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News September 25, 2006 Issue

Plaintiffs' Lawyers Attack Revenue Sharing Under ERISA

A St. Louis plaintiffsí law firm has filed a series of class action lawsuits alleging that large corporate 401(k) plan sponsors breached their fiduciary duties under ERISA by failing to adequately consider the amount of revenue sharing payments made in connection with their planís investment selections. Because the revenue sharing payments were not taken into account, the suits allege, the plan sponsors caused plan participants to pay excessive fees. The suits are based on the assumption that revenue sharing payments are plan assets, an issue addressed in the recent Haddock v. Nationwide Financial Services litigation.

The suits, which name various directors and officers of the plans as co-defendants, claim that the plan sponsors failed to capture available revenue sharing payments and use them solely in the interests of the plans and plan participants. As a result, the suits allege, plan participants paid unreasonably high fees for their planís administrative and investment management services. The suits also allege that the revenue sharing payments were not properly disclosed to plan participants.

As reported on, six cases have been filed. In an interview, Jerome Schlichter, partner at Schlichter, Bogard & Denton, the firm that filed the suits, declined to specify the exact number of cases. He also declined to confirm reports that more cases will be filed. "Itís impossible to say," said Schlichter. "We havenít said that we would."

ERISA lawyers are viewing the lawsuits as significant and disturbing. Groom Law Group partner Rick Matta said that advisers should anticipate fee-related questions from their ERISA clients. "From a client relations standpoint, plan sponsors are going to want to know what is happening," he said. For example, plan sponsors may begin asking whether their plans face the same sorts of issues in relationships with service providers as those alleged in the lawsuits. "We would expect them to be turning to the service providers for this kind of information," said Matta.

Groom partner Stephen Saxon warned that the cases "set the stage for another wave of litigation" against investment managers and other plan service providers. "Thereís no doubt in my mind that that is going to happen," he said. "Mark my words."

Saxon noted that advisers to mutual funds in which a 401(k) plan invests should be spared, as such advisers are not fiduciaries under ERISA and the mutual fund is not deemed plan assets. "Thatís the safest place to be," he said. However, if a manager "steps outside that umbrella," he said, it could be named as a co-fiduciary. "Managers have the money and the plaintiffsí bar will find a way to get to the money," he said.