After a few years of decline, litigation involving 401(k) plans “has surged again recently,” according to a study published by the Center for Retirement Research at Boston College.  This is likely not news to 401(k) sponsors and service providers, who are confronted with this reality on a near daily basis.  However, the study is a fascinating read, in part because it chronicles many cases brought since 2006, but also because it discusses the consequences of all this litigation—both the good and the not-so-good.

Complaints filed by participants of 401(k) plans against their plan fiduciaries over the past ten years follow a pattern.  Section 401(k) plan litigation exploded during the recession in 2008, with many allegations targeting funds holding employer stock whose value plummeted.  The number of lawsuits peaked at 107 in 2008, and 2009 remains second on the list for number of 401(k) lawsuits filed over the past 12 years.

Section 401(k) litigation tapered off during the first few years of this decade, with the Supreme Court’s 2014 Dudenhoeffer v. Fifth Third Bancorp decision delivering a devastating blow to the so-called “stock drop” cases.[1]

Although the Court agreed with the Sixth Circuit that employer stock ownership plan (ESOP) fiduciaries are not entitled to a special “presumption of prudence,” its discussion of the difficulty such allegations faced in meeting the pleading standard led to many dismissals.

But starting around 2015, the study finds, 401(k) litigation began to surge again.  The more recent cases focus on “excessive fees” paid either for actively managed investment funds or for record-keeping and other administrative services.  There has been a corresponding shift in who is sued: record-keepers, third-party administrators, and other plan service providers are increasingly named as defendants, in addition to or instead of the employees or fiduciary committees of plan sponsors.  The plaintiffs in many of these “excessive fees” cases probe the complicated—and sometimes opaque—fee structures between plan service providers such as record-keepers and investment advisors for what plaintiffs believe to be hidden kickbacks.

Continue Reading ERISA Litigation Surging – Focus on Fees

Our colleague Jason Levy recently published an article in The Actuary Magazine on the Department of Labor’s fiduciary conflict rule.  More than six years in the making, this rule represents perhaps the most significant regulation from the DOL during the Obama Administration.

The fiduciary conflict rule expands the definition of fiduciary to cover, with certain exceptions, all investment advice provided to a retirement plan (like a 401(k) plan, defined benefit pension plan, or an IRA), or to a participant or beneficiary in any of those retirement plans.  The rule imposes fiduciary status on a broad category of professionals, including many broker-dealers who previously had taken the position that they were not investment advice fiduciaries based on a DOL regulation that had been in place since 1975.

In contrast to the sweeping changes it imposes on investment advice professionals, the fiduciary conflict rule will have a far more modest effect on employers.  The rule is not intended to confer fiduciary status on sponsors of retirement plans.  Likewise, there had been concern under the proposed version of the rule that human resources and other employees who interact with participants might be considered fiduciaries when they discuss retirement plan investments with their co-workers.  However, the final version of the rule provides that, absent unusual circumstances, such employees would not be covered.

Nevertheless, the fiduciary conflict rule has important implications for employers that sponsor retirement plans.

Continue Reading What Employers Need to Know About the Fiduciary Conflict Rule