ERISA Litigation: How Low Will 'They" Go?

The ERISA litigation field in recent years has seen copycat filings, plagiarism in pleadings, factual flaws, and misleading assertions—but to my eyes, we’ve just hit a new low.

I’m speaking of what appears to be a new strategy, at least in this area of the law. Specifically, a California law firm by the name of Lieff Cabraser Heimann & Bernstein is in the midst of what appears to be a pre-trial “shakedown.”

More specifically—brought to my attention by Daniel Aronowitz (writing for The Fid Guru Blog)—Leiff Cabraser is currently engaged in a letter writing campaign to plan sponsors, alerting them to a series of assertions about ERISA litigation, allegations about the fees paid by participants in their plans (relative to a standard that has been repeatedly criticized in that context at trial)—all alongside the fact that they’ve allegedly found an as-yet-unnamed plaintiff-participant in the plan in question that is said to be willing to represent a class action alleging the plan’s fiduciary breach. 

Oh—and the purpose of this campaign? Why, according to the letter, Lieff Cabraser Heimann & Bernstein is “open to discussing our client’s ERISA claims in hopes of reaching an early resolution…before a great deal of time and expense is incurred by any party in litigating this matter.” 

And if the threat of litigation was not sufficient to garner their attention, the letter closes, “This may be the last time that the parties have total control over the outcome of this matter without leaving it up to the Court. A settlement now, before the parties have incurred significant litigation expenses, will benefit both parties.”

Perhaps, but I’m guessing one party in particular.

Sadly, there’s nothing illegal in this approach—even though it smacks of extortion. As for the recipients of these letters, they may well know that the fees their plans/participants are actually paying are much different than the letter suggests, but they may NOT know of the shortcomings in the way the 401(k) Averages Book data is presented (though already noted by more than one court) and applied to their plans (Mr. Aronowitz does an artful job of explaining that, however, and it’s worth a look!). However, they probably ARE aware of the headlines that appear with distressing regularity tracking this type of litigation and may well have a sense of the multi-million-dollar settlements—whose pace and frequency seem to be quickening with each passing month. 

Looking at the arguments presented in most of these actions, it’s hard to dismiss the feeling that most are, in fact, (just) playing for that quick settlement; half of their filings (and most are pretty short) are simply a cut and paste regarding ERISA’s obligations alongside an inference (and sometimes more than an inference) that the plan fiduciaries in question (and those who appointed them) have fallen short of those obligations. They cite plans that are supposedly comparable (at least in size and participant count), extract numbers from government filings that don’t capture the full picture of costs (or services), lay those down next to data from sources known to have shortcomings for those purposes, toss in some “best practice” commentary from a trade publication or two, and rely on the forbearance of the judiciary to open the door to the more intrusive (and costly) process of discovery, deposition, and at some point, trial. 

That’s been the way of this type of litigation for awhile now, where it is simply easier—and, sadly, cheaper—for plan fiduciaries (and their insurers) to just settle and move on, though that process inevitably serves to fund the plaintiffs’ bar’s next “foray.”

Consequently, it’s been refreshing of late to see some federal district courts require more to establish a “plausible” argument to get past that point—to call for not only an accounting of fees, but of the services rendered for those fees. That surely complicates matters for the plaintiffs’ bar—but then, why should they be able to drag firms through the arduous process of discovery and depositions with no more than regurgitated copy, sweeping generalizations, and a table or two cobbled from unrelated sources? 

But now it seems that this law firm at least doesn’t even want to go through that exercise—and why should they if they can simply unleash a correspondence campaign that stands to bring in a payoff from who knows how many plans without even the bother of a court filing or appearance?

I know it’s easy to sit here and carry on as to why plan fiduciaries need to stand up to this kind of practice—to applaud the actions of federal judges who can see what’s going on here, and hope they continue to demand more than mere allegations and flawed assumptions. Unfortunately, this most recent undertaking is perhaps an obvious progression of a sad, regrettable trend.

But I can promise you that if this “works”—it won’t be the last.

- Nevin E. Adams, JD

‘Damned’ (Even) If You Do

 The flurry of lawsuits unleashed on holders of the BlackRock LifePath target-date funds is not without precedent—but it’s surely a head scratcher.

I’m referring, of course, to the recent swarm of lawsuits challenging nearly a dozen of the nation’s largest 401(k) plans and their decision(s) to select, and hold, on their investment menu the BlackRock LifePath target-date fund suite. It’s a decision that the Shah Miller law firm (on behalf of multiple ex-participant plaintiffs) says was the result of fiduciaries who “chased low fees” over performance.[i]

Of course, it’s not unusual for these types of lawsuits cite obscure articles as authority, rely on Form 5500 data that often doesn’t tell the whole story, state as fact things that are really only theories (or opinions), lean on averages, or base comparative conclusions on surveys distorted by sampling size or content. 

But in a characterization straight out of George Orwell’s 1984, this one draws straight from a point of analysis that, to my eyes, anyway, seems to say one thing while the plaintiffs’ attorneys claim to see something completely the opposite. “War is peace,” if you will.

Setting aside for a minute the reality that performance isn’t necessarily indicative of an imprudent process[ii]—and that it’s been far more common over the past two decades for fiduciaries to be challenged on the allegedly “excessive” fees than performance (though the latter is often tagged on to the fee claim), the plaintiffs here have challenged the selection of a fund suite that Morningstar has identified as among the “best” in that category—run by an “innovative team with topnotch resources.”

