401(k) Litigation Continues At ‘Fever Pitch’

Class action litigation based on the Employee Retirement Income Security Act remains, as one amicus brief labeled it, at a “fever pitch.” We at Euclid Fiduciary counted 48 new excess fee and performance lawsuits filed in 2023.

This is down from a near-record 89 complaints in 2022 but still reflects the higher filing frequency of the last eight years, in which 463 excess fee cases have been filed.

The most obvious explanation for the lower number of filings in 2023 is that frenzied court activity in the more than 200 pending cases is keeping legacy law firms like Capozzi Adler and Walcheske & Luzi too busy to file many new cases. The Schlichter law firm, widely reported to be trolling for participants on LinkedIn and social media to initiate excess fee claims against large company-sponsored health plans, was fully engaged with three excess fee trials in the last eight months.

In all, 2023 was a year of significant activity in pending cases, with a record 42 settlements; a record number of motions to dismiss, summary judgment and appellate rulings; and at least five cases being tried, including one before a jury. With new plaintiff firms entering the fray, all signs point to a continued high volume of excess fee cases and heightened risk exposure for sponsors of large retirement plans, especially jumbo-sized plans.

The following is a summary of the 2023 case filings, trends and reported settlements in ERISA excess fee and performance litigation.

Frequency

As noted, plaintiff law firms filed 48 new excess fee and performance cases in 2023. This is down from the higher number of complaints filed in each of the three previous years, but the total number is more consistent with the approximate 55-per-year average of the modern era of excess fee cases that started with the university cases in 2016.

We note that the frequency of filings was slightly higher in the second half of the year. Case filings averaged three to four cases per month in the first half of the year, but that increased to five cases per month in the second half of the year as the leading legacy firms returned with more filings.

The trend appears to be repeating the pattern of 2020 and 2021: the record year (2020), with 101 filings, was followed by a 40% drop-off the following year (2021) as legacy firms filed fewer cases.

The following tables compare 2022 to 2023 by law firm filings:

The chart below shows the size of the plans being sued:

2023 was the year of plaintiff law firms targeting jumbo plans with assets greater than $1 billion. If you read internet blogs, you will see commentary that plaintiff law firms are moving downstream to sue smaller plans, but that was not true in 2023.

The vast majority of cases were filed against plans with more than $500 million in assets, and two-thirds of the cases were against jumbo plans with at least $1 billion in assets. The outliers were the proprietary case against the $102 million GWA LLCplan and the excess fee case against the $140 million Amy’s Kitchen plan. The overwhelming trend was to sue jumbo plans with a higher potential for damages or to leverage a settlement.

In addition to the normal cycle of high- and low-volume years, we have seen evidence that any short-term slowdown in the frequency of filings will be temporary.

We continue to see ERISA Rule 104(b) information demands from plaintiff law firms, and many turn into lawsuits. Notably, we have seen a plaintiffs’ law firm that specializes in securities fraud class actions and with no experience in excessive fee cases sending demand letters to multiple companies threatening litigation based on purported excess recordkeeping fees. It shows we are nowhere near an end to lawsuits alleging excess recordkeeping fees and investment fees.

Trends

An analysis of the 2023 lawsuits reveals that plaintiff law firms continue to pursue bread and butter excess recordkeeping fee claims, but the number of investment underperformance lawsuits continues to rise.

The below chart tracks the types of excess fee and investment imprudence claims filed in 2023:

Claims of fiduciary imprudence for failing to leverage the size of the plan to negotiate a lower recordkeeping fee remains the staple of excess fee lawsuits.

The legacy law firms continue the same playbook of suing large plans for purported excessive recordkeeping fees based on the Form 5500 filing, then comparing the plan fees to unreliable Form 5500 data inflated with transaction and other non-recordkeeping fees.

While some complaints acknowledge that participants receive account statements and fee disclosures with the exact recordkeeping fee, most lawsuits continue to include transaction fees, thereby inflating the fees alleged to be excessive.

But while the legacy law firms continue to use the same basic playbook, newer entrants are advancing novel theories of fiduciary liability for recordkeeping fees. The most notable change in recordkeeping fee claims came from the 10 lawsuits filed by the Wenzel law firm in which it asserts new claims of improper indirect compensation to recordkeepers beyond traditional revenue-sharing claims. Most notably, the complaints allege that plan fiduciaries failed to monitor float interest in the clearing accounts of the plans’ recordkeepers.

