2023 Retirement Plan Litigation Highlights

Employers across the country sponsor more than 625,000 401(k) plans. Due to poor practices and a lack of oversight, lawsuits first targeted 401(k) plans about 15 years ago. Since then, lawsuits have continued and recently reached historic levels.

According to a recent article from Brach and Eichler LLC, from 2019 through mid-2022, more than 200 class action lawsuits were filed against 401(k) plans, fiduciaries and plan sponsors. Companies spent more than $150 million to settle those lawsuits.

To provide plan fiduciaries with an update on recent litigation in the industry, below are some of the lawsuits we have been monitoring in the last few months.

Wehner v. Genentech Inc.

The plaintiff in Wehner v. Genentech Inc. alleged that the plan fiduciaries breached their duties by imposing recordkeeping, administrative and investment management fees that were too high. In addition, the plaintiff stated that investment funds included in the menu allegedly underperformed and had high fees.

After multiple rounds of motions to dismiss, the only claims that remained were the violation of duty for excessive recordkeeping and administrative fees and the failure of fiduciaries to monitor these fees. The claims regarding the investment performance and high investment fees were thrown out.

Lessons for plan advisers and sponsors

• Have a process in place to review fund performance;
• Follow the criteria outlined in your IPS; and
• Document your committee’s decisions.

This suit has been settled for $250,000. 

Sean Duffy

Kohari et al v. Metlife Group Inc. 

A group of participants in this suit alleged that the fiduciaries selected proprietary funds for the plan’s investment menu that promoted their employers’ products and earned the employer additional profits. As noted in the suit, this went against fiduciary duties of selecting and monitoring investments in the best interests of plan participants.

The proprietary investments were said to be more expensive and of lower quality than other competitive options in the marketplace. 

Lessons for plan advisers and sponsors

• Have clarity around fees and all the parties receiving compensation; and
• If using proprietary funds, ensure they are in the best interest of participants and not being used because of a requirement or because pricing incentives are received.

This suit currently has a proposed settlement of $4.5 million. 

Anderson v. Advance Publications Inc. 

In this suit filed in August 2022, the plaintiff alleged the target-date funds (BlackRock) used in the retirement plan were performing significantly worse than many of the mutual fund alternatives offered by target-date-fund providers.

It also mentioned that the fiduciaries looked to be chasing low fees charged by BlackRock TDFs instead of considering their generated returns. In fact, there have been about a dozen other suits filed across the country with similar allegations against BlackRock’s target-date series.

Lessons for plan advisers and sponsors

• Know what’s under the hood of your qualified default investment alternative; and
• Review the universe of options periodically, because it’s ever changing.

These suits have not fared well in courts, with almost all dismissed. In this case, the participants dropped the suit.

McManus v. Clorox Co.

The participant/plaintiff who filed this suit alleged that the plan sponsor has:

• Breached fiduciary duties under the Employee Retirement Income Security Act;
• Violated ERISA’s benefit of private interests’ provision; and
• Engaged in self-dealing transactions.

The complaint indicated that the plan sponsor has acted wrongfully by using plan forfeitures of terminated participants to offset company contributions, rather than offsetting plan expenses. The suit acknowledged that the plan document gives the sponsor discretion regarding how plan forfeitures are used, but the plaintiff stated that such forfeitures have consistently been used to reduce the company contributions. 

The claim stated that the plan sponsors were not acting solely in the interest of plan participants, since they are consistently utilizing the forfeited funds to reduce their own future contributions to the plan. 

Lessons for plan advisers and sponsors

• Make sure the plan document is being followed closely.

This suit is currently under litigation. 

Outlook

Historically, most 401(k) lawsuits have targeted high recordkeeping/administrative fees and poor investment performance. Over the past several years, they now seem to be targeting a wider range of areas. Managed accounts, target-date funds, proprietary fund usage and forfeiture usage have all been named in recent lawsuits.

We expect lawsuits to continue at a high pace over the next several years. This reinforces the need of a sound prudent process as plan fiduciaries and the assistance of an investment adviser to mitigate fiduciary risks involved with sponsoring a retirement plan.

This contribution is based on a piece posted by Conrad Siegel.