Nor is the Morningstar evaluation irrelevant here—indeed, the plaintiffs lean heavily on it to draw their conclusions of poor performance, though they do so primarily by challenging the benchmark, insisting that the suite be benchmarked against other target-date suites—despite their striking difference in focus and glidepath. See, the BlackRock series operates with a “to” retirement date focus, rather than the “through” retirement focus that most others in this space have now embraced (and all of the ones the plaintiffs point to). That means, of course, that the asset allocation, certainly in the components nearing retirement age, are more conservative than those that are managing for 20-30 years beyond that. And—in bull markets, anyway—more conservative often means lower performance. On the other hand—and certainly if your goal is to wind down your investment risk as you approach retirement… and here one can’t help but remember 2008… (not to mention 2022…) 

Not that the BlackRock glidepaths are overly conservative—in fact, the Morningstar commentary (and the lawsuits that cite it) acknowledge that for newer target date funds—those for younger investors—BlackRock’s have tended to be more equity-laden, at least compared with those the plaintiffs would have serve as its benchmark. This lawsuits seem to mistake this difference for some kind of “equity discrepancy,” rather than a deliberate, thoughtful glidepath, one oriented to do what all target-date funds once claimed to—to move to more conservative asset allocations as one neared the target date (and, arguably still do, though the “throughs” have a different endpoint in mind). 

There is, of course, a certain tendency among plan fiduciaries to seek the comfort of the pack in making plan design and investment decisions—which is understandable when one considers the personal liability that comes with that assignment. But these suits seem to create a not-so-subtle inference that any glidepath that varies from the through retirement “pack” is going to be viewed as imprudent—not based on a bad or unreasoned theory, but rather based on a specific time window when certain strategies simply don’t match those of different philosophies. 

So, how is this particular approach constructed? The analysts at Morningstar see it this way: “This index-based series benefits from BlackRock’s robust approach to asset allocation and a research-intensive culture. They keep costs low by investing exclusively in passive index funds, though this gives management fewer tools to outperform over shorter periods compared with more active strategies that can tactically tilt the portfolio or select talented active managers. Yet, the team continues to innovate, with current research looking at ways to get targeted fixed-income exposures across the glide path.”

The report goes on to note that, “Continuing to revisit prior assumptions and make proactive changes that are backed by rigorous research gives us confidence that the team will continue to evolve the series over the long term to investors’ benefit.”

Little wonder then that the BlackRock suite winds up with a “gold” Morningstar Analyst rating. 

What’s harder to figure out is why the plaintiffs’ bar decided to take to task the large plans and plan fiduciaries that opted for this suite and approach. 

Well, perhaps except for the obvious.

- Nevin E. Adams, JD

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[i] There were other allegations that varied with the plan targeted, but the LifePath funds and performance was the dominant claim.

[ii] At this juncture we have no way to know what processes, if any, the charged plan fiduciaries have in place to provide the prudent process and review required of plan fiduciaries—not that the plaintiffs have kept that from inferring its absence. 

The 'Terror' of 401(k) Litigation

So much of our lives have been disrupted by the COVID-19 pandemic—but the pace of 401(k) litigation, it seems, has, if anything, accelerated.

Now, some may find the label “terror” in the title extreme. In fact, it hadn’t really occurred to me until I read the response of defendants to a suit slapped on Genentech Inc. and the plan fiduciaries of its $7.6 billion 401(k) plan in early October. In a response to that excessive fee suit, the defendants’ attorneys referred to this suit—and others like it—as “an in terrorem attack on fiduciaries and employers seeking sweeping monetary and injunctive relief geared toward disrupting employee benefit relationships and causing protracted, expensive litigation.” 

“In terrorem,” Latin for “into/about fear,” has a legal context—a legal threat, really—one generally voiced in hope of compelling an action (or lack of action) without resorting to a lawsuit or criminal prosecution. It normally arises in regard to a provision in a will which threatens that if anyone challenges the legality of the will or any part of it, then that person will be cut off or given only a dollar, rather than what is left to them in the will. 

While that may (or may not) be an accurate characterization of that particular litigation, the motivations of the plaintiffs’ bar on these matters are surely as diverse as the plans and plan designs they challenge, if not the experience, expertise and expectations of the individual firms themselves. Indeed, having had the opportunity to discuss these matters with a few over the years, I am persuaded that some at least are indeed fighting what they honestly believe is the “good fight.”[i] They see evidence of inattentive fiduciaries manipulated (or motivated) by unscrupulous providers, sometimes over a period of years, if not decades, all to the financial detriment of participants who must work (and save) all the more to compensate for the “theft.”  

However, in the process they have sought to create presumptions of imprudence that (IMO) aren’t. They’d have us (or more precisely, a judge) believe that active management is not only inherently inferior to passive approaches, but unacceptable, that RFPs not only must be conducted, but at a minimum must be conducted on a 3-year cycle, to accept that recordkeeping fees are prudent only if assessed as a function of participant count (as though size and complexity of the plan’s investments and design shouldn’t be a consideration), that extrapolated averages of published plan fees are sufficient to set a benchmark of reasonability, that a stable value option is superior to money market, except when money market is better than stable value, that they provide too many options for participants to choose from… or too few. Indeed, as the defendants in the Genentech response note, “Fiduciaries that manage 401(k) plans are getting sued no matter what they do.”  