Finally, the Haley Pawlenko law firm filed five recent complaints with novel theories of imprudent use of plan forfeitures.

In these lawsuits, plan participants allege that plan fiduciaries violated ERISA by using plan forfeitures to offset employer contributions instead of to pay plan expenses. The five plans being sued have plan documents that allowed discretion to the plan fiduciaries to use plan forfeitures to offset plan expenses and employer contributions.

In addition, while many cases assert excess recordkeeping fees, we continue to see an evolution toward more cases alleging investment imprudence.

For example, two cases filed by the Capozzi law firm are mostly focused on alleged investment underperformance:

• Macias v. Sisters of Leavenworth Health System, filed in June in the District of Colorado, in which the complaint alleges “mediocre” and “chronic underperformance” of the J.P. Morgan Smart Retirement target-date funds; and
• Fitzpatrick v. Nebraska Methodist Health System Inc., filed in January in the District of Nebraska, in which the complaint alleges chronic underperformance of Wells Fargo target-date funds.

The most noteworthy performance case of the year is the alleged investment imprudence claim against American Airlines.

The lawsuit filed by Hacker Stephens and Sharp Law LLP initially alleged that American Airlines plan fiduciaries selected and included at least 25 ESG-themed investment options in its sponsored defined contribution plan that are more expensive and that underperformed, and that fiduciaries included funds from investment managers who voted for egregious examples of ESG proxy mandates.

The plaintiffs immediately filed a new complaint after the motion to dismiss established that the plan had no ESG investments, and the sole plaintiff had not accessed the brokerage link feature of the plan. The amended complaint takes a new tact, alleging that the plan should have eliminated the option for participants to select ESG-themed investments in the brokerage link and should have divested from BlackRock investments in the plan because BlackRock has voted proxies to promote ESG corporate mandates.

As the case has progressed through discovery, given that the motion to dismiss the amended complaint remains pending, the plaintiffs have changed their theory of the case. Instead of divesting investments offered by investment managers who voted their proxies in favor of corporate ESG measures, the expert testimony proffered by plaintiffs in the case now asserts that American Airlines should have leveraged its BlackRock investments to convince the firm to change its proxy voting related to certain stock investments in companies like Exxon and Chevron.

This radical liability theory has many problems, but the main issue for the plan sponsor industry is that this type of lawsuit could be filed against any plan sponsor in the country, as there is nothing unique in the case that relates to the American Airlines plan. The case also shows how companies can be forced to spend significant dollars to defend frivolous claims when the district court does not rule on the motion to dismiss, including standing claims, before discovery and expert testimony is allowed.

Settlements

2023 was a year of record settlements in excess fee cases, with an all-time high of 42 settlements.

Since 2020, 111 settlements have been reported, with the number of settlements increasing progressively each year. During this four-year period, the 111 settlements amounted to $911 million, with a record $353 million in total settlement values in 2023.

The 2023 average settlement was $8.8 million, with a settlement range from $200,000 to $124.6 million. The overall value was heavily influenced by the three record settlements: $124.6 million from Ruane, Cuniff & Goldfarb LP, $61 million from General Electric Co. and $30 million from Verizon. If the $124.6 million settlement is removed, the average settlement value was still a robust $5.6 million.

While attempting to synthesize 42 settlements into cohesive conclusions is difficult due to the various fact patterns and complexity of each case, we believe two themes emerged in 2023 that demonstrate a settlement barbell effect.

On one hand, the average settlement for routine excess recordkeeping and investment cases has gone down. This is due to the lower quality of the recent cases and to the federal appellate decisions that have demonstrated that certain appellate courts will enforce a meaningful benchmark requirement comparing services for excess recordkeeping claims.

There is also a perception that the prolific plaintiff firms are willing to take a cost-of-defense settlement in a business model of churning cases. By contrast, while the average settlement value has diminished for routine cases, certain plaintiff law firms are seeking record settlements in cases involving alleged investment underperformance. The Verizon case is emblematic of this pattern, as the case settled immediately after summary judgment was denied. This contrasting pattern leads to a settlement barbell, with lower-value cases on one end and higher value investment underperformance cases on the other extreme.

Daniel Aronowitz is president of Euclid Fiduciary. His full analysis of 2023 excess fee and performance litigation is available here.