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Compliance March 15, 2024
401(k) World: The Litigators
The final story in this quarter’s PLANADVISER In-Depth series considers 401(k) litigation’s present and future.
Reported by Alex Ortolani
Art by Melinda Beck
Defined contribution plan litigation traces back to 2006, when attorney Jerry Schlichter and his firm, Schlichter Bogard & Denton LLP, filed what became its first case, Tussey v. ABB Inc. The complaint, which alleged a breach of fiduciary duty due to corporate expenses being paid out of employees’ retirement assets, was settled about 13 years later for $55 million.
By that point, an era of plan litigation had begun that, from the plaintiffs’ view, seeks to protect workers from retirement plan negligence. From the position of many plan fiduciaries and their defense attorneys, the trend has spurred a host of copy-cat complaints aiming to wring settlements from large plan sponsors and providers.
Whichever side is more accurate at any given moment—or if it’s some combination of both—one thing is certain: DC litigation remains relatively robust. Today, litigation tracker and insurance underwriter Encore Fiduciary reports at least 20 cases per year being filed since 2016, including a peak of 101 cases filed in 2020, with more filings predicted in 2024. These cases generally focus on the country’s largest plans, with 2023’s cases including 32 plans with more than $1 billion in assets, 12 with between $500 million and $1 billion, and only two with less than $250 million.
Veronica Bray, who has worked with plan sponsors to benchmark and search for retirement plan providers and advisers for the past eight years, expects no slowdown in litigation, with the potential for lawsuits to move “down market.”
“There are only so many billion-dollar plans, and we have already seen lawsuits in the hundred million dollar plans,” notes Bray, a former plan adviser and now owner of Retirement Plan Advisor Search.
Meanwhile, innovation and evolution naturally continue in the roughly $9 trillion DC space, which, in turn, continues to get attention from the plaintiffs’ bar. In Bray’s view, no matter where litigators turn, plan sponsors and their advisers must remain diligent in managing and monitoring retirement plans fees.
“No one can avoid a lawsuit, but plan committees can be educated on the right steps to take,” she says. “Just having an adviser is not enough—[plan sponsors] need to be equipped with the right questions to ask to ensure their adviser is checking all of the right fiduciary boxes.”
A Moving Target
Kim Jones, a partner in Faegre Drinker Biddle & Reath LLP, does not believe lawsuits have significantly changed retirement industry practices operating under the Employee Retirement Income Security Act, primarily because trial decisions by and large have supported fiduciary practices under ERISA.
“At the end of the day, the processes haven’t changed,” Jones says. “When these 401(k) cases go to trial, they have been generally favorable for the plan fiduciaries.”
Many cases end up settling, Jones says, in part because going to trial can be both time consuming and expensive.“There is a business decision that is made,” she says. “That’s a big concern from the defense bar’s stance, because we’d love to see more cases be litigated on the merits.”
Another challenge for defense attorneys is that outcomes may vary depending on which of the country’s district courts, often followed by appellate circuit courts, are hearing the case. While some courts are more likely to dismiss a case at the pleading stage, others will send them through for evidence.
In one recent incident covered by Jones and a colleague, a judge in the Eastern District of Wisconsin issued three decisions in the same day to throw out suits due to lack of significant plan “comparators”—a win for the defense and, in Jones and colleague’s view, precedent. The same judge, a few days later, did not dismiss similar suits brought by the same law firm, Walcheske & Luzi LLC.
Despite the differing outcomes, Jones notes that excessive fee complaints are slowing down as earlier cases get dismissed. Meanwhile, her firm is working on the next wave of cases, including more recent lawsuits regarding forfeiture cases, in which plaintiffs are arguing that plan sponsors should only be using forfeited funds to reduce fees for participants.
Faegre Drinker Biddle & Reath, she says, is also preparing for new employee benefit-related complaints to come in health care, which has come under increased regulation via the Consolidated Appropriations Act of 2021. Schlichter Bogard & Denton LLP, the firm that kicked off DC plan litigation, appears to be a frontrunner in considering this area of litigation, though no complaints have yet been filed.
Plaintiffs’ Bar
Attorney Paul Secunda, who runs the employment litigation practice at the aforementioned Walcheske & Luzi, returned to litigation about four years ago from academia, having been a professor of law at, most recently, Marquette University Law School. Secunda says he was prompted by noticing that many large firms in Wisconsin, and nationally, had support in managing their workplace benefit plans, but that participants were less well represented.
“I noticed that there was a complete absence of people counseling and advising and protecting the participants in the plans and their beneficiaries,” he says, noting that there were active law firms in the space, but not enough for the need.
The attorney filed his first excessive fee complaint in June 2020 and has since filed about 50—about one per month. At the start, the complaints were focused on allegedly excessive recordkeeping and administration fees.
At the heart of those initial cases, Secunda says, is a debate between the plaintiffs’ bar and the defense bar over whether recordkeeping fees are commoditized and therefore negotiable according to plan size. He points to a case brought by Schlichter Bogard & Denton, Hughes v. Northwestern University, which went to the U.S. Supreme Court. After being remanded to the 7th Circuit, a panel of judges found that “plaintiffs have sufficiently alleged that recordkeeper consolidation and soliciting an equally capable but lower-cost recordkeeper were available options.” The judges sent two of three claims back to the district court to be reevaluated.
Secunda believes such litigation has led to lower fees for participants.
“When people ask me, ‘Has the plaintiffs’ bar done anything?’ I say, ‘Look at recordkeeping fees,’” he says. “They are a third of what they used to be.”
That fee compression, however, is partly what is leading to future areas of litigation, Secunda says. With big recordkeepers facing reduced fees, it begs the question of, “How they can make money?”
That is at the crux of complaints Secunda has filed, and likely more he will be filing. Those complaints center on plan sponsors defaulting participants into managed accounts and directing them to self-directed brokerage accounts.
“Is litigation slowing down? No,” he says. “I’ve always felt like the 401(k) world and the 403(b) world are run by the large investment companies, and they need to generate funds … and so they have to find different areas where they can generate revenue, and they can’t do it in recordkeeping anymore.”
Participant Focus
Eric Droblyen, president and CEO of 401(k) provider Employee Fiduciary LLC, writes frequently about ERISA compliance, plan design and investment management. He cautions the mid-to-small retirement plan market that it should not be influenced too much by legal concerns. In his view, the best approach plan fiduciaries can take is focusing on their participants and getting the right outcomes, as opposed to worrying about litigation.
“We need to change the mindset of the employer from, ‘I’m afraid of getting sued’ to the importance of prudent investment selection for participant returns,” he says. “When you’re an employer hiring an adviser, you have to have an advisory who is operating under a fiduciary standard of care. A broker or insurance agent can be conflicted, and if advice is conflicted, what’s the value of it?”
Firms can benefit, he says, by hiring a 3(38) investment manager that can take on the fiduciary decisions related to plan menus. In addition, he notes that people should beware of that “inner Gordon Gecko,” looking to make the highest returns.
“Retirement plan investing should be boring,” Droblyen says. “That’s the reality.”
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