When the dust “settles” in these cases—sometimes over decades, but of late more rapidly—most still produce nothing but a monetary “arrangement”—the amount nearly always significantly less than the damages alleged, and the per participant recovery relatively small.[ii] The plaintiffs’ attorneys get somewhere between 25% and a third of that recovery—which is deemed reasonable[iii] since they often labor long and without compensation until a settlement or adjudication is reached, though it is often tens of millions of dollars when it happens. 

Those suits that do go to trial generally seem to turn out in favor of the plan fiduciary(ies), either because the substance behind the plaintiffs’ claims is found to be insufficient, or the actions of the plan fiduciaries are determined to clear the admittedly high bar of ERISA’s prudence. It’s easy to overlook that result because, as human beings, we are inclined to see a settlement in manners as heinous as those alleged as an admission of culpability, if not guilt, whatever the legal disclaimers. Regardless, while the proceeds that flow to the plaintiffs’ counsel surely offset the investment of time and effort getting to that point, there’s little question that some of it simply goes to funding the next suit… 

As with any apparently profitable enterprise, this current wave of 401(k) litigation has attracted new entrants—and copycats—not only in actions, but in the very language employed in their filings. Based on their record to date, it’s doubtful that they will enjoy much success under the full scrutiny of adjudication—but then, that may not be their objective.  

Ultimately it takes time, patience—and yes, money—to stand up to this threat. 

But here’s hoping that, knowing the threat exists, plan fiduciaries continue to take the time to be thoughtful, deliberate and, yes, prudent in the exercise of their critical duties, that they take the time to document that work—that they do so with the involvement and engagement of wise counsel—that they find ways to share the fruits of that diligence with those they serve—and that in so doing, they deprive the plaintiffs’ bar of any rational basis upon which to bring, much less prevail in, these pursuits.

- Nevin E. Adams, JD

 

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[i] There’s no question that 401(k) fees have declined over the years—and while the plaintiffs’ bar would surely like—and some are, perhaps entitled—to claim credit for at least some of that, fees decline for any number of reasons, though plan fiduciaries, writ large, are more sensitive to the issue these days. Then again, the costs of this litigation are being paid by someone, and insurers have not traditionally been known to long absorb the impact of such things to their bottom line—indeed, some have already taken to asking pointed questions of employers in the course of questionnaires that would seem to have little to do directly with the insurance coverage sought. 

[ii] The named plaintiff(s) generally are accorded $10,000 to $25,000 each for their time and trouble in representing the class.

[iii] Though that never takes into account the time, effort, expense and opportunity costs for the employers that must devote time and treasure to the litigation.

The Contingency 'Plan'

So, how much should the plaintiffs’ attorneys who wrangled a $12 million settlement receive for their time, effort and trouble?

Well, if you’ve been keeping up with such things, you’ll do some quick math and arrive at a figure of $4 million since, after all, these class action suits[i]—undertaken on a contingent fee basis—generally produce a pay day of somewhere between 25% and 30% of the settlement amount.[ii]

In this case, that’s the settlement amount requested by the law firm of Schlichter Bogard & Denton for their work in a suit involving Oracle Corp. and its 401(k) plan (over 6,300 hours—5,631.10 hours of attorney time & 696.5 hours of non-attorney time—according to the filing (Troudt v. Oracle Corp., D. Colo., No. 1:16-cv-00175, motion for attorneys’ fees 5/8/20). That’s aside from the requested reimbursement of what those same attorneys characterize as “reasonable out-of-pocket expenses of $410,501.60,[iii] and $25,000 for each of the named class representatives.”

The filing states that that fee “would not even provide the lodestar[iv] amount that the attorneys who handled this case would have generated on an hourly rate charge, and would provide no compensation or multiplier to Class Counsel for the substantial risk of nonpayment they undertook.” Specifically, those 6,327.60 hours add up to a combined lodestar of $4,316,867.00—only 92% of the hourly rate of the Schlichter lawyers and staff in working on this case.

Par for the course in such motions, the plaintiffs take pains to justify settlement in lieu of a full adjudication of the issues by pointing out the uncertainty of the result. Here they not only note that “even if Plaintiffs prevailed at trial the aggressive defense presented the possibility that Class Members would have to wait over a decade to receive any compensation pending multiple appeals,” explaining that both Tussey v. ABB, Inc. and Tibble v. Edison took more than a dozen years and involved multiple appeals.

The filing cites the “fact-intensive nature of the remaining imprudent investment claims,” the “adverse findings” in the case of Sacerdote v. New York Univ. “…on similar imprudent investment claims, including the court’s rejection of Plaintiffs’ expert, who was the same expert here.”

The petition makes two other obvious but seldom acknowledged points. First, that the named plaintiffs “…would not have been unable to pursue this litigation other than on a contingency fee basis and no competent plaintiffs’ lawyer or law firm would take on such risky representation for less than one-third of any monetary recovery.”

Second—and perhaps just as importantly—they acknowledge that “as a plaintiffs’ law firm that works solely on a contingency basis, the decision to pursue this class action and commit significant resources and potentially thousands of attorney hours to obtain a successful recovery impacts Class Counsel’s ability to handle other actions.”

And that, it seems fair to say, was always the contingency “plan.”

- Nevin E. Adams, JD

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[i]This settlement, as have several in this genre, notably those brought by the Schlichter law firm, are more than just monetary, of course. This one in particular imposes limitations on the recordkeeper (current and over the next three years) in terms of soliciting plan participants for non-retirement plan related services.

