The United States Supreme Court’s recent unanimous decision in Cunningham v. Cornell University significantly increases the risk that employers and other fiduciaries (e.g., fiduciary committees) will be sued and forced to defend the fees and expenses paid to plan service providers (e.g., recordkeepers, consultants, and investment advisors) out of the assets of the plan.
Under the Supreme Court’s ruling in Cunningham, participants may file excessive fee lawsuits solely on the basis that the plan paid a service provider’s fees out of plan assets; that is, participants may file suit without having to allege that the fees were excessive or inappropriate. To state it another way, the Supreme Court’s decision allows plaintiff’s counsel to author complaints without having to allege (or even obtain evidence in advance of filing suit) that a plan’s fees are potentially excessive. The Supreme Court’s decision makes it crystal clear that the burden of establishing that plan fees are not excessive or otherwise inappropriate is squarely on the employer or other responsible fiduciary, which, if sued, would need to defend a plan’s fee practices in the context of costly litigation.
Background
The Employee Retirement Income Security Act of 1974 (ERISA) bars a fiduciary from causing a plan to engage in a transaction if the fiduciary knows or should know that the transaction constitutes a direct or indirect furnishing of goods, services, or facilities between the plan and a “party in interest.” The term “party in interest” includes recordkeepers, investment advisors, and trustees, among others. This means that the payment of compensation to a service provider is presumptively prohibited. A separate part of ERISA provides an exemption to this prohibition if it can be established that the compensation paid to the service provider is no more than reasonable compensation for the services rendered and meets other requirements imposed by regulation. Under the Supreme Court’s decision, the burden is on the employer or other responsible fiduciary to establish compliance with the exemption.
Implications and Action Steps
Employers and other plan fiduciaries have long been advised of the importance of engaging in a careful review of the fees paid from the plan (and, therefore, by participants) to ensure, to the extent possible, that the fees are reasonable. The Supreme Court’s decision shines a spotlight on this fiduciary function and the importance of having a clearly defined fiduciary governance structure that is designed to prudently perform this function.
Action Steps
Employers should take the following steps to ensure they are in the best position possible to defend the fees paid by the plan (and, therefore, by the plan’s participants) in the event of a lawsuit:
- Review service provider contracts and required service provider fee disclosures (so-called ERISA § 408(b)(2) disclosures) to identify the services provided and associated fees and ensure that the contracts comply with all other exemption requirements.
- Annually review the fees actually paid by the plan to ensure they are paid in accordance with the terms of the service provider agreements.
- Periodically compare the plan’s fees and expenses to the fees and expenses paid by comparable plans (e.g., via software programs that access nationwide plan data), and solicit actual fee bids from service providers via requests for information (RFIs) or, where service is at issue, full-blown requests for proposals (RFPs).
- Where the fees are determined to be unreasonable, seek a reduction in fees or retain new service providers.
- Retain an independent consultant to perform these functions, and be sure to carefully document the process and actions taken.
- Smaller employers with limited benefits staffing should consider participating in a pooled employer plan (PEP) as a means of reducing fees and litigation and liability exposure.
If you have any questions regarding the content of this alert, please contact Art Marrapese, Employee Benefits Practice Area chair, at amarrapese@barclaydamon.com, or another member of the firm’s Employee Benefits Practice Area.