Lawyers, Funds and Money

  I recently stumbled across a report that claimed a “Massive Gap Between Participant and Attorney Recoveries in ERISA Lawsuits.”

That wasn’t exactly news to me, though it was a handy quantification[i] of a subset of ERISA settlements to make the case that the per-participant recoveries in ERISA litigation pale in comparison to the 25%–33% “pay day” that the plaintiffs’ bar gets in cases where there is a settlement.

The report — by Davis & Harman — focused on 27 settlements in 2025 involving (only) underperformance and excessive fee cases. In producing their conclusion, they employed some math that was arguably a bit “squishy”[ii] — and the results are all over the board — but you didn’t need to rely on that to see — and appreciate — the huge gap between what wound up in the lawyers’ pockets versus participants.

The rationale is, of course, that class action suits can be expensive to mount and pursue. The attorneys take on these cases, investing their time, energy, and money for years (and in some cases, decades) with no offsetting compensation. And, of course, there was no tally for all the cases filed that wound up with no recovery to counterbalance that expense.

But — let’s face it — when there is a “payday” for plaintiffs’ attorneys, it nearly always dwarfs whatever recovery they win for individual participants, if only because the recovery (net of attorneys’ fees, their expenses, the compensation to named plaintiffs, and the expense of administering the recovery) gets spread among thousands, and sometimes tens of thousands, of participants[iii] (we’re nearly always talking about large plans, after all). 

Moreover, there are plenty of signs that certain firms are simply “in it” for the quick settlement “funded” by insurance money (the exhaustion of which likely incentivizes many a settlement). Little wonder that some of these firms begin their career with a personal injury focus.

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There’s an argument to be made (and, trust me, the plaintiffs’ bar makes it) that litigation — or perhaps more precisely fear of future/potential litigation — has led to any number of long-term positive outcomes for the system overall. We’re talking about lower fund expenses, special (less expensive) retirement share classes, widespread availability of collective investment trusts, a reduction in revenue-sharing practices, greater reliance on passive/index fund options, etc. And there’s merit in those outcomes, though I’d be hard-pressed to “credit” that as a goal or objective of the firms that brought litigation.

However, there is something to be said for the renewed “outside” perspective that litigation has brought to retirement plan design and administration; would the move toward less expensive fund options have occurred as rapidly as it did without all those excessive fee suits? Would we be questioning the efficacy of managed accounts? The unbridled use of participant data? Would we, even today, be reminding folks to look to their plan documents to make sure it aligns with their forfeiture reallocation procedures?

But then, there are also any number of (at least potentially) positive changes (retirement income, alternative investments, managed accounts, target-date funds as a default, and at one time even automatic enrollment) that have been held in abeyance for fear of being sued. And let’s face it — the pace of litigation has led to significantly higher insurance premiums for every retirement plan. That’s a price we all pay.[iv]

In fairness, the vast majority of retirement plans will never be confronted with a class action lawsuit — they are, quite simply, too small to attract the attention of even the greediest plaintiffs’ attorneys.

Frankly, I’ve always considered the fear of litigation to be a poor motivator of good behaviors, though there are lessons to be learned.

Litigation may grab headlines and enrich attorneys, but it’s not a retirement strategy. The real work — and the real value — comes from plan fiduciaries who understand their role, document their decisions, and act solely in participants’ best interests.

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That’s where — and how — participant outcomes are actually improved.

Not because of litigation — but in spite of it.

• Nevin E. Adams, JD

 

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[i] See Davis & Harman Survey Highlights Massive Gap Between Participant and Attorney Recoveries in ERISA Lawsuits – Davis & Harman LLP.

[ii] They compared the median of the average per-participant award to the average plaintiff’s attorney’s fees…focused only on excessive fee and underperformance suits settled in 2025.

[iii] The participant-plaintiffs named in the suits fare better, of course, with “awards” routinely coming in between $5,000 and $10,000 each, though their investment of time and reputation surely counts for something.

[iv] Settlement amounts, though not insignificant, can be just the tip of the iceberg when it comes to tallying up the cost of litigation. Rarely acknowledged is the cost in time and outside counsel required to defend against litigation, much less the enormous cost of discovery, depositions, etc., before you even get to trial. 

