported recordkeeping | $250,000 |
| Insurance spread economics | $1,875,000 |
| Other revenue sharing | Unknown |
| Managed accounts | Unknown |
| Proprietary investments | Unknown |
| Rollover economics | Unknown |
| Potential economic relationship | $2,125,000+ |
The Form 5500 says:
$25 per participant.
The broader economics in this simplified illustration are:
$212.50 per participant.
That is an entirely different fiduciary picture.
The Spread Is the Revenue Sharing Nobody Calls Revenue Sharing
Traditional revenue sharing is relatively easy to understand.
A mutual fund charges 75 basis points.
Some portion goes back to the recordkeeper for shareholder servicing or recordkeeping.
Eventually the industry recognized the conflicts created by those arrangements.
Plans migrated toward institutional shares, zero-revenue-sharing funds and CITs.
But insurance-company plans present another potential form of indirect economics.
Spread products.
With a general-account product, the insurer takes participant assets, invests them and promises participants a crediting rate.
The difference between what the insurer earns and what it credits—after considering expenses, reserves, capital costs and other contractual economics—contributes to the insurer’s economics.
That spread is not necessarily reported on the Form 5500 as:
Recordkeeping compensation: $1,875,000.
Yet the insurer may have access to those assets precisely because it has a broader relationship with the retirement plan.
That deserves fiduciary scrutiny.
This Can Make Ford Look Simple
Ford allegedly involves a $20 headline fee plus identifiable additional payments.
The insurance-company model can be more difficult.
Imagine seeing this on the Form 5500:
Recordkeeper compensation: $27 per participant.
Then discovering that the same insurance company has hundreds of millions of dollars in:
- general-account fixed annuities;
- guaranteed-interest accounts;
- separate-account products;
- stable-value products;
- proprietary funds;
- target-date products;
- managed accounts; or
- affiliated investment vehicles.
The right question isn’t:
Is $27 competitive?
Of course $27 may be competitive.
The right question is:
What is the insurance company making from the entire plan relationship?
The Wrong Benchmark Can Produce the Wrong Answer
This exposes a fundamental weakness in conventional recordkeeping benchmarking.
Suppose a consultant reports:
| Plan | Reported RK cost |
| Comparable Plan A | $45 |
| Comparable Plan B | $39 |
| Comparable Plan C | $34 |
| Your Plan | $27 |
The committee minutes then say:
“Recordkeeping fees were reviewed and determined to be reasonable.”
That conclusion may be meaningless if nobody examined the recordkeeper’s other economics.
The consultant has benchmarked the visible invoice.
The fiduciary needs to understand the economic relationship.
Those aren’t necessarily the same thing.
Ford Gives Plaintiff Lawyers a Roadmap
The Ford complaint is important because plaintiffs aren’t simply alleging that $20 was excessive.
That would be a difficult argument.
Instead, they are effectively saying:
$20 wasn’t the real number.
That is the concept plaintiff lawyers should apply to mid-sized plans.
A plan showing $25 or $30 per participant shouldn’t automatically be eliminated from an excessive-fee investigation.
It may deserve more investigation, particularly when the recordkeeper is also an insurance company providing investment or spread products.
The first question should be:
Where else does the recordkeeper make money?
Cunningham v. Cornell Changes the Stakes
This becomes particularly important after the Supreme Court’s unanimous decision in Cunningham v. Cornell University.
ERISA §406 prohibits specified transactions involving plans and parties in interest.
Plan service providers can fall within the party-in-interest framework.
Section 408 contains exemptions permitting necessary plan services subject to statutory requirements, including reasonable compensation.
The Supreme Court held that plaintiffs bringing a §406(a) claim do not have to plead facts negating those exemptions.
The exemptions are affirmative defenses.
That doesn’t make ordinary recordkeeping contracts unlawful.
It does make the complete compensation arrangement more important.
If an insurance-company recordkeeper is receiving money or economic benefits through several channels, fiduciaries should understand those channels rather than assuming that a $25 Form 5500 number establishes reasonable compensation.
Don’t Confuse Spread With a Disclosed Fee
There is an important distinction.
An insurance spread isn’t necessarily a conventional fee.
Part of the spread may compensate the insurer for:
credit risk, capital requirements, guarantees, liquidity, administration and other contractual obligations.
That doesn’t make the spread irrelevant.
It means fiduciaries need to understand it.
The proper analysis isn’t necessarily:
“Every basis point of spread is an excessive recordkeeping fee.”
That would be too simplistic.
The better questions are:
How large is the spread?
What risks and services legitimately justify it?
What does a competitive product provide?
Does the recordkeeping relationship influence the selection or retention of the spread product?
Was the insurer selected as an investment provider independently from its role as recordkeeper?
And, particularly after Cunningham:
What transactions are occurring with a party in interest and what exemption permits them?
Those are much harder questions than simply comparing Form 5500 recordkeeping numbers.
A $25 Recordkeeping Fee Should Sometimes Be a Red Flag
For a large insurance-company-recordkept plan, an extraordinarily low disclosed recordkeeping fee should not automatically end the investigation.
Sometimes it should start one.
If competitors need $40 per participant to provide the service and an insurance company apparently does it for $20, the fiduciary should understand why.
Maybe the insurer is simply more efficient.
But maybe the recordkeeping business provides access to profitable investment products.
Maybe there is traditional revenue sharing.
Maybe there are proprietary funds.
Maybe there are managed-account payments.
Maybe there are spread products.
Maybe there are rollover opportunities.
Or maybe there is some combination of all of them.
There is nothing inherently wrong with a provider earning money.
The fiduciary problem begins when the committee doesn’t know how much the provider is earning or where it is coming from.
Plaintiff Lawyers: Don’t Screen These Cases Out
This may have significant implications for how plaintiff firms screen 401(k) cases.
A common screening methodology starts with Form 5500 data.
Plans with high administrative costs receive attention.
Plans showing $20–$30 per participant may get discarded.
That could be exactly backwards for some insurance-company plans.
A $500 million plan reporting $25 per participant while holding $100 million in the recordkeeper’s own insurance products could potentially be far more interesting than a plan transparently paying an independent recordkeeper $50.
The $50 may actually be $50.
The $25 may not really be $25.
Ford May Be the Tip of the Iceberg
Ford deserves attention precisely because it is enormous and sophisticated.
If plaintiffs can allege that even Ford’s $20 recordkeeping price didn’t capture the complete economics, consider what may be happening in the much larger universe of mid-sized plans.
A $200 million or $500 million plan may not have Ford’s purchasing leverage.
It may rely much more heavily on an insurance-company recordkeeper.
The insurer may simultaneously provide recordkeeping, investments, stable value, annuities, managed accounts and rollover services.
And the Form 5500 may still appear to show:
$25 per participant.
That is why the next generation of excessive-recordkeeping litigation shouldn’t begin by sorting Form 5500s from highest fee to lowest fee.
It should begin by asking:
Who is the recordkeeper?
What other products does it provide?
How much plan money is invested with it or its affiliates?
Where does it make its money?
And after Cunningham v. Cornell:
Is the recipient a party in interest, what transactions occurred, and can the defendants establish the applicable exemption?
Ford gives us the headline.
But the potentially much larger litigation opportunity may be buried among hundreds of ordinary $100 million to $1 billion retirement plans whose Form 5500s appear to show some of the lowest recordkeeping fees in America.
The $25 recordkeeping fee may be the number that should make you look harder—not stop looking.
Follow the money first. Benchmark it second
Commonsense 401(k Revenue Sharing
The CommonSense 401k Project 