The Fiduciary's Fee Disclosure Failure
Lakeshore Community Bank sponsors a 401(k) plan with 620 participants and $48 million in assets. The plan's recordkeeper, Meridian, charges an asset-based fee of 0.35% plus a per-participant fee of $45. The plan's investment committee, consisting of the CFO and the HR director, has not reviewed the plan's fee disclosures in three years. In that time, Meridian introduced a new revenue-sharing arrangement with a fund family that pays Meridian 0.15% of assets for certain funds. The committee never received a written disclosure of this arrangement. A participant complaint alleges that the committee breached its fiduciary duties by failing to monitor fees. The CFO argues that the committee relied on Meridian's expertise and that the fees are within industry norms.
1. Evaluate whether the committee breached its fiduciary duties under ERISA section 404(a)(1).
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ERISA section 404(a)(1) requires fiduciaries to act solely in the interest of participants and beneficiaries, with the care, skill, prudence, and diligence of a prudent person familiar with such matters. The committee's three-year failure to review fee disclosures is a failure to monitor and a failure to act prudently.
The committee had a duty to understand the plan's fee structure, including both the asset-based fee and the per-participant fee, and to compare them against available alternatives. The 404(a)(5) participant fee disclosure rules and the 408(b)(2) service provider disclosure rules require the plan to receive written disclosures of compensation, including indirect compensation such as revenue sharing. Meridian's failure to disclose the 0.15% revenue-sharing arrangement is a 408(b)(2) violation, but the committee also has an independent duty to obtain and review that information.
The CFO's reliance on Meridian's expertise is not a defense. A fiduciary may rely on a service provider's representations only if the fiduciary has no reason to doubt them and has engaged in a prudent process. The committee never requested the disclosures, never reviewed them, and never documented its review. That is a breach regardless of whether the fees are within industry norms.
The committee's failure to monitor also implicates the duty to monitor service providers. The committee should have established a regular review cycle, documented the review, and compared fees against benchmarks. The participant complaint is likely to survive a motion to dismiss on these facts.
2. Identify the prohibited transaction issues arising from the revenue-sharing arrangement and the available exemptions.
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The revenue-sharing arrangement may constitute a prohibited transaction under ERISA section 406(a)(1)(C) (furnishing of services between a plan and a party in interest) and section 406(b) (fiduciary self-dealing) if Meridian is a fiduciary.
Meridian is likely a party in interest under ERISA section 3(14) because it provides services to the plan. The payment of revenue sharing from the fund family to Meridian, where the fund family is also a party in interest, is a transaction between the plan and a party in interest. The arrangement may be exempt under PTE 84-24 (for insurance agents and brokers) or PTE 2020-02 (the new fiduciary rule exemption), but those exemptions have specific conditions.
The most relevant exemption is ERISA section 408(b)(2), which exempts reasonable arrangements for services if the plan receives the required written disclosures. However, section 408(b)(2) does not exempt the underlying transaction if the compensation is not reasonable or if the arrangement involves self-dealing. The committee must determine whether the revenue sharing is reasonable compensation for services actually rendered.
If Meridian is a fiduciary, the arrangement may also violate section 406(b)(1) (dealing with plan assets in its own interest) and 406(b)(3) (receiving consideration from a party dealing with the plan). The committee should obtain a written disclosure of the arrangement, determine whether the compensation is reasonable, and consider whether to terminate the arrangement or seek an individual exemption. The committee should also evaluate whether the fund family's payments create a conflict of interest that affects the investment recommendations.