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. 

3 Things That (Seem to) Scare Plan Sponsors

Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night. And sometimes it’s just a good time to think about the things that give us pause—that cause a chill to run down our spine. 

In that category, here are three things to ponder…

Getting Sued

Plan sponsors will often mention their fear of getting sued (actually, their advisors frequently broach the topic), and little wonder. The headlines are (still) full of multi-million dollar lawsuits against multi-billion dollar plans—the pandemic has, if anything, seemed to accelerate the pace. If relatively few seem to actually get to a judge (and those that do have—to date—largely been decided in the plan fiduciaries’ favor), they nonetheless seem to result in multi-million dollar settlements. Oh, and not only has this been going on for more than a decade, the issues raised are evolving as well.

It's not that the fear is unfounded—plan fiduciaries certainly can be sued, and that includes responsibility for the acts of co-fiduciaries, and liability that is personal, to boot (see 7 Things an ERISA Fiduciary Should Know).

Of course, most plan sponsors won’t ever get sued, much less get into trouble with regulators. And those who do are much more likely to drift into trouble for things like late deposit of contributions, errors in nondiscrimination testing, or not following the terms of the plan.

Still worried about getting sued? As one famous ERISA attorney once told me, you might as well worry about getting hit by a meteor. Unless, of course, you have more than $1 billion in plan assets.

ESG

In fairness, it’s not ESG—environmental, social & governance—investing per se that seems to “scare” plan sponsors from offering these options, but rather concerns as to their level of accountability for choosing to do so. Indeed, there’s plenty of survey data to suggest that workers want these options, particularly younger workers. That said, workable, consistent definitions of ESG remain fluid, and perhaps as a result, the adoption rate among defined contribution plans has been tepid—and the take-up rate among participants even lower. Fewer than 3% of plans offer an ESG option, according to the 62^nd annual Plan Sponsor Council of America survey, and less than 0.2% of plan assets have been invested in those options. 

Many think the hesitancy comes from confusion about how the Labor Department views these options, or more precisely the prudence of including them as a participant investment option. For a long time there had “only” been Interpretive Bulletins (IBs) (in 1994, 2008 and 2016) and, more recently, a 2018 Field Assistance Bulletin (FAB) on this subject. And while the 2016 IB was read as encouraging consideration of ESG factors (or at least discouraging the discouraging), the 2018 FAB was widely viewed as pulling back on that stance, in the process establishing what had been called the “all things equal” standard, which meant that so long as two otherwise identical investments met all the requisite prudence standards, a fiduciary could (prudently) pick the one that (also) had ESG attributes. 

And then in June, noting its concern “that the growing emphasis on ESG investing may be prompting ERISA plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan,” the Labor Department proposed a new rule to “clarify” things.

Now the rule itself is pretty standard stuff—but the Labor Department wrapped that in about 60 pages worth of preamble and impact analysis that conveyed what many (including this writer) saw as a clear sense of skepticism about the prudence of those options, or at least a concern that plan fiduciaries might be inclined to lower the prudence bar in order to accommodate the inclusion of these options. And if there was any doubt as to the concerns of the Trump administration, the rule specifically calls out ESG as unsuitable as a focus in qualified default investment alternatives (QDIA) (not that I am aware of any that have yet taken that step, and perhaps the rule was intended to forestall that). All this at a time when the Labor Department has made a series of (allegedly separate and unrelated) inquiries to both plan sponsors and RIAs about their current  processes regarding ESG consideration and review.

As one might expect in view of the billions of dollars (already) committed to ESG—not to mention its increasing prominence in the focus of a growing number of investment managers—that rule drew a ton  (more than 8,000) of comments (most critical), but is now back for review at the Office of Management and Budget (OMB) in a timeframe so short as to suggest to many that it didn’t undergo much change. 

All of which arguably leaves plan sponsors contemplating a shift to ESG with a great deal of uncertainty. They may not be “scared,” but one can certainly understand a bit of apprehension.

Lifetime Income Options

Speaking of apprehension, while defined contribution plan fiduciaries aren’t exactly scared  of retirement income, DC plans have long eschewed providing those options. There’s no question that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help (certainly with some help from a trusted advisor). 

