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An employer (as a plan sponsor) and its third-party administrator were held accountable for more than $13 million for failing to control plan fees. However, the Eighth Circuit overturned an award of more than $20 million for plan losses resulting from investment choices, finding that the plan could not be liable for fund performance. Here is what happened.
The employer sponsored a retirement plan and each participant decided how to allocate contributions among the investment options. The plan generally invested in mutual funds. After a competitive bidding process, the employer hired an administrator, paying a flat fee for each participant. The administrator was primarily paid through revenue sharing under which the mutual funds pay a portion of investor fees.
Over time, the administrator began providing additional services including processing payroll and acting as recordkeeper. The administrator incurred losses from these services, but made substantial profits through the plan. The employer and the administrator later negotiated an agreement covering all services, under which the administrator provided the additional services below market cost.
An outside consulting firm then advised the employer that it was overpaying for recordkeeping services and cautioned that the revenue-sharing agreement might be subsidizing the other services provided. The employer did not act on this information.
Eventually, the participants sued the employer fiduciaries and the administrator, alleging various breaches. The district court agreed, finding that the employer violated its fiduciary duties by failing to monitor recordkeeping costs, failing to negotiate rebates, paying higher costs in order to subsidize additional services, and other violations.
The district court awarded $13.4 million for failing to control recordkeeping costs and $21.8 million for losses the plan suffered as a result of investment choices. As noted above, the Eighth Circuit appeals court overturned the award for plan losses, finding the employer could not be liable for offering investment options in good faith. However, the Eighth Circuit affirmed that the employer had violated its fiduciary duties.
Interestingly, the Eighth Circuit also noted that the Employee Retirement Income Security Act (ERISA) allows for “reasonable attorney's fees” but questioned whether the district court's grant of nearly $13 million in attorney's fees was reasonable. The appeals court vacated the award and indicated that “the district court should be careful to apply the generous attorney rate it has allowed in this case only to work that requires an attorney — not administrative, clerical, or paralegal work.”