Jackson Walker partner James R. Griffin spoke regarding recent ERISA litigation, and particularly, the current trends in 401(k) plan litigation, at the November 2016 meeting of the American Society of Pension Professionals and Actuaries. The presentation was part of a two-hour continuing education meeting of the Dallas/Fort Worth Benefit Council.

Recent Trends in 401(k) Plan Fee Litigation 

The litigation surrounding 401(k) plan fees that has been building for a decade has seen an unprecedented surge of late. In the last eighteen months, more than 100 lawsuits have been brought, the majority of which challenged investments made and fees paid by 401(k) plans of large companies like Intel Corp and Verizon Communications Inc. These companies had mega plans with several billions of dollars in assets (approximately $15 billion and $30 billion, respectively). Such plan fee litigation has led to significant multi-million dollar settlements. Large corporate employers, generally with the help of BigLaw, have had to incorporate solid plans to minimize the risk of being sued and ensure a successful defense if, or when, they are sued. Smaller companies, however, were not targeted. Until now.

Fujitsu’s American subsidiary and BB&T Corp were both sued for excessive fees in plans with less than $2 billion in assets, ($1.3 billion and 1.6 billion, respectively). Putnam Investments LLC was sued with only $589 million in assets. In May 2016, LaMettry’s Collision, a Minnesota auto body repair company with barely 100 participants and less than $10 million in assets, was targeted. A lawsuit of this nature against a company this size was previously unthinkable. A few weeks later, Checksmart Financial LLC was sued with only $25 million in assets.

This trend has captured the attention of small plan administrators, advisers, and attorneys across the country. There are nearly 75,000 401(k) plans with less than $25 million in assets now at stake given this new direction in 401(k) plan fee litigation. Smaller plans may be even more vulnerable to litigation as they often carry higher fees due to their size and generally have fewer resources to facilitate proper training and administration of their retirement plans.

Chevron Case Offers Hope for Plan Administrators

It is not all bad news for 401(k) plan administrators however. The recent dismissal of an excessive-fee lawsuit against fiduciaries of Chevron Corp.’s 401(k) plan suggested issues with many recurring arguments made by plaintiffs in 401(k) fee plan litigation. The decision affirmed two standards that should be applied in all fiduciary breach cases. First, the fiduciary’s decisions should be reviewed in light of circumstances at the time the decision was made, not in light of investment performance. In other words, the prudence of the investment cannot be judged in hindsight. Second, while fees are important, fiduciaries should evaluate fees in relation to the quality, nature, and scope of the services provided. The duty of loyalty is not breached merely by causing a plan to incur unreasonable expenses. The Plaintiffs filed an Amended Complaint the month after the Motion to Dismiss was granted. A new Motion to Dismiss the Amended Complaint is currently pending.

Positive Takeaways

It is more crucial than ever that any employer offering a 401(k) plan understand ERISA requirements, no matter the type of business or its size. Under ERISA, the company offering the plan is a fiduciary and as such owes both a duty of loyalty and duty of prudence in the operation of the plan. Potential litigation claims include self-dealing, high fees, poor performance, involvement in proprietary mutual funds, or funds included in the plan for the employer’s own profit. Understanding the changing legal landscape and developing proper protocols is crucial to avoiding such claims.

Employers should seek legal advice as to the fiduciary practices they should adopt, the process of selecting and training qualified fiduciaries, and steps to ensure a quality decision-making process. It is always wise to hold regular committee meetings and keep written minutes and to periodically request proposals. Understanding administrative fees and mutual fund expenses in relation to options and investments and making choices to balance both is critical in protecting a company from and defending against 401(k) plan fee litigation.

About Jim Griffin

Jim has an exhaustive knowledge and understanding of ERISA matters and over three decades of experience representing clients in a wide variety of employee benefit plan and executive compensation matters. He works closely with the ever-changing Internal Revenue Code and ERISA to keep clients informed and protected.