There are in-plan options available in the marketplace now, of course, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary). Or who feel that the benefits and/or participant need for such options makes it worth the additional considerations. On the other hand, those industry surveys notwithstanding, participants don’t seem to be asking for the option (from anyone other than industry survey takers)—and when they do have access, mostly don’t take advantage. Let’s face it, even when defined benefit pension  plan participants have a choice, they opt for the lump sum. 

It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective; only about half of defined contribution plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option, and that’s despite the 2008 Safe Harbor regulation from the Labor Department regarding the selection of annuity providers under defined contribution plans (which was designed to alleviate, though it did not eliminate, those concerns), not to mention a further attempt to close that comfort gap in 2015 (FAB 2015-02).

Proponents are hopeful that the SECURE Act’s provisions regarding lifetime income disclosures (though many recordkeepers already provide this), enhanced portability (a serious logistical challenge if you ever want to move from a recordkeeper that provides the service to one that doesn’t) and, perhaps most importantly, an expanded fiduciary safe harbor for selection of lifetime income providers, will—finally—put those “fears” to rest. We’ll see.

Don’t get me wrong—there are plenty of things for ERISA fiduciaries to be worried about. The standards to which their conduct must comply are “the highest known to law,” and with good reason. Prudence is often associated with caution, and fiduciaries generally find more comfort in the middle of the trend “pack” than on its fringes.

That said, the standard is to act (solely) in the best interests of plan participants and beneficiaries—even though it may be “scary” from time to time…

- Nevin E. Adams, JD

Why You Shouldn’t Hire Your Brother-in-Law as Your Plan’s Advisor

Last week an advisor reached out to me looking for an article on a topic that comes up with remarkable frequency.

Specifically, this advisor was dealing with a situation where a client was considering hiring their brother-in-law as the plan advisor, and wondered if we had ever written an article dealing with that situation. It’s not the first time I have been asked that, though sometimes it’s a cousin, a friend, a friend’s cousin, or a cousin’s friend.

When that situation comes up – and come up it will – this is what I would tell them:

If you’re a plan sponsor, you’re an ERISA fiduciary.

If you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. Ditto if you are able to hire individuals to control those assets – including your brother-in-law.

Plan decisions you make as an ERISA fiduciary – including hiring those who provide plan services – must meet certain criteria.

As an ERISA fiduciary you have a legal obligation to act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them. Does hiring your brother-in-law meet that test? Would it look that way to a judge?

As an ERISA fiduciary, you’re expected to be an expert — or to hire help that is.

You may not have been told this when you were given this responsibility, but when you, as an ERISA fiduciary, act for the exclusive purpose of providing benefits, you are legally bound to do so at the level of a hypothetical expert. Lacking that level of expertise, the Labor Department says that “a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.” Like your brother-in-law?

As an ERISA fiduciary, you’re expected to fire help that isn’t expert.

The flip side of hiring an expert is being able to terminate that relationship if they aren’t fulfilling their obligations. Think how awkward Thanksgiving dinner will be if you fire your brother-in-law. Think how awkward it will be standing in front of a judge if you should have – and don’t.

Your liability as an ERISA fiduciary is personal.

There are any number of things that can go wrong in running a workplace retirement plan. That’s why it’s important to hire experts – and to keep an eye on them. But don’t forget that ERISA fiduciaries can be held personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.

It is, of course, possible that your brother-in-law is an expert in such matters, that he brings real value to your plan and the participants and beneficiaries it serves, and that your decision to engage his services is based solely on your desire to fulfill your fiduciary obligations.

If so, by all means proceed – just take care to make sure – as you should with any such hire – to document the rationale behind that decision.

Your brother-in-law will understand.

- Nevin E. Adams, JD

"Better" Business

There was another judicial decision in another revenue-sharing case earlier this month—and another victory for a plan sponsor.

The case was Loomis v. Exelon (see Another Plan Sponsor Win on Revenue-Sharing), a case argued before the 7th U.S. Circuit Court of Appeals, which had previously weighed in on the case that appears to be setting the tone in most of these cases, “Hecker v. Deere & Co.” Hecker, as you may recall, involved a situation with a large, multi-billion-dollar plan that offered its participants access to a couple of dozen funds from a single provider alongside a self-directed brokerage window that afforded access to funds beyond that. The 7th Circuit dismissed that challenge, finding that the competitive forces of the market were sufficient to ensure reasonable fee levels for the specific funds on the menu, and that, if the participants felt otherwise, they could always pursue other options via the brokerage window.