[ii]Indeed, according to the filing, when you take into account the benefit of the tax deferral on the settlement amount once its restored to the 401(k), the requested fee is 28% of the settlement’s full value.

[iii]According to the filing, the “vast majority of these fees were incurred for necessary experts and to conduct critical depositions.”

[iv]Basically, the lodestar method involves multiplying the number of hours reasonably devoted to the case by a reasonable hourly rate—the latter may, of course, vary based on the geographical area, the nature of the services provided, and the experience of the attorneys. And, of course, what’s deemed “reasonable.”

ERISA Litigation – The Year in Review

There were a lot of ERISA litigation settlements in 2019 – but how are those trending?

An analysis by Bloomberg Law finds that class settlements in employee benefit disputes hit $449 million in 2019 – a figure that they noted was up significantly from 2018’s $291 million, but well short of the $559 million in settlements recorded in 2017.

That said, “only” about half of the 2019 “tab” – some $193 million – came from excessive fee suits, according to the report. The average of such settlements? $12 million.

In March, the parties in Tussey v. ABB, one of the oldest (2005) excessive fee suits, came to terms for $55 million. Other settlements announced included:

• Northrop Grumman ($16.5 million); 
• a 2017 stable value suit settlement finally approved; 
• the settlement terms of two fiduciary breach suits involving Safeway’s 401(k) plan, its investment structure, plan consultant, and selection of target-date funds have been submitted for court approval; 
• another suit involving the $2.3 billion 401(k) and 403(b) plans of the Allina Health System (which was for $2.425 million); and 
• a $1.2 million settlement with the $96.5 million 401(k) plan of Gucci America Inc. This settlement pales in comparison to the normal multi-billion dollar plans that normally draw the attention of the plaintiffs’ bar, but even here the plaintiff cited the plan’s “substantial assets” and said that the plan fiduciaries “…have significant bargaining power and the ability to demand low-cost administrative and investment management services within the marketplace for administration of 401(k) plans and the investment of 401(k) assets.” 

‘Excessive’ Forces

Another grouping came with the so-called excessive fee suits involving university 403(b) plans. The year saw five of those settled, the largest – and in many ways the most bizarre (allegations of a quid pro quo between the University and recordkeeper Fidelity, whose CEO Abigail Johnson sits on the university’s Board of Trustees) – was with MIT, which settled with plaintiffs represented by Schlichter Bogard & Denton for $18.1 million – and, what seems to be emerging as a trend in these cases, a series of non-monetary commitments for RFPs, changes in revenue-sharing practices, and even training for plan fiduciaries.

The largest settlements prior to MIT were with Vanderbilt University, which in April 2019 announced a $14,500,000 cash settlement, as well as a long list of process/procedural changes that were also to be monitored over a three-year period, and Johns Hopkins, which settled for $14,000,000, also alongside a number of plan design/procedural changes. In March, Brown University settled for $3.5 million, as well as “other, structural relief” – and a $10.65 million settlement, also alongside a series of changes in plan administration was approved in February.

However, on that “score,” it’s worth noting that St. Louis-based Washington University, New York University and Northwestern University have thus far prevailed in making their cases in court. The University of Pennsylvania, which in 2017 won at the district court level, in 2019 had that decision partially overturned by an appellate court. The plan fiduciaries’ motion for an en banc review of that decision was rebuffed earlier this year, but just ahead of the holidays, they petitioned the nation’s highest court to weigh in on the threshold for getting to trial.

‘Self’ Serving?

Financial services companies that included their own funds in their 401(k)s also found themselves a target of litigation in 2019, among those striking deals were SEI ($6.8 million), MFS ($6.875 million), Eaton Vance ($3.45 million), Franklin Templeton ($4.3 million, announced in 2018) – though the terms in the latter, particularly as regards the attorney fees – were not without controversy.
In November, the parties in a suit involving Invesco announced a settlement, but those terms haven’t yet been announced.

As it turns out, those settlement numbers are lower than those seen in 2018, according to Bloomberg. However, it’s also worth noting that we began the year with a big victory by the American Century plan fiduciaries where many of the allegations that have been widely made in these excessive fee cases were refuted by testimony and documentation that revealed the kind of thoughtful, ongoing, due diligence process that plan fiduciaries are often counseled to undertake.

But if you’re wondering where the “big” money was in ERISA litigation in 2019 – there was $100 million by Dignity Health to end a church plan lawsuit (though that settlement hasn’t yet been approved, pending a resolution on the issue of attorneys’ fees), and SSM Health Care Corp. and St. Anthony Medical Center Inc. settled church plan lawsuits for $60 million and $4 million, respectively, according to the report. These (and a number of 2018 settlements) came in the wake of a 2017 decision by the U.S. Supreme Court regarding these programs at religiously affiliated hospitals that treat their pension plans as ERISA-exempt “church plans.” The lawsuits alleged that the hospitals abused ERISA’s religious exemption to significantly underfund their pensions.

What Next?

It seems likely that proprietary fund suits will continue to emerge (as a couple did in Q4), and while the American Century case would seem to provide a solid roadmap for defense, settlement – and settlement on the scheduled date of trial – seems to be becoming the order of the day. While the university suits seem likely to continue, that could change if the Supreme Court takes up, and decides in favor of the University of Pennsylvania defendants. As for whether excessive fee litigation will (finally) move down market – there’s evidence (the Gucci case noted above) that such things remain possible, though the contingent fee nature of compensation for the plaintiffs’ bar may serve to hold such things in check for a while longer. And yet, there are smaller law firms just now entering the “fray”… 

Advisors? Well, they’ve mostly avoided being drawn into the crosshairs of ERISA litigation – but not always.

