Top Advisers: Diligence About 401(k) Plan Litigation as Crucial as Ever

As the risk of 401(k) plan litigation remains at a heightened level, plan advisers face increasing pressure to protect plan sponsors. The steady drumbeat of plaintiffs’ bar lawsuits, driven by both legitimate claims and by opportunistic legal actions, highlights the growing challenges advisers face as fiduciaries, according to practitioners.

With evolving retirement plan designs and expanding fiduciary responsibilities, compliance with the Employee Retirement Income Security Act remains complex and elusive. Meanwhile, experts note that litigation is no longer confined to large plans, with smaller plans also under threat. Recent legal developments, including the U.S. Supreme Court’s overturning of the Chevron doctrine, further complicate the landscape.

Legal developments increase the need for robust risk management and vigilance among the adviser community, and top advisers shared thoughts on how to manage the evolving landscape.

Who’s At Risk

“The number of [plan litigation] cases have continued to rise,” says Robert Massa, managing director of Qualified Plan Advisors, a division of Prime Capital Investment Advisors LLC. “There are more law firms that are looking for opportunities to bring these lawsuits. Some of them are legitimate, as always, and some of them are frivolous and everywhere in between, so we have to be more diligent than ever.”

As retirement plan design branches into new areas, such as in-plan retirement income and environmental, social and governance factors, the fiduciary scope for which advisers are responsible continues to expand, Massa says. ERISA does not provide step-by-step documentation for advisers on how to stay “100% within the guidelines.”

“There’s just no such thing,” he says. “That’s part of what we teach in fiduciary training. We have this funny page where we say, ‘Here’s the exact set of standards that you need to follow as a fiduciary,’ and it’s a blank page.”

Among plans, Massa states that larger ones are still most likely to be targeted, with lawyers looking at plans with greater than $100 million in assets. He says plaintiffs’ attorneys file lawsuits for free, hoping for settlement or a favorable conclusion; going through that entire process for a $5 million plan would not be worth the cost.

Massa did note that small plans are not being ignored, however, as they still face plenty of risk with Department of Labor and IRS regulatory enforcement.

Jania Stout, a senior vice president of retirement and wealth at OneDigital, agrees, adding that plan litigation previously may have revolved around large class action suits focused on the mega market, but that is not necessarily the case anymore.

“Now we see suits that are being filed for less than $1 billion in assets, and even sometimes there’ll be that random $30 or $50 million plan that’s got some type of lawsuit,” says Stout. “As it comes down market, it’s going to impact or create more fear for plan sponsors than before.”

The pool of candidates to sue in the mega market has shrunk, and the largest number of plans are on the smaller end, so law firms are coming down market, Stout explains. Additionally, litigation risk has increased overall, as law firms have more familiarity with this type of legal proceeding.

“It used to be just maybe one, two or three,” she says. “Now we’re seeing, as I track it, over a dozen to two dozen plaintiffs’ councils out there that are running these types of lawsuits.”

Protecting Plan Sponsors

Businesses of all sizes—large, midsized or small—face inherent risks, Stout states. It could be scrutiny from a plaintiff’s attorney or from the Department of Labor after a disgruntled employee made a call; advisers need to prepare to defend their clients, regardless of plan size.

Stout says her firm has not had a client go through with a case, but they have had a client receive an exploratory letter from a plaintiffs’ law firm. They call the document a “Schlichter letter,” says Stout, named after Schlichter & Bogard, the firm that first started bringing 401(k) cases under ERISA. It’s a term used in the industry even when it’s not the Schlichter firm requesting information.

“[The plaintiff’s law firm] sent an exploratory letter to the client and started asking for a lot of information,” she says. “The good news about the situation was that we had a really good, prudent process for them. We had all their documentation. We were able to immediately work with their ERISA counsel and let the law firm know politely they’re not going to find anything here.”

Stout says advisers at her firm always tell plan sponsors not to give out information to whoever asks. Sponsors should always call their adviser and ERISA counsel before sharing sensitive information with a law firm or regulatory agency.

“It’s not that you’re hiding anything,” she says. “You want to be really careful when you’re dealing with any of those entities.”

Sean Kelly, a financial adviser and vice president with Heffernan Financial Services, emphasizes that the best practice for protecting plan sponsors from litigation is through meticulous documentation.

“In the investment policy statement that we have in place with every client, we’re really spelling out how we monitor the investments basis, what’s passing, what’s failing,” he says. “They’re all documented, written and signed.”

Kelly says his firm also offers investment committee training for clients on fiduciary responsibility. The investment committee ensures fee transparency by clearly outlining who is being charged and who is being paid. The committee is also responsible for benchmarking recordkeepers, third-party administrators and plan advisers on costs and services.

 “We make sure it’s as frequent as the DOL and ERISA recommend, making sure that everybody’s pencils are sharp,” Kelly says.

Chevron

Advisers are also paying close attention to the Supreme Court case that overturned almost 40 years of precedent requiring the federal judiciary to defer to federal agencies’ “reasonable interpretations” of federal laws, shifting instead to the previous standard by which courts can consider—but do not need to defer to—an agency’s interpretation.

Massa says that without Chevron deference, everything on both sides of the lawsuit equation changes. He says although the ruling could reduce the regulatory role of the DOL in some places of ERISA, it could also be “very painful” for plan fiduciaries.

“[The Supreme Court ruling] also opens up the question of, ‘Why the fiduciary construct?’” says Massa. “If we don’t have any guidance, then it also opens new avenues for potential ways that plaintiffs can bring suits. It’s a double-edged sword.”