In Exelon, there was no brokerage window, though there were 32 fund options, mostly (24) mutual funds—mutual funds that were retail-class funds. Once again, the 7th Circuit noted that “all of these funds were also offered to investors in the general public, and so the expense ratios necessarily were set against the backdrop of market competition,” and restated its holding in Hecker that “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund.” And then the court launched off into what, IMHO, was an odd juxtaposition of the benefits of those retail funds against “institutional” funds, which it claimed don’t offer the same level of liquidity, transparency, and ability to benchmark against comparable investments. Really? Have they never heard of an “I” share?


I once opined that, based on the Hecker decision, I would advise plan sponsors to give “participants LOTS of fund choices —via a brokerage window if possible—and I would make sure that there were at least some low-cost fund choices available via that window,” and that, among other things, I wouldn't concern myself “overly much with the fees paid by the plan/participants—so long as those fees were paid via mutual fund expense ratios that are the same as those paid by investors in the retail market” (see IMHO: “‘Winning’ Ways?” ). It was a tongue-in-cheek remark, of course, but the Hecker decision struck me as heavily - perhaps too heavily - dependent on free-market principles: Participants weren’t forced to put money in the plan, those who chose to do so weren’t forced into any particular option, and the fees associated with those options were, almost by definition, reasonable since they were subject to free and fair market forces.

That same court was similarly inclined here—and, if you can’t embrace the rationale, one can at least appreciate the consistency.

More than that, in this case, the 7th Circuit noted that Exelon had no real motivation to put “bad” fund options on the retirement plan menu. “[T]here is no reason to think that Exelon chose these funds to enrich itself at participants’ expense. To the contrary, Exelon had (and has) every reason to use competition in the market for fund management to drive down the expenses charged to participants, because the larger participants’ net gains, the better Exelon’s pension plan is. That enables Exelon to recruit better workers, or reduce wages and pension contributions without making the total package of compensation (wages plus fringe benefits) less attractive. Competition thus assists both employers and employees, as Hecker observed.”

The question here isn’t whether Exelon, or any employer, reaps personal benefit from the plan, or how it is structured. Employers do, of course, reap the recruiting/retention benefits of providing a robust and competitive package of benefits, alongside certain tax benefits—though, in my experience, these pale in comparison to the investment of time, money, and effort required. The decision to offer a plan, like the decision to participate, is voluntary. Bad law and intrusive regulation can weigh on the former, and poor plan design and lax administration can surely restrain the latter.

ERISA fiduciaries are, however, not merely expected to offer a “competitive” program, nor is it enough to simply steer clear of arrangements that enrich their bottom line at the expense of participants. Rather, every plan decision is supposed to be not just in the interests, but in the BEST interests, of participants, and from the perspective—or with the assistance—of experts in the field.

That test may, of course, be satisfied by merely offering access to the same types of investments available to retail investors, but, IMHO, that doesn’t mean we shouldn’t expect—better.

—Nevin E. Adams, JD

Court Costs

Last week brought to light an aspect of 401(k) litigation that doesn’t generally get a lot of coverage—and the participant-plaintiff was presented with a $50,000 bill.

Now, at some level, this case was “just” another stock drop suit where some kinds of accounting issues contributed to a sudden (and ostensibly unexpected) drop in the price of company shares, including those held in the company’s 401(k) plan.1 These types of cases have cropped up one after another in the wake of the market downturn, and while the fact patterns behind the drop in share price vary slightly, the suits themselves allege pretty much the same thing: The plan fiduciaries kept the stock as a plan investment after it was no longer prudent to do so; to wit—after it suffered a precipitous drop in value.

Most of these cases don’t seem to get very far, the courts either deferring to a “presumption of prudence” (see “IMHO: Prudent Mien?” or, as in this case, finding that ERISA 404(c)’s safe harbor provided shelter (see”Court Gives Baxter 404(c) Protection in Stock Drop Suit”).


