Increasing 401(k) lawsuits: Causes, consequences

With 401(k) plans taking over from pensions as the chief employer-provided means of saving for retirement, there’s plenty of ground to cover in keeping up with fiduciary obligations of those who have to administer the plans and their assets.

A new brief from the Center for Retirement Research at Boston College looks at the proliferating phenomenon of lawsuits over those fiduciary obligations, the reasons for the lawsuits and the effects they have on the 401(k) plans they challenge, including the potential to throttle innovation.

The stakes are high: The percentage of workers who have access to a retirement plan at work who are covered by a 401(k) or other DC plan has risen from just 12 percent in 1983 to 73 percent in 2016. And when it comes to dollars, the report points out, “401(k)s now hold over $5 trillion in assets, without counting the even larger amount of assets that start in 401(k)s but end up in … IRAs.”

The brief reports that although the number of suits had dropped in the wake of the Great Recession, that’s changed and the numbers are now “surