I recently wrote about the legal risks regarding plan fees that should be considered by Canadian employers who sponsor group registered retirement savings plans and defined contribution pension plans (that article can be found here). These risks have been emphasized by several lawsuits filed against U.S. employers in the last few months. The following is a brief update on litigation activity in the U.S. which should give pause to Canadian employers who sponsor capital accumulation plans for their employees.
This week, no fewer than seven high-profile U.S. universities were sued regarding fees charged in their defined contribution retirement plans. Plaintiffs are seeking class-action status against these U.S. educational institutions alleging, among other things, that their employers acted imprudently by selecting high-cost funds for the plans when lower-cost alternatives were available. These lawsuits are part of a trend that has emerged in the last decade: claims against large and small U.S. employers which allege that fees haven’t been adequately disclosed, service providers are being paid unreasonable fees for the services they provide, and insufficient diligence has been carried out to properly select reasonably-priced funds and monitor whether fees remain competitive for years after funds are selected.
Some commentators have referred to this trend as a gold rush for lawyers. Several very large, respected U.S. companies have settled claims for tens of millions of dollars, while at the same time asserting that they have acted prudently in charging plan fees for administration, record-keeping and investment services.
The spate of U.S. litigation should prompt Canadian employers to mull over the following obvious questions: Do plan fees hold up against a benchmark of fees charged by other plans? Could the same services be provided at a lower price? Has the employer conducted, and kept records of, regular reviews of fee options? Was expert advice obtained in selecting funds and negotiating with service providers and investment managers? Consider this wording in a very recent claim against a small U.S. employer:
“Defendants had a flawed process – or no process at all – for soliciting competitive bids, evaluating proposals with respect to services offered and reasonableness of fees for those services, actively monitoring the reasonableness of fees assessed to Plan participants, and choosing a service provider on a periodic, competitive basis.”
Could all Canadian employers defend such allegations – especially those who have not paid attention to the fees charged in their plans for a few years? They may mistakenly think that their trusted service provider will inform them if fees could be reduced. That may not be the legal obligation of a service provider. And it may not be in the financial best interests of service providers to do so.
The Ontario pension regulator has formally encouraged pension plan administrators to shine a light on fees. It stated in a 2016 guideline that it expects employers who sponsor defined contribution pension plans to give “due consideration” to including wording in statements of investment policies and procedures that sets out “expectations, ranges, or limits on total plan expenses and fees; and guidelines for monitoring expenses and fees”. Good advice, especially in light of the litigation on this topic in the U.S.