What’s interesting to me about this case isn’t that it is a stock drop suit, not that the judge found 404(c) applicability as a shield (honestly, I’m not “getting it” in this case), and certainly not that the employer prevailed (that seems a pretty common result in stock drop cases). No, what I found interesting—and what one would hope that plaintiffs who get lured to these actions in the future might want to keep in mind—is that they might lose more than just their day in court.

Not that it was an all-out victory for the defendants. Sure, they’ll get $50,000 from the participant-plaintiff, but they had asked for roughly $500,000—and that didn’t include attorney fees! But in this case, after spending some time discussing whether such awards could be made and on what grounds, Judge Gottschall decided that such fee awards were allowed—and then proceeded to pick apart the itemized requests for reimbursements with the fine-tooth comb of someone auditing a business expense reimbursement request (disallowing most for either a lack of specificity or an inability to document the origins of the expense).

Regardless, I found the list of expenses to be eye-opening2, and while the defendants may well have had other resources to tap to cover them, it was a stark reminder of just how expensive litigation can be, how much court costs, even when you win.

But maybe there’d be less of that if those who set such things in motion had to spend some of THEIR money when they’re wrong.

—Nevin E. Adams, JD

1 Specifically, U.S. District Judge Joan B. Gottschall of the U.S. District Court for the Northern District of Illinois granted the assessment of some $50,000 in costs associated with the litigation against David E. Rogers, who filed the suit against Baxter International in 2004. The suit, rejected by this same judge in 2010, alleged that Baxter continued offering company stock in its 401(k) plan after it was no longer prudent to do so (specifically, after its stock twice took tumbles after the reporting of disappointing earnings results, one involving fraud at a Brazilian subsidiary). Judge Gottschall ultimately dismissed the suit because she found that the employer qualified for protection under ERISA 404(c)’s safe harbor (see “Court Gives Baxter 404(c) Protection in Stock Drop Suit”).


2 From Baxter and former Baxter CEO Harry Kraemer:

(1) $23,163.44 for transcripts and video recordings of court hearings and depositions,
(2) $6,956.60 for photocopying court documents and preparation materials for depositions,
(3) $112,648.13 for exemplification and copying costs incurred in connection with responding to discovery requests (including nearly $78,500 in fees paid to an “e-discovery vendor” to process data into a readable format that could be reviewed and produced to plaintiff, as well as $15,000 spent digitalizing documents that existed in hardcopy format—at a rate the court said was about twice as expensive as simply copying them),
(4) $163,474.09 for the cost of computerized legal research.

From former Baxter CFO Brian Anderson:

(1) $4,070.95 for transcripts,
(2) $10,673.10 for photocopying,
(3) $2,687.04 for exemplification of trial exhibits,
(4) $173,150.00 for expert-witness expenses (apparently without providing any supporting documentation, so it was rejected).

“To Do” List—Part 2

Being a plan fiduciary is a tough job—and one that, it’s probably fair to say—is underappreciated, if not undercompensated. In my experience, most who find themselves in that role (see “IMHO: Duty Call”) do an admirable job of living up to the spirit, if not the letter, of their responsibilities.

Nonetheless, there are plenty of areas in which we could do a better job. In this week’s column, we’ll touch on the rest of my “10 things you’re probably doing wrong” list:


6. Thinking your plan qualifies for 404(c) protection—and misunderstanding what that means.

Any number of studies suggest that many, perhaps most, plan sponsors think their plan meets the standards of ERISA 404(c ), a provision that ostensibly shields them from being sued for participant investment decisions, so long as certain conditions are met.

On the other hand, industry experts are nearly uniform in their assessment that very few, perhaps no, plans meet those standards (though the courts have been somewhat more liberal in their application). So, even if you think your plan does comply—check. And even if your plan does comply, understand that, while 404(c)’s shield may offer some protection against an individual participant suit, it offers no insulation against a participant suit predicated on an inappropriate investment option. Remember, too, that the DoL thinks you’re responsible for every participant investment decision except those behind 404(c)’s “shield.”

7. Depositing contributions on a timely basis.

The legal requirement for when contributions must be deposited to the plan is perhaps one of most widely misunderstood elements of plan administration. Unfortunately, a delay in contribution deposits is also one of the most common flags that an employer is in financial trouble—and that the Labor Department is likely to investigate.

