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.”

Litigation, Regulation, and Tax Reform – Oh My!

It’s been a busy year, a crazy summer – and we’ve still got a presidential election to go.

It has been years since things actually slowed down in the summer (at least in the way we all seem to remember it), but this summer has been busier than any I can remember. Not only has everybody been making preparations for the implementation of the Labor Department’s fiduciary regulation (and it’s affecting different business models very differently), we’ve had the looming prospects of litigation regarding the legality of the regulation itself, and the authority of the Labor Department to undertake it.

The challenges to that regulation share certain critical aspects, and yet each has its own unique flavor – and let’s not forget that they are filed in three different federal venues (four, counting the one filed just last week). Could one prevail in convincing a federal judge to grant a preliminary injunction to stop the rule’s implementation? Could such a ruling actually serve to maintain the status quo until after the presidential election? Could that presidential election result in new leadership at the Labor Department? If so, might a new president decide to halt implementation, and set a new course for that regulation? It seems unlikely now, but that’s pretty much what happened in 2008 with the then-pending advice regulation from the Labor Department.

Oh, and what about the series of excess litigation lawsuits taking on some of the nation’s largest (and we’re talking multi-billion dollar) university retirement plans? A decade ago, the law firm of Schlichter, Bogard & Denton galvanized the retirement industry’s attention with about a dozen such lawsuits filed against similarly mammoth 401(k) plans.

Things have changed since then, of course. Sure, revenue sharing is still an issue, as is the disclosure of such transactions to participants. But there is a greater sophistication in the current wave of allegations – it’s not just the use of retail versus institutional shares, but the failure to consider investment vehicles like collective investment trusts and separate accounts, the choice of active management funds with an S&P 500 benchmark instead of an S&P 500 index option itself, the choice of a poor-yielding money market fund instead of a stable value option – and in some cases, the choice of what is alleged to be a high-priced stable value choice rather than a relatively straightforward money market fund.

Since the beginning of the year, the cases brought against 401(k) plans – and this has found its way into the 403(b) litigation – have challenged not only the methodology for recordkeeping fees (dismissing asset-based revenue-sharing in favor of per-participant approaches), but attempted to set markers as to what that reasonable per-participant charge should be. Needless to say, millions of dollars are at stake – and one suspects we’re not near the end of even this litigation cycle.

And then there’s the prospects for tax reform. Sure, we may have been lulled into complacency by the gridlock in Congress that calls to mind a Friday afternoon traffic jam on the Beltway. But the major party candidates are already talking about changes to tax rates, and the rates they plan to cut – and in some cases plan to raise – could, if enacted, have a ripple effect on the current tax structures for retirement plans. Could the current 401(k) deferral be rejected in favor of a Roth-only approach? Might the contribution limits and benefit levels be frozen in place – or even reduced? Tax reform means different things to different people – and can impact different people in very different ways. And make no mistake, those kinds of changes are being contemplated as you read this. Could something actually happen?

In the midst of all this change and potential disruption lies opportunity for advisors. There will be plan fiduciaries looking for guidance, and plan sponsors more open to plan design changes than they may have been otherwise. It’s likely that firms (and advisors) that had previously been committed to the retirement business will rethink that commitment, and advisors who merely dabbled in this space may well decide it has simply become too rife with potential litigation to continue their dalliance.

That said, if the field is winnowed, the firms – and advisors – who remain will doubtless be made of sterner stuff. Those who survive and who hope to prosper will likely have to step up their game to compete effectively in this new, and more challenging arena.

- Nevin E. Adams, JD