If we’ve learned nothing else from this year of litigation, it’s what we’ve always known: a prudent process (eventually) prevails.

But sometimes it’s (apparently) cheaper to just settle.

- Nevin E. Adams, JD

'Special' Treatment

Our industry has long disparaged the apparent “overindulgence”¹ of participants in the stock of their employer as a retirement investment. However, for plan fiduciaries – and those who advise them – there may be a more pressing concern.

Anyone who has been paying attention to 401(k) plan litigation these past several years knows that a common trigger – perhaps the most common trigger – for litigation is the presence of company stock in the plan; more specifically, the presence of company stock that has sharply declined in value. In fact, these days no sooner does some big earnings surprise or unanticipated business calamity make the headlines than the plaintiffs’ bar is out “trolling” for potential clients. And let’s face it, a 401(k) plan is a class action litigant’s dream – potentially thousands of similarly situated and comparably injured plaintiffs in one place (so to speak).  

But if the instances of litigation have been numerous, the odds of success – for plaintiffs – have been anything but.

Prudent ‘Presumptions’

For a long while, these claims failed to clear a “presumption of prudence.” Now, one needn’t scour ERISA’s text to discern the boundaries of this legal construct; indeed, that would be a futile effort. Rather, it is a concept gleaned by the courts (and subsequently enshrined in legal precedent) from their understanding of the black letter of the law. It is a concept that found its footing in a 1995 case called Moench v. Robertson. Now, in that case, as in many of the new generation of “stock drop” cases (drawing their name from the fact that the action arises after the value of the stock drops), a plan participant sued a plan committee for breaching its fiduciary duty based on its continued investment in employer stock after the employer’s financial condition “deteriorated.” In the aftermath of the Moench ruling, nearly every court district court that considered the issue of prudence of employer stock holding had rejected plaintiff claims based on this so-called “presumption of prudence.”

That was the “law of the land” in such matters until 2014 when the Supreme Court seemed truly concerned that the “presumption of prudence” standard basically established a standard that was effectively unassailable by plaintiffs outlined a new standard – a “more harm than good” standard that emerged with Fifth Third Bancorp v. Dudenhoeffer. The notion here was that a plan fiduciary might be excused from taking action with regard to company stock in the retirement plan – such as removing it as an option, or forcing a liquidation of those investments – if doing so would do “more harm than good.”

More Harm?

“Inspired” by this new standard, many of the so-called “stock drop” suits which hadn’t passed muster under the “presumption of prudence” threshold refiled. But ironically, those too had generally come up short of the new standard – though they did at least routinely get past the summary judgment stage. Which, of course, meant more time and expense for the fiduciary defendants – but no recovery for the plaintiffs (or the plaintiffs’ attorneys, who generally work on a contingent fee basis in these class actions).

At least that was the case until a recent district court decision (Jander v. Ret. Plans Comm. of IBM) was overturned by the U.S. Court of Appeals for the Second Circuit, which concluded that, in fact, the plaintiffs plausibly alleged facts showing that a prudent ERISA fiduciary “could not have concluded” that a corrective disclosure of an allegedly overvalued IBM business would have done “more harm than good to the fund.”

In fact, the plaintiff in that case – recently accepted by the Supreme Court – argued that no duty-of-prudence claim against an ESOP fiduciary has passed the motion-to-dismiss stage since the 2010 decision in Harris v. Amgen, nothing that “imposing such a heavy burden at the motion-to-dismiss stage runs contrary to the Supreme Court’s stated desire in Fifth Third to lower the barrier set by the presumption of prudence.”

What’s Next?

And yet, that same Second Circuit Court of Appeals whose decision teed up the issue that the nation’s highest court will now consider – within a week of that decision – found that a similar case lacked the “special circumstances” necessary to overcome the more harm than good bar.

As for what lies ahead, the forthcoming review by the U.S. Supreme Court could bring a new, more relaxed pleading standard to the fore. Or it might establish a “new” standard that doesn’t do anything more to improve plaintiffs’ prospects than the “more harm than good” did beyond the “presumption of prudence.”

In any event, plan fiduciaries who still maintain company stock as plan investment option (and according to the Plan Sponsor Council of America’s 61^st Annual Survey of Profit Sharing and 401(k) Plans, 12% of plans allow company stock as an investment option for both participant and company contributions, and 4% restrict it to company contributions only) might well want to spare themselves the cost and aggravation of litigation that seems inevitable when (if?) the value of that stock holding goes down.

In this day and age, a plan fiduciary unable to see the potential for employer-security-related litigation is perhaps unworthy of the role, and a dual-role plan/corporate fiduciary unable to appreciate the potential for a conflicted duty vis-à-vis his or her fiduciary responsibility to the retirement plan is surely living in a state of active denial.

Because while “special” circumstances may seem to warrant such consideration, ultimately, perhaps inevitably, the end result seems to eventually be putting not only prospective plaintiffs, but the plan fiduciaries, between a rock and a hard place.