Note that the law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Many have read the worst case situation (the 15th business day of the month following) to be the legal requirement. It is not.

8. (Not) monitoring providers on a regular basis.

In some sense, we all “monitor” the performance of plan providers all the time. Is the Web site available when people try to access it? Do checks and statements arrive on time? Are the balances displayed accurate? The reality is that, for most of us, no news is seen as “good” news. After all, if the answer to any of those questions was “no,” we’d not only know about it, we’d be complaining about it (after fending off our own set of complaining phone calls). Odds are that you have a very full-time job dealing with the things that are “broken”—why go looking for trouble?

However, relationships with providers are like any other relationship—we all slip into “ruts” of complacency—and the best way to keep that new customer “honeymoon” feeling alive is to do something as simple as ask your current provider for a regular service review. At least once a year—no matter how well things are going—you should determine if your plan has access to the new services that have come online since you converted; that you are getting the advantages of the most current thinking about costs and fees; and how your plan’s participation, deferral, and asset diversification stack up. And every three to five years (sooner if there are problems, of course), you should go through a formal request for information (RFI) or request for proposal (RFP) process—on your own, or with the help of an adviser (who doubtless has more experience with such things).

Remember also that the DoL says that, “Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable.”

9. Not following the terms of the plan document.

Plan documents are, after all, legal documents and can skirt the fringes of readability. Retirement plans develop certain patterns or routines—the way things are handled—that may not, over time, remain consistent with the terms of the plan. Particularly if you are using a plan document prepared by a provider (or, worse, an ex-provider) that may well accommodate that provider’s approach, but may not match (or may not have kept up with) how you actually administer the plan. It is a good idea to do a document/process “audit” every couple of years; don’t assume that “the way we’ve always done things” is supported by the legal document governing your plan.

10. Not realizing who is a fiduciary—and what that means.

The first thing to understand is who a plan fiduciary is, and to understand that the “test” isn’t what you call yourself (or, in some cases, what you avoid calling yourself), but your ability to control and influence plan assets. A fiduciary is any person or entity named in the plan document (e.g., the plan sponsor and trustee); any person or entity that has discretionary authority over the management of a retirement plan or its assets (all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee—if it has such a committee—and those who select committee officials); and any person or entity that offers investment advice with respect to plan assets, for a fee.

Remember too, that the authority to appoint a fiduciary makes you a fiduciary—and that hiring a “co-fiduciary” does not make you an “ex” fiduciary.

If you are a fiduciary, and you feel that you lack the expertise to make those decisions, you will of course want—and, in fact, are expected—to hire someone with that professional knowledge to carry out the investment and other functions.

Finally, remember that, IMHO, you’re more likely to get sued for not doing something you should be doing than for doing something you shouldn’t be doing.


—Nevin E. Adams, JD

You can find more information on fulfilling your fiduciary responsibilities at the Employee Benefits Security Administration’s (EBSA) Web site HERE

All For One

Looks like James LaRue will get his day in court, after all.

Last week’s Supreme Court result (see Justices OK Individual ERISA Suits in Landmark Ruling) could perhaps have been anticipated – certainly there has been little of late to suggest an interest in depriving participants of their right to sue - but the margin of victory – 9-0 – was striking.

The case - LaRue v. DeWolff – involved a participant that claimed he had instructed his plan administrator to transfer his balances to different funds. Those instructions were either ignored, or never presented in the first place, depending on who you choose to believe – but the lack of attention to those instructions allegedly cost James LaRue $150,000. What really happened, why LaRue chose to sue when he chose to sue, and how much damage was done as a result has yet to be established – the case was dismissed by two lower courts that, relying on an earlier Supreme Court precedents, determined that ERISA did not permit individual participants to bring suit on behalf of their own interests, only on behalf of the plan as a whole.

