New Year Brings Familiar DC Plan Litigation Actions

It may be a new calendar year for defined contribution (DC) retirement plans, but the professionals running them are still concerned with the same serious fiduciary risks that troubled the 401(k) industry in 2015.

Following a busy month of December, new retirement plan litigation is already grabbing industry trade media headlines this year—alleging by-now familiar varieties of malpractice on the part of some very large plan sponsors and their service providers.

The new cases include Rosen v. Prudential and Bell v. Anthem, which both at their core argue retirement plans of any substantial size have tremendous bargaining power to demand low-cost administrative and investment management services—and therefore that plan sponsors or providers who don’t negotiate strongly for a good deal for participants are making a punishable fiduciary breach. As Employee Retirement Income Security Act (ERISA) fiduciaries to the plans in question, the complaints suggest plan officials and service providers are obligated to act for the exclusive benefit of participants and beneficiaries, rather than striving to get a good deal from the plan sponsoring employer’s or service provider’s perspective.  

Over the years different cases have taken different approaches to the central problems of alleged imprudence and conflicts of interest within 401(k) plans. For example in the new Bell v. Anthem complaint, it is alleged that plan fiduciaries allowed unreasonable expenses to be charged to participants for administration of the plan, and that they selected and retained high-cost and poor-performing investments compared to available alternatives. The complaint suggests the Anthem plan, “as one of the country’s largest 401(k) plans … with over $5.1 billion in total assets and over 59,000 participants with account balances,” should have gotten as good or better a deal than anyone in the institutional investing markets, but it failed to do so in a variety of ways, leading to about $18 million unnecessary fees/losses for participants. 

One detail that ought to worry outside plan sponsors and officials is that the Anthem plan had recently taken direct action to reduce its expenses—but it simply didn’t go far enough in its push for better pricing, according to the complaint. Most of the “imprudent” funds cited by name are provided by Vanguard, widely known for transparency and affordability, and are actually quite cheap from an industry-wide perspective, below 25 bps in annual fees. One fund cited has just a 4 bps annual fee, but according to the compliant an otherwise identical 2 bps version could have been obtained by an investor with the size and sophistication of the Anthem plan. Therefore an alleged breach occurred when Anthem continued offering the 4 bps version.

NEXT: Weak negotiators targeted in DC plan suits 

The Anthem complaint describes further alleged breaches resulting from the plan sponsor's failure to negotiate better pricing based on the size of its plan. For example, plaintiffs suggest recordkeeping fees paid to Vanguard were excessive and ranged widely in an arbitrary manner that did not reflect the level or value or the actual services being delivered. Pricing for recordkeeping, according to the complaint, fluctuated essentially at random from $42 to $90 or more per participant per year, while similar-sized plans paid steady prices of less than $30 per year per participant during the time period in question.

In the Rosen v. Prudential complaint, plaintiffs take up a somewhat different issue related to revenue sharing payments exchanged by their plan’s service providers. They go so far as to suggest certain “kickback payments” were exchanged by Prudential and other investment service providers, “essentially as part of a pay-to-play scheme in which Prudential receives payments from mutual funds in the form of 12b-1 fees, administration fees, service fees, sub-transfer agent fees and/or similar fees [collectively referred to as revenue sharing payments] in return for providing the mutual funds with access to its retirement plan customers, including its 401(k) plan customers.”

The complaint says the revenue sharing payment in question were “internally described by service providers, such as Prudential, as ‘services fees’ and reimbursement for expenses incurred in providing services for, to, or on behalf of the mutual funds.” The plaintiffs say this was blatantly deceptive, because “the amounts of the revenue sharing payments bear absolutely no relationship to the cost or value of any such services.” They are instead based, “in whole or in part, on a percentage of the retirement plans’ investments in a mutual fund that are delivered to it by Prudential and/or based on the magnitude of the investments by such retirement plans in the mutual fund.”

The complaint goes on to suggest Prudential performs the same services regardless of the amount of revenue sharing payments, if any, made to it. “As a result of its acceptance of these unlawful payments, Prudential occupies a conflicted position whereby it effectively operates a system in which it is motivated to increase the amount of such payments, while improperly requiring certain plans and/or participants who invest in mutual funds and similar investments that provide higher amounts of revenue sharing payments to incur and pay unreasonably high fees for the services provided,” the complaint says.

NEXT: What’s a concerned plan official to do? 

Speaking recently with PLANADVISER, David Levine, principal and ERISA-specialist with Groom Law Group, suggested one of the most important takeaways from the last several years’ worth of retirement plan litigation is that, “as plan officials and fiduciaries, your primary job is to monitor and watch things and make necessary changes.”

“To me, something else the growth in big name cases such as Tibble v. Edison really shows is that plaintiffs firms are feeling emboldened and they are looking for new and creative ways to challenge plans and drag them into court,” Levine explains. “As a plan fiduciary you need to be carefully watching and monitoring for all sorts of potential claims.”

The monitoring process will be rooted in such fiduciary staples as peer-group benchmarking of recordkeeping fees, investment costs/performance and any other recurring expenses paid out of participants’ accounts. Beyond actually performing this monitoring effort, plans must also be careful to keep formal documentation of all investment- and service-related deliberation and decisionmaking. Levine suggests plan committees should maintain a formal schedule of periodic meetings and keep detailed minutes of both deliberations and decisions made during each meeting. If challenged in court, the plan will then already have evidence ready to go that can clearly prove it went through a prudent process in making a given decision or non-decision. 

Jamie Fleckner, partner in Goodwin Procter's Litigation Department and Chair of its ERISA Litigation Practice, agrees plaintiffs’ lawyers have been emboldened by recent settlements and court decisions. 

“I sat next to a prominent plaintiffs’ lawyer during the Supreme Court arguments in Tibble, and immediately after the arguments, long before the decision even came out, he said, ‘We will see you in court,’” Fleckner told PLANADVISER last year. “He told me he had been holding off on filing some 401(k)-related complaints, but after Tibble he is feeling emboldened." Both Fleckner and Levine say they have had clients “who have had employees in their plans get solicitation letters directly from plaintiffs’ attorneys, looking to identify employees or retirees who participant in 401(k) plans, to see if they’d be willing to sue their plan sponsors.”  

Drawing a lesson from the settlements of Spano v. Boeing and Abbott v. Lockheed last year, Fleckner warns that seemingly minor fiduciary breaches can get magnified into major headaches for plan sponsoring employers—especially large employers. For example, including a retail share class of a given mutual fund that is just a few basis points more expensive than the institutional share class can lead to tens of millions of dollars in settlement costs. In other cases, more "boring" sections of the investment menu have gotten sponsors in a lot of trouble. 

“One of the last very large one of these cases to settle was the Lockheed case,” Fleckner says. “It was a multi-billion plan and faced a settlement price tag of about $62 million. About two-thirds of the value of that settlement derived from the plaintiffs' challenge to the performance of the stable value fund. They argued, successfully, that it was invested more like a money market fund than a stable value fund, and as a result the returns were lower than could otherwise have been obtained.”

Levine concludes by noting it’s important for advisers to be “proactively managing your clients. You need to make sure everything is in line—that the disclosures all line up and that that plan documents are all in order. Plaintiffs lawyers are out there right now looking for the gaps.”