Continued lawsuits over excessive 401(k) fees are on track to force providers to change the way they deliver products and are likely to lead to the end of revenue-sharing agreements.

Ameriprise on Thursday agreed to pay $27.5 million to settle a suit that alleged it loaded its company 401(k) with its own mutual funds and violated its fiduciary responsibility. The company did not respond to an inquiry seeking comment on the settlement.

It follows nearly a dozen similar cases over the last couple of years, and many more going back to 2000, over excessive fees that are embedded into investments made available for 401(k) plan participants, says Brian Menickella, co-founder and managing partner of King of Prussia, Penn.-based financial services companies The Beacon Group of Companies.  These fees are often unknown to the participant, while eroding their returns, he says.

An employer has a responsibility to protect employees from these kinds of investments, he adds, as the employer must act in the best in the best interest of the plan participants. In the Ameriprise case, for example, the employer was alleged to be receiving kickbacks from the “excessive fees, which is called revenue sharing.” Menickella says revenue sharing is the common denominator for all the recent cases.

The Ameriprise settlement “puts everyone on notice,” he says. “The 401(k) has been the quiet benefit for a long time, no one complained about it. If you saw a 10% return the employee was happy, but didn’t realize that should be a 12% or 13% [return.] … Now there is a lot more light being shined on these plans through these [lawsuits.]”


In the near future, Ary Rosenbaum of The Rosenbaum Law Firm PC in Garden City, N.Y., sees the end of revenue sharing. “It is a platform that will be over,” he says. “Nobody will want to touch it with a 10-foot pole.” By ending the practice, he adds, it increases transparency and keeps everybody on the “up and up.”

But like anything in business, that will take some time, Rosenbaum, whose firm focuses on ERISA and retirement plans, says. “In this industry there are no tidal waves. It’s like throwing a message in a bottle — quite a few years for it to get to shore,” he says. “It’s a long range change you’ll see. It will evolve over time and with any great ERISA litigator, they will find more and more companies” to bring suits against.

As a result, all big providers who are in the business and have their own funds in their plan need to look into it and consider changing their fund lineup, Rosenbaum says.

In these large class action lawsuits, he explains, you are often dealing not with bad people, but bad decisions. “There may not be any wrongdoing, but any showcase of impropriety leads to the suggestion there was impropriety,” he adds. “It’s all about experience. You can’t have something that looks shady. Revenue sharing has always been a practice that looks shady to me.”

The real outcome of these lawsuits is that it will “force providers to change the methods and platforms in which they delivery 401(k)s,” Menickella says. “They are targeting this revenue sharing and [it will be] more than the norm that revenue sharing is no longer in the equation.”

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