Emerging issues in 401(k) fee litigation – Reichert v. Juniper complaint

On August 11, 2021, a complaint was filed in Reichert v. Juniper Networks, alleging that defendant fiduciaries of the Reichert 401(k) plan breached their duties of prudence and loyalty under ERISA by, among other things, “failing to objectively, reasonably, and adequately review the Plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost” and “authorizing the Plan to pay unreasonably high fees for managed account services.”

In many respects, the Juniper complaint follows the pattern set more than 10 years ago for this sort of litigation, but two elements of it are somewhat unusual. First, plaintiff’s theory that two share classes included in the fund menu were not “prudent, in terms of cost” because of the availability of revenue sharing in an alternative share class (that plaintiff asserts should have been selected), even though that alternative share class carried a higher sticker price. And, second, plaintiff’s attack on the plan’s managed account arrangement.

In this note we briefly discuss plaintiff’s theory on these two issues.

Higher priced fund less costly because of revenue sharing

Plaintiff argues that plan fiduciaries, in constructing a fund menu and evaluating the cost of alternative investment funds/share classes, must focus on a share class’s “Net Investment Expense,” defined as the “difference between the total expense ratio and … revenue sharing,” arguing that that net amount is the actual cost of the investment services provided with respect to any investment fund. 

Plaintiff then identifies two share classes that, it alleges, were imprudently included in the plan fund menu, because the Net Investment Expense for those share classes was greater than available alternative share classes, even though the alternative share classes had higher total expense ratios.

The table below (from the complaint) illustrates plaintiff’s argument.

Because, for the “prudent alternative share classes,” fees net of revenue sharing, were less than the selected share classes, the share classes selected were alleged to be imprudent.

We are not aware of plaintiffs in other cases making this sort of argument or of any court decision finding fiduciary imprudence based on it. It presents some obvious problems (for plaintiff), e.g., revenue sharing from a particular fund/share class may not necessarily benefit participants investing in that fund.

Nevertheless, sponsor fiduciaries will generally want to consider this issue – fees net of revenue sharing and not just a fund’s sticker price – in making decisions about what funds to include in a plan fund menu.

Managed account fees

As a preliminary matter, we note that the managed account provisions of the Juniper 401(k) plan appear to function as a supplement to the plan’s investment funds, rather than as a standalone “qualified default investment alternative” (QDIA). 

There have been previous lawsuits targeting managed account arrangements and fees, including a series of cases attacking so-called “pay to play” arrangements.

Plaintiff in Juniper attacks the plan’s managed account arrangement on two grounds. First, he argues that, at 65 basis points, the arrangement is overpriced, citing “a number of other managed account providers whose services are virtually identical to the services provided to Plan participants … and whose publicly known fees range from 0.25% to 0.30% on all assets.”

Second, he argues that “[t]he Plan’s managed account services added no material value to participants to warrant any additional fees. The asset allocations created by the managed account services were not materially different than the asset allocations provided by the age-appropriate target date options ubiquitously available to Defendants in the market and already available to participants in the Juniper Plan.”

Arguments similar to these in Juniper were also made in the Home Depot litigation.

These two arguments fit together. That is, it is conceivable that particularly robust managed account services may actually be fairly priced at 65 basis points. But those “not materially different” from a target date fund would (in all likelihood) not be.

While it is not novel for plaintiffs to target managed accounts in a 401(k) fee lawsuit, it is not common. If plaintiffs can win some cases on this issue, or get some settlements, then these claims are, however, likely to be more common.

Sponsor fiduciaries implementing a managed account arrangement – whether (as here) as a supplement designed to help participants in choosing funds or as a standalone QDIA – will want to review a managed account program’s value proposition and compare both its effectiveness (in improving participant outcomes) and cost with other alternatives, to determine whether any fee differential is reasonable.

In addition, in view of the pay-to-play litigation noted above, sponsors may also want, in selecting a recordkeeper, to consider whether the recordkeeper limits available managed account solutions.

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We will continue to follow these issues.