U.S. Litigation
Recently, U.S. employees have brought lawsuits against employers that sponsor 401(k) plans and their service providers. They allege that, as plan fiduciaries, the employers failed to adequately:
• investigate fee arrangements and understand how service providers are compensated;
• negotiate fee reductions or rebates and look for alternatives to determine whether or not the fees paid by plan members were reasonable;
• monitor service providers and the fees and expenses charged to the plan; and
• disclose to members the actual fees and expenses incurred by them under the plan.
In particular, U.S. litigation has focused on the “hidden fees” paid indirectly to brokers, investment managers and other providers. Even though the overall fee may be reasonable, the plaintiffs allege that the failure to determine whether or not the separate services were necessary and appropriate for the plan, and the failure to separately disclose such costs to plan members, represent a breach of fiduciary duties under U.S. federal pension legislation (ERISA). To date, most of these cases have been settled or remain undecided.
But the issue has triggered several bills in Congress requiring greater fee disclosure, although none has passed yet. It also prompted the U.S. pension regulator, the Department of Labor, to issue proposed regulations addressing enhanced disclosure by service providers in contracts with plans. The draft regulations mandate that contract terms must require the provider to disclose all services to be performed and identify all compensation to be received by the provider directly from the plan or indirectly from other parties. The proposed regulations also contain rules for attributing and disclosing bundled fees.
Will Canada Follow?
Although there is no Canadian equivalent to ERISA, fiduciaries here are subject to similar legal duties (to act prudently and solely in the best interests of members). By law, Canadian and U.S. fiduciaries must ensure that fees and expenses incurred by the plan are appropriate and reasonable.
While the scope of fiduciary responsibility in relation to DC plans has yet to be legally tested in Canada, it is not a stretch to conclude that fiduciary duties would apply to employers and a variety of service providers in relation to DC plans. These duties, along with recent case law emphasizing a plan administrator’s legal duty to disclose all “highly relevant” information to plan members, provide the legal foundation for lawsuits over fees in Canada.
In Canada, the CAP Guidelines state that plan sponsors should provide members with a description and the amount of all fees and expenses to be borne by the members, including fees relating to investment management, recordkeeping and those of other providers. This may require breaking down bundled fees and disclosing them separately.
In view of these legal duties, Canadian sponsors of DC plans should carefully review all fees being charged to plan members and consider providing enhanced disclosure of all fees borne by plan members (including full disclosure of all providers that receive fees). In addition, sponsors should make every effort to demonstrate that any fees being charged to members are both appropriate and reasonable.
Paul Litner is a partner in the pension and benefits department at Osler, Hoskin & Harcourt LLP. plitner@osler.com
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