I can’t say, however, that I was impressed with the rationale presented by Justice Stevens, who authored the court’s decision (he was joined by Justices Souter, Ginsburg, Breyer, and Alito, while Chief Justice Roberts and Justice Kennedy filed an opinion concurring in part and concurring in the judgment, and Justice Thomas filed an opinion concurring only in the judgment, which Justice Scalia joined). Essentially, Justice Stevens admitted that the Supreme Court had previously held in Massachusetts Mutual Life Ins. Co. v. Russell, that ERISA didn’t permit individual participant suits (1) - but that while “Russell’s emphasis on protecting the “entire plan” from fiduciary misconduct reflects the former landscape of employee benefit plans. That landscape has changed.”

Change “Parse”?

How has it changed? Well, to put it simply, because defined contribution plans have individual accounts, and – here I’ll let Justice Stevens speak for himself – “Russell’s emphasis on protecting the “entire plan” reflects the fact that the disability plan in Russell, as well as the typical pension plan at that time, promised participants a fixed benefit. Misconduct by such a plan’s administrators will not affect an individual’s entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan…. Thus, Russell’s “entire plan” references, which accurately reflect §409’s operation in the defined benefit context, are beside the point in the defined contribution context.”

Of course, defined contribution plans were not “beside the point” when the Russell case was decided, and the justices then ((in an interesting touch, Stevens also authored that opinion) addressed what ERISA allowed, not what it provided for suits brought in a non-individual account context under ERISA. Consequently, to my eye, anyway, it’s as though the Supreme Court sought to “excuse” its prior decision as not being applicable to ALL plans covered by ERISA (you’d think that could’ve been mentioned at the time), or worse – to suggest that because the “landscape” has changed, so has the law.

I suppose some will appreciate the “vitality” such flexible interpretations give the law, but it’s precisely those kind of situational determinations that unduly complicate our lives, IMHO. Defined contribution plans (and those individual accounts) have been with us more than a century, ERISA for a generation. What about the prevalence of defined contribution plans relative to defined benefit programs warrants a reinterpretation of the latter to adequately address the former – other than perhaps the fact that the justices themselves didn’t “get” individual accounts in 1985 when the Russell case was decided? Or, more cynically, that the justices messed up in their Russell decision, and wanted to rationalize what could plausibly be viewed as a repudiation of the previous decision?

A Loss is a Loss

That’s why I much prefer the rationale expressed by Justice Thomas in his concurrence – a concurrence that “is not contingent on trends in the pension plan market. Nor does it depend on the ostensible “concerns” of ERISA’s drafters.” Thomas goes on to affirm the statutory right of a participant, beneficiary, or fiduciary to bring suit (“obtain relief”), and then goes on to state what common sense dictates – losses to individual accounts in a plan are losses of the plan – and recoverable as such (2).

Whatever the rationale, the law of the land now affirms that participants can bring suits based on injuries to their individual accounts. Frankly, the court’s previous sense that an injury to a participant in a plan was not a plan injury smacked of the kind of legal hair-splitting that only lawyers (and I have a JD) and politicians relish. Now, in the wake of the LaRue decision, I can understand and appreciate the concerns expressed on behalf of employers – that this case will simply set off a wave of new and expensive litigation.

No doubt the coverage of the LaRue case will serve to discourage some who were contemplating offering a 401(k), but I doubt that it will lead to the demise of plans already in existence. Much as I hate to contemplate the prospect of more red meat for the plaintiffs’ bar, I suspect the individual participant lawsuit “shield” pierced by the LaRue decision was unappreciated by most plan sponsors. Perhaps most obviously, why else would so many have sought the protections of ERISA’s 404c, but to avoid the possibility of an individual participant suit?

Still, one need look no further than the rash of so-called stock drop cases or the revenue-sharing challenges to see the potential – and the LaRue headlines certainly convey the sense of a new way for workers to sue their employers. But I think plan sponsors – certainly the ones attentive to their fiduciary responsibilities - have long been concerned about participant lawsuits.

Of course, they’re also probably not the ones who should be worried.

- Nevin E. Adams, JD


(1) ERISA Section 409(a) provides: “Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made throughuse of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. A fiduciary may also be removed for a violation of section 411 of this Act.” 88 Stat. 886, 29 U. S. C. §1109(a).

(2) “The allocation of a plan’s assets to individual accounts for bookkeeping purposes does not change the fact that all the assets in the plan remain plan assets.”