 

- Nevin E. Adams, JD

 

1. Participants given an option to invest in company stock have long invested what professionals would deem an inappropriately large percentage of their portfolio there ( Vanguard’s How America Saves 2019 report notes that 4% of participants with the option to invest in company stock have more than 20% of their balance so invested) – arguably the least diversified investment option on the menu, and one that is inextricably tied to the success of their employer’s business (meaning that when the business slips, so might the prospects of their continued employment). On the other hand, an investment in their employer is seen by many as a mark of confidence and loyalty – and, for many, it’s doubtless the investment on that menu that they best understand. 

Are SDBAs the Next Litigation Target?

Back in the 1990s, the ability to support a self-directed brokerage account (SDBA) capability was a widely utilized means of winnowing the field in a 401(k) search, and more recently, the option seemed to hold promise as a foil for excess fee litigation charges. But that could be changing.

The SDBA option allowed participants to make investment choices outside the standard retirement plan menu – a big deal at a time when you could count the number of choices on two hands. Vanguard’s 2017 “How America Saves” report notes that one in six (17%) plans offer the SDBA option, though nearly a third (30%) of plans with more than 5,000 participants do. And while this amounts to nearly 3 in 10 Vanguard participants having access to the option, only 1% of these participants used the feature in 2016, and in those plans, only about 2% of plan assets were invested in the SDBA feature that year. PLANSPONSOR’s 2017 DC Survey pretty well mirrors those findings: 18.7% of plan sponsor respondents have the option, with nearly half of plans with more than $1 billion in assets choosing to do so.

Of course, with SDBAs, it has never been about how many used the option, but who – and for the very most part, the option has its greatest appeal among those whose balances (or financial acumen, real or perceived) calls for it, particularly among closely held small businesses and professional practices, such as lawyers and doctors.

Fee Litigation

In the early days of the so-called excessive fee litigation, at least one court (the 7th Circuit, in Hecker v. Deere) found compelling the notion that the existence of the SDBA gave participants access to a sufficient variety of reasonably priced funds to refute excessive fee claims against a plan that had a “regular” fund menu comprised of nothing by the proprietary funds of its recordkeeper.

However, and while it hasn’t been a primary focus of recent litigation, several of the more recent suits do raise concerns with the existence of the SDBA, but more importantly, how it was managed.

About a year ago, in a suit brought by American Century participants against their own plan, the plaintiffs took issue with how the SDBA was administered, and while they acknowledged that usage of the SDBA is higher within than industry statistics would suggest, they went on to state that that result was “no doubt due to Defendants’ imprudence and self-dealing” (less than 7% of the plan’s assets are held in SDBAs).

In a 2015 suit involving PIMCO, the plaintiffs argued that “…those who choose to utilize an SDBA are typically assessed an account fee and a fee for each trade” — fees that they said “often make an SDBA a much more expensive option compared to investing in the core options available within the Plan.” Additionally, they claimed that because “employees investing in mutual funds within an SDBA must invest in retail mutual funds, rather than the lower-cost institutional shares typically available as core investment options,” those who do use the option again pay higher fees.

And then, just this year, in a suit brought against Schwab, the participant-plaintiffs charged that not only that Schwab received revenue sharing payments from third-party ETF and mutual fund providers whose funds were made available to via the platform, but that the SDBA’s “byzantine complexity and confusing schedule of fees alone make it inadvisable for all but the most sophisticated of investors.” The plaintiffs framed the availability of the option to all participants (rather than just more sophisticated participants) as an issue, and charged that Schwab made no effort to determine: (a) if the SDBA was a prudent option at all, or (b) if another provider’s SDBA might have been better.

All of which should remind us that plan fiduciaries have a responsibility to carefully select and monitor their SDBA provider and these services. That could include:

• the qualifications and qualify of the provider;
• the reasonableness of the fees; and
• the security of the account and stability of the provider.

And just like any provider of services to a qualified plan, if the brokerage window can’t be prudently selected, the plan should not offer that window.

Something on which the plaintiffs’ bar now seems to be focusing.

- Nevin E. Adams, JD

Your Plan Might Be an Excessive Fee Litigation Target If…

Last week another of the so-called excessive fee lawsuits was settled – not adjudicated, mind you. Here are some factors that the targets of these lawsuits seem to have in common.

Now, in fairness, most of these cases haven’t actually gone to court – and, by my count, most of the ones that actually get to court are won by the employers/plan sponsors. Even the Tibble case, which drew so much attention when it made it to the Supreme Court, eventually came out in favor of the plan sponsors (though they “lost” the Supreme Court decision).

However, a lot of litigation has been filed over the past decade, and millions of dollars spent — reminding me of an old mentor’s admonition that you can spend a lot of money in court being “right.” That so many employers have decided that it is “cheaper” to settle for millions of dollars gives you some idea of the magnitude of these challenges.

So, with that in mind – and with apologies to Jeff (“you might be a redneck…”) Foxworthy: Your plan might be an excessive fee litigation target if…

It’s a multi-billion dollar plan.

Nearly all of the excessive fee lawsuits filed since 2006 (when the St. Louis-based law firm of Schlichter, Bogard & Denton launched the first batch) have been against plans that had close to, or in most cases in excess of, $1 billion in assets. There’s no real mystery here. Willie Sutton robbed banks for the same reason: that’s where the money is. And if you’re a class action litigator, that also happens to be where a large number of similarly situated individuals can be found.

Harder to figure out is why plans of that size, and the expertise/resources that such employers can ostensibly bring to plan administration, have been so vulnerable.

