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

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