Fighting Words

“[T]he complaint is a rambling 38 page collection long on legal argument, public policy rhetoric and repetition, but vague in its allegations of facts which might be relevant to the claims alleged.”

With all the tact of a law professor dressing down a first-year student, U.S. District Judge John Shabaz of the U.S. District Court for the Western District of Wisconsin last week dismissed one of the so-called 401(k) revenue-sharing lawsuits brought by the St. Louis-based law firm of Schlichter, Bogard & Denton – and did so in just 18 pages. And he did so “with prejudice and costs.”

It was the second such case to be dismissed. In an even more succinct dismissal in February (two-pages), U.S. District Judge John Darrah said that the 401(k) participants in the Exelon Corp. plan failed to make a "link between the administrative fees they were charged and their market-based losses" (see Court Tosses 401(k) Participants’ Request for Investment Losses Relief).

Not that there weren’t elements of plan structure that might raise eyebrows in some quarters in the most recent case—the agreement between the plan sponsor (Deere & Co.) and the provider (Fidelity) to limit the fund menu to funds managed by Fidelity, for one thing (23 of the 26 funds on the menu were Fidelity’s). And then there is the judge’s matter of fact assertion that “Defendant Deere could have negotiated lower fees with Fidelity Research, or could have selected different funds from different providers with lower rates but has made no effort to do so.” One could readily imagine those exact words being uttered as a stark condemnation of a fiduciary that had failed to live up to its duty—but this court recounted it as a statement of fact, nothing more (and, for the record, there’s no fiduciary bar to doing what Deere did, so long as their motivations were solely in the best interests of plan participants/beneficiaries, and the fees and services so obtained were reasonable). Besides, the plan did offer access to a brokerage window. If participants wanted something beyond a Fidelity offering, they could tap into some 2,500 other alternatives.

Reasonable Doubts?

Furthermore, IMHO, Judge Shabaz was too willing to conclude that, since Deere participants were paying the same for their mutual investments as other investors, the fees must be reasonable. On the surface, the fees weren’t obscene—fees ranged from .07% for the Spartan Fund to 1.01% for the Diversified International Fund, according to the ruling. Still, it’s one thing to conclude that those fees were reasonable; quite another, IMHO, to assume that they are reasonable simply because others (and retail investors, to boot) are willing to pay them.

Still, Shabaz was clear in refuting the notion that the plan had any obligation to delve into the specifics of any revenue-sharing arrangement (“recent proposals to amend the regulations…to require revenue-sharing disclosures in annual reports make it apparent that present regulations do not require it”), and clearer still in rebuffing the notion that there was an obligation to share those details with plan participants (“Nothing in the statute or regulation directly requires such a disclosure”). Additionally, Shabaz concluded that the fee disclosures included in the Summary Plan Descriptions (SPDs) and prospectuses were sufficient for participants to make informed investment decisions—or at least that requiring more would “require judicial expansion of the detailed disclosure regime crafted by Congress and the Department of Labor pursuant to its statutory authority.”

While he acknowledged that some of the issues raised were undergoing reconsideration (1), when all was said and done, he found no merit in the claims, concluding in effect that it appeared “beyond a reasonable doubt that the plaintiffs can prove no set of facts in support of the claim which would entitle the plaintiffs to relief.”

One should be cautious in drawing too many conclusions from this result, of course. In the same way that lawsuits contain only one side of the situation, dismissals all too often shuttle aside potentially triable issues, not because the issues aren’t there, but because plaintiff’s counsel didn’t make an effective presentation. Still, on the issue of revenue-sharing disclosures, I think Shabaz got it right.

When the cases were first filed I, perhaps like many of you, was no doubt surprised that these kinds of allegations were applied to some of the largest 401(k) plans in the nation—plans that, by any reasonable assessment, probably had the staff and plan-size “clout” to get such matters “right.” Of course, they also had the size that makes for “deep pockets” and public brand(s) that typically eschew the kind of publicity that accompanies a lawsuit and facilitates a quiet settlement.

This time, however, it seems that they have a willingness to fight back.

- Nevin E. Adams, JD

(1) “A review of the report confirms that the revenue sharing issue raised by plaintiffs’ complaint is a matter of policy concern within the Department of Labor. It also unequivocally confirms that present regulations do not require disclosure of the information.”