Your multi-billion dollar plan has retail class mutual funds.

Granted, even at the largest employers, individuals frequently find themselves assigned the responsibility for being a plan fiduciary with little or no training or background. Still, in this day and age, it’s remarkable that so many of these targets were either so ignorant of the concept of share classes or so poor at negotiating with their providers that they included options in their multi-billion dollar plan menus funds that were, in some cases, no more competitive in price than what the individual plan participants could have acquired in their IRA.

You have proprietary funds on your menu.

As a financial services provider, there are any number of valid business reasons to include your own funds on the menu you offer to your workers. It’s a testament to your willingness to “eat your own cooking,” a statement of confidence in the skill and acumen of your investment management staff.

However, this access can be used to prop up funds with steady cash flow that aren’t deserving of that confidence, and can provide at least the temptation on the part of committee members to favor internal offerings to the exclusion of external choices. Moreover, since it can be difficult politically to “fire” an internal service provider, the plan might find itself paying “retail” prices, not only for funds, but for administrative services – an issue that has been made in several of these lawsuits.

The bottom line: However outstanding your internal options are, the current litigation environment seems to favor a “Caesar’s wife” approach – your actions need to be above (and beyond) suspicion.

You can’t remember the last time you benchmarked your plan/investments.

Let’s face it, even changing a single fund on an existing menu can be complicated, much less a full blown consideration of changing record keepers and fund menus. And plan sponsors, even plan sponsors at multi-billion dollar plans, juggle myriad responsibilities and are constantly pulled in multiple directions. “If it ain’t broke, don’t fix it” is a mantra born of practicality, if not necessity, for most. If the current process and services are working, that is often “enough.”

But if you haven’t been through some kind of competitive bidding/review process in recent memory – well, “it seems to be working” isn’t necessarily in keeping with the legal admonition to ensure that the services rendered and fees paid for those services are “reasonable” and in the best interests of plan participants and their beneficiaries.

And even if it is in the eyes of a judge, a motivated plaintiff’s bar can likely make an issue of it.

You are still paying asset-based record keeping charges, rather than a per-participant fee.

Okay, this is a new one. I don’t recall seeing this being an issue until this year – and though it has been alleged, and incorporated in a couple of the most recent settlements, to my recollection, no court has ever ruled on this.

That said, the current and apparently emerging argument is based on the notion that there is little correlation between record keeping services and the dollar value of that account. And the most recent litigation puts forth some fairly specific notions of what that reasonable per-participant charge should be. And did I mention that this has even been raised in some very recent litigation involving a $10 million plan?

You haven’t hired a qualified retirement plan advisor to help.

It’s possible that advisors have been involved in these plans, but to date I can only recall one situation where an advisor was involved/named (though not as a party to the litigation), and that more an investment consultant than an advisor, per se.

That said, when you look at the issues like share class selection, and the lack of regular review (not to mention documentation of that review) in many of these cases, you can’t help but think, “Where was the advisor?” The answer seems to be that these plans hadn’t engaged those services.

And then you can’t help but wonder what difference their involvement might have made.

- Nevin E. Adams, JD

Your Plan Might Be an Excessive Fee Litigation Target If…

Last week another of the so-called excessive fee lawsuits was settled – not adjudicated, mind you. Here are some factors that the targets of these lawsuits seem to have in common.

Now, in fairness, most of these cases haven’t actually gone to court – and, by my count, most of the ones that actually get to court are won by the employers/plan sponsors. Even the Tibble case, which drew so much attention when it made it to the Supreme Court, eventually came out in favor of the plan sponsors (though they “lost” the Supreme Court decision).

However, a lot of litigation has been filed over the past decade, and millions of dollars spent — reminding me of an old mentor’s admonition that you can spend a lot of money in court being “right.” That so many employers have decided that it is “cheaper” to settle for millions of dollars gives you some idea of the magnitude of these challenges.

So, with that in mind – and with apologies to Jeff (“you might be a redneck…”) Foxworthy: Your plan might be an excessive fee litigation target if…

It’s a multi-billion dollar plan.

Nearly all of the excessive fee lawsuits filed since 2006 (when the St. Louis-based law firm of Schlichter, Bogard & Denton launched the first batch) have been against plans that had close to, or in most cases in excess of, $1 billion in assets. There’s no real mystery here. Willie Sutton robbed banks for the same reason: that’s where the money is. And if you’re a class action litigator, that also happens to be where a large number of similarly situated individuals can be found.

Harder to figure out is why plans of that size, and the expertise/resources that such employers can ostensibly bring to plan administration, have been so vulnerable.

Your multi-billion dollar plan has retail class mutual funds.

Granted, even at the largest employers, individuals frequently find themselves assigned the responsibility for being a plan fiduciary with little or no training or background. Still, in this day and age, it’s remarkable that so many of these targets were either so ignorant of the concept of share classes or so poor at negotiating with their providers that they included options in their multi-billion dollar plan menus funds that were, in some cases, no more competitive in price than what the individual plan participants could have acquired in their IRA.

You have proprietary funds on your menu.

As a financial services provider, there are any number of valid business reasons to include your own funds on the menu you offer to your workers. It’s a testament to your willingness to “eat your own cooking,” a statement of confidence in the skill and acumen of your investment management staff.

