Compliance December 13, 2023

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

Attorneys from Faegre Drinker Biddle & Reath LLP discuss qualified retirement plan litigation trends for the new year.

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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.

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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.

Data & Research December 13, 2023

DOL’s Fiduciary Rule Faces Uncertain Future

Although regulators are motivated to finalize the rule, it will likely face litigation, according to Capital Group’s senior counsel.

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The Department of Labor’s fiduciary rule faces a “rocky road” ahead due to expected litigation, despite regulators pushing to finalize the rule, according to Jason Bortz, the Capital Group’s senior counsel, at the firm’s webinar, “Washington Update: Legislative and Regulatory Changes for the 401(k) industry,” on Tuesday.

The new DOL regulation defines when a person is acting as a fiduciary investment adviser in dealing with a plan or an individual retirement account. To a large extent, the rule will not impact workplace retirement plan advisers, who already operate as fiduciaries following the Employee Retirement Income Security Act, Bortz noted. The Capital Group owns American Funds, the fifth largest defined-contribution-investment-only asset manager in the country, according to PLANADVISER’s 2023 DCIO survey.

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The proposed rule would, however, have an impact on the broader advising community in terms of individual retirement account rollover guidance and the sale of annuities as retirement income products. While the DOL and the administration of President Joe Biden seem focused on getting the amendments passed, the road to approval will be paved with potholes, according to Bortz.

Second Run

The legislative expert pointed to prior history as a key example of what might slow the proposal down: A prior rule instituted during the administration of former President Barack Obama was voided by the U.S. 5th Circuit Court of Appeals in 2018. The appellate decision stated that the DOL rule was “an arbitrary and capricious use of regulatory power.”

“This is [the DOL’s] second run at it, and I will just say it is very similar to their prior iteration. It is not dramatically different,” Bortz said.

The rule will apply to investment professionals and those who work for a broker/dealer or an investment adviser. When they make a recommendation to an IRA owner, a plan fiduciary or plan participant, they “will now be held to a fiduciary standard,” Bortz noted.

“Your broker/dealer firm or RIA will have to have conflict-of-interest-mitigation policies in place,” Bortz said. “I usually get asked, ‘How big a deal is this?’ I’d say it’s still a big deal, but it’s not as big a deal as it was back in 2015, 2016. … The world has evolved enormously since then.”

In institutional retirement, the vast majority of advisers are either doing business in an advisory capacity or, if acting as a broker of record, they are getting level compensation, meaning the compensation does not vary based on the investment menu. Bortz said firms have also adopted sophisticated policies to appropriately govern rollover recommendations.

Bortz is not particularly “worried about institutional retirement. There are issues, and I wouldn’t say it’s nothing,” he said. “But the biggest impacts are more on the wealth side of the fence. They’re picking up anything that’s commissionable investment advice, like annuity recommendations as a particular focus. It’s not quite the size it once was, but it is a big change if it gets to the finish line and goes live.”

Litigious Future

Will the regulation reach the finish line? The answer is complicated, Bortz said.

He expects the rule will get finalized, as it was rolled out in the White House with Biden giving a speech about its importance. In addition, the administrations is going through an “incredibly accelerated regulatory process compared to usual,” showing its desire to get something passed.

“The proposal was released on Halloween, and we’re already having a hearing,” he said. “I’ve never seen an agency having a hearing before comment letters are due in my entire career. It has never happened, so that’s kind of wild.”

Bortz said comment letters are due by January 2, 2024, and regulators are going to be very motivated to finalize rules by May 2024 because of legislation that creates an easy path to revoke an agency rule. He predicted the package will be finalized in April or May but noted that there is a consensus that the rule will be challenged.

“It’s going to the courts, and did they really do enough to sort of change the facts they lost last time?” he asked. “Why wouldn’t they lose this time? Then you throw on top of that, there’s an election. If there’s a new administration, it’s hard for me to see them not reopening this rule. There are a lot of reasons to think it faces an ‘iffy’ future. No guarantees, but it’s got a rocky road ahead.”

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