The realm of retirement plan fees is currently experiencing a stir due to a recent legal interpretation of ERISA’s prohibited transaction rules. This interpretation poses the risk of triggering numerous speculative challenges to retirement plan fees.
The core of this legal viewpoint suggests that the negotiation of a standard recordkeeping contract could be viewed as a prohibited transaction unless it’s demonstrated that the arrangement adheres to one of the relevant exemptions to those rules. This perspective could permit a plaintiff to challenge a plan fiduciary merely based on an assertion that the plan entered into a contract with a party that had some prior connection with the plan. Such a viewpoint might enable lawsuits targeting standard retirement plan fees without the plaintiffs having to provide any significant details to back their claims.
To provide context, third-party service providers, such as recordkeepers or investment managers, are frequently engaged by plans. A considerable number of ERISA plans rely on third-party advisers or consultants. The significance and potential impact of this recent interpretation cannot be understated, as it might affect a majority of benefit plans.
Two primary issues arise from this interpretation. First, the prohibited transaction rules are interpreted in a manner that produces a somewhat circular logic. It could, in effect, prevent a plan from paying fees for services to a service provider that provides those services for a fee. The implications of this could be profound, effectively suggesting that every contract related to plan services might be prohibited unless proven otherwise.
The second concern arises from the viewpoint failing to recognize certain statutory language. This language indicates that the prohibited transaction rules should only be invoked when it’s clear that no exemption is applicable. Instead of starting with the assumption that a contract might be unlawful, courts should lean towards the idea that a contract is legitimate, unless the opposite is proven. This approach resonates more closely with the entirety of the statute.
This legal interpretation might lower the threshold for plaintiffs challenging retirement plan fees. They may no longer need to provide substantial evidence other than the occurrence of a transaction between the plan and an affiliated party. Current requirements demand much more substantial details from plaintiffs, particularly that they not only demonstrate fees were paid but that these fees were overly high.
Reading the sections of ERISA in such a way makes routine service provider agreements seem problematic, and this doesn’t fit well within the broader remedial scheme of ERISA. Permitting these service contracts to be challenged could lead to significant operational challenges for plan administrators and sponsors.
The consequences of this interpretation, beyond the direct legal implications, are substantial. It could potentially expose fiduciaries to liability or at least substantial defense costs, even when they can demonstrate they’ve managed plans prudently and at reasonable costs. The broader view of fiduciary roles and responsibilities needs a reconsideration to ensure retirement plans can operate smoothly and efficiently.