However, this access can be used to prop up funds with steady cash flow that aren’t deserving of that confidence, and can provide at least the temptation on the part of committee members to favor internal offerings to the exclusion of external choices. Moreover, since it can be difficult politically to “fire” an internal service provider, the plan might find itself paying “retail” prices, not only for funds, but for administrative services – an issue that has been made in several of these lawsuits.

The bottom line: However outstanding your internal options are, the current litigation environment seems to favor a “Caesar’s wife” approach – your actions need to be above (and beyond) suspicion.

You can’t remember the last time you benchmarked your plan/investments.

Let’s face it, even changing a single fund on an existing menu can be complicated, much less a full blown consideration of changing record keepers and fund menus. And plan sponsors, even plan sponsors at multi-billion dollar plans, juggle myriad responsibilities and are constantly pulled in multiple directions. “If it ain’t broke, don’t fix it” is a mantra born of practicality, if not necessity, for most. If the current process and services are working, that is often “enough.”

But if you haven’t been through some kind of competitive bidding/review process in recent memory – well, “it seems to be working” isn’t necessarily in keeping with the legal admonition to ensure that the services rendered and fees paid for those services are “reasonable” and in the best interests of plan participants and their beneficiaries.

And even if it is in the eyes of a judge, a motivated plaintiff’s bar can likely make an issue of it.

You are still paying asset-based record keeping charges, rather than a per-participant fee.

Okay, this is a new one. I don’t recall seeing this being an issue until this year – and though it has been alleged, and incorporated in a couple of the most recent settlements, to my recollection, no court has ever ruled on this.

That said, the current and apparently emerging argument is based on the notion that there is little correlation between record keeping services and the dollar value of that account. And the most recent litigation puts forth some fairly specific notions of what that reasonable per-participant charge should be. And did I mention that this has even been raised in some very recent litigation involving a $10 million plan?

You haven’t hired a qualified retirement plan advisor to help.

It’s possible that advisors have been involved in these plans, but to date I can only recall one situation where an advisor was involved/named (though not as a party to the litigation), and that more an investment consultant than an advisor, per se.

That said, when you look at the issues like share class selection, and the lack of regular review (not to mention documentation of that review) in many of these cases, you can’t help but think, “Where was the advisor?” The answer seems to be that these plans hadn’t engaged those services.

And then you can’t help but wonder what difference their involvement might have made.

- Nevin E. Adams, JD

A Fiduciary ‘Idiot Light’

Among the assorted “idiot lights” that adorn my current car dashboard is one that alerts me to low tire pressure.

It’s come in handy on precisely two occasions – one when a nail had punctured my tire (though I had already discerned that I had a problem from the sound of the flat tire nanoseconds before the light came on); the other when I had neglected to keep an eye on the tire pressure (which coincided with a day that I had let my daughter take my car to work). Other than that, it’s never really been on or an issue – or a help – until recently, when it came on, and stayed on, about 100 miles from home.

Now my owner’s manual suggested that this behavior might be a sign of a bad sensor, and sure enough, (after 100 miles of driving angst) that was subsequently confirmed by my mechanic – who also informed us that it would cost a couple of hundred dollars to replace it. Perhaps needless to say, that light continues to illuminate my dashboard.

Since the initial flurry of so-called “excess fee” litigation a decade ago, many have perhaps become numbed to the filings. Nearly all have involved multi-million, and multi-billion dollar plans – name brand companies. One might well expect – and many pundits have opined – that this litigation, funded, if not fueled, by a contingency fee structure, was really a concern for those larger plans and their larger asset pools.

Fiduciary Failings?

Or would have, until the recent filing in the case Damberg v. LaMettry’s Collision, Inc. (D. Minn., No. 0:16-cv-01335), which involved participants who were part of a 114-participant plan that had (in 2014) less than $10 million in plan assets.

These small plan participants alleged that the plan fiduciaries breached their fiduciary duties by:

• selecting an unduly expensive structure for its 401(k) plan – one that bundled recordkeeping and investment management services;
• failing to conduct an RFP for the structure to minimize expenses;
• failing to evaluate whether an unbundled or alternative fee structure was a better option;
• failing to conduct due diligence regarding whether the assessed fees (retail versus institutional shares) were appropriate; and
• failing to actively monitor the selected structure’s fees and expenses.

They also challenged the application of asset-based fees for recordkeeping (rather than a flat per-participant fee), and went on to suggest that for retirement plans with more than 100 participants, a reasonable annual per capita fee paid by retirement plan participants should not exceed $18.

Nothing New?

These types of charges are nothing new, of course. All (with the possible exception of the concerns expressed about the bundled pricing structure) have been invoked in just about every one of the previous excessive fee lawsuits.

What is different, of course, is that these charges are being leveled at a plan that is considerably smaller than those that have thus far been the targets of this type of litigation.

On many occasions during the months since that sensor light on my car dashboard started blinking, I have worried that I might actually have a problem, one “masked” by my choosing to ignore the glaring reminder on my dashboard. I’ve worried that, by ignoring the warning signs that “idiot light” is meant to detect, I will one day wind up feeling like a true idiot, and all because I was too cheap (or lazy) to replace that tire sensor.

Plan fiduciaries – and those who guide them – have had at least a decade to see the writing on the wall on these excessive fee lawsuits. Those who have been ignoring these risks because they think they are immune, or are too small to be a target, should have just seen an “idiot light” come on their fiduciary dashboard.

- Nevin E. Adams, JD

See also: 5 Things Plan Sponsors Should Know; 5 Things Plan Sponsors Don’t (Always) Do — But Should.