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Despite Obstacles, 401(k) Excessive Fee Lawsuits Proliferate

Although federal courts generally look skeptically at lawsuits challenging 401(k) plan fees practices, such suits continue to be filed.  One of the most recent is being pursued by the same St. Louis-based law firm that started the frenzy of fee challenges in 2006.  On September 28 plan participants represented by lawyers at Schlicter, Bogard, and Denton filed an eight-count complaint against Ameriprise Financial, Inc. and alleged fiduciaries of the Ameriprise 401(k) plan, claiming that the investment funds offered under that plan were imprudently selected and charged excessive fees (Krueger v. Ameriprise Financial, Inc., No. 011:-cv-02781-SRN-JSM (D. Minn. Sept. 28, 2011).  To see the complaint, click here.

This case again targets the mega-plan market–the Ameriprise plan held almost $971 million in assets at the end of 2010–but with more targeted and refined allegations.  The complaint alleges that Ameriprise, its board of directors, the plan’s administrative and investment committees, and other purported fiduciaries failed to act for the exclusive benefit of plan participants, imprudently selected investment options, and engaged in prohibited transactions.  Like other recent lawsuits, such as David v. Alphin, which was brought by participants in Bank of America’s 401(k) plan, and Fuller v. Suntrust Banks, Inc., which was brought by participants in Suntrust’s 401(k) plan, the Krueger case alleges that the fiduciaries’ decision to include investment options that were managed by affiliates of Ameriprise was intended to benefit Ameriprise by generating excessive fee revenue, rather than the Ameriprise plan’s participants.  Although financial services entities are free to include their own “in-house” or “proprietary” investment products in their plans, they generally must jump a number of administrative hurdles in order to avoid ERISA prohibited transactions.

Plaintiffs have had only limited success with excessive fee claims.  Many recent appellate court rulings appear to have created a fiduciary-friendly body of precedent through which fee challenges will be judged.  Nevertheless, several cases have resulted in large settlements, and at least one ended in a partial verdict in favor of plan participants at the trial stage.  Perhaps learning from their predecessors, plaintiffs in the Krueger case have alleged that:

  • The Ameriprise plan’s fiduciaries failed to engage in a prudent process when selecting and monitoring investment funds;

  • The fees charged by the funds offered in the Ameriprise plan exceeded the median fees for similar funds based on a survey conducted by the Investment Company Institutes

  • The plan’s investment committee chose funds that were poorly rated by Morningstar, when many other options were available; and

  • The investment committee offered funds at a more expensive share class than was available to the plan.

The complaint also contends that Ameriprise’ s board of directors is on the hook for over $20 million in alleged losses, because it acted as a fiduciary in appointing and monitoring the plan’s other fiduciaries.

Of course, this lawsuit has only just been filed, and the Krueger plaintiffs will undoubtedly face a vigorous defense and a skeptical court when pursuing their claims. The case underscores, however, that as long as Americans are dependent upon defined contribution plans for their retirement, the fiduciaries in charge of those plans will be closely scrutinized.