Litigation Trends to Watch in 2024: Drop in TDF Suits, More Forfeiture Complaints

There is good and bad news when it comes to the litigation targeting defined contribution plan fiduciaries in 2024, according to attorneys from Faegre Drinker Biddle & Reath LLP.

In one area of class action complaint, attempts to sue plan fiduciaries for choosing one type of low-cost target-date fund versus other options appear to be petering out, in part due to a string of losses. However, an area of increased litigation, and focus, is emerging in a series of complaints targeting how retirement plan forfeitures are being used by plan sponsors.

Low Cost Effort

Kimberly Jones, a partner at Faegre Drinker, discussed during a client webinar on Tuesday the key trends in the near decades-long “wave of litigation” targeting plan fiduciaries for allegedly paying excessive recordkeeping and administrative fees or maintaining expensive or underperforming investments in the plan offering.

In fall 2022, Jones noted, law firm Miller Shah LLP filed a string of lawsuits attacking fiduciaries for offering allegedly underperforming BlackRock Inc. target-date funds. The complaints were unique in essentially admitting that the TDFs were low-cost, yet alleging they were not the best option.

“Not surprisingly, this criticism for choosing low-cost investments has really infuriated plan fiduciaries and defense attorneys alike, because it really feels like the fiduciaries are in between a rock and a hard place,” Jones said. “If you are getting sued for offering low-cost investments, then you feel like you just can’t win.”

The response from courts, as noted by Jones, has been mostly uniform: siding with defendants. Nine out of 12 lawsuits have been at least initially dismissed, pending amended complaints, and six were dismissed with prejudice or voluntarily dismissed.

Only one, Trauernicht v. Genworth, was won by the plaintiff, but only after the court found “more details about deficient monitoring process” in the discovery process. Meanwhile, there has only been one new complaint filed since August 2022 regarding the BlackRock TDFs.

“It turns out this may have been a failed experiment by the plaintiffs’ bar in this situation,” Jones said. “We’re not expecting to see any more filings any time soon.”

BlackRock is the country’s largest manager of defined contribution investment assets, according to PLANADVISER’s 2023 DCIO survey.

New Frontier: Forfeitures

A new area for the plaintiffs’ bar has emerged in place of low-cost TDFs, however: how plan fiduciaries are managing forfeitures in qualified retirement plans.

This year, five lawsuits were filed by law firm Hayes Pawlenko LLP regarding how plan sponsors managed funds from nonvested portions of terminated participant accounts, Jones noted.

According to the IRS, such forfeitures can be used to pay plan expenses, reduce employer contributions or allocate back to plan participants, as per Faegre Drinker’s interpretation. How fiduciaries handle them, however, must be laid out in the plan documents.

The five complaints allege that the plan sponsors in question were incorrectly using the forfeiture funds to reduce employer contributions instead of allocating the funds to remaining plan participants, Jones noted. The suits are now pending against the Clorox Co., HP Inc., Intuit Inc., Qualcomm Inc. and Thermo Fisher Scientific Inc.

“There are no relevant decisions at this point, but we have identified some weaknesses in the complaints that are going to come to light,” Jones said. “Primarily … using forfeitures to reduce employer contributions is permitted by the IRS, and the complaints explicitly allege that the plans at issue provided that forfeitures could be used for the purpose that the employers were using them for, which is offsetting contributions.”

Jones said Faegre Drinker expects motions to dismiss to be filed shortly, and there should be some clarity by spring 2024 on whether the cases “have any legs.”

During the webinar, attorneys for Faegre Drinker also discussed legal issues related to trending areas such as environment, social and governance investing in defined contribution plans; the more stringent regulatory environment in the health care industry; and artificial intelligence use in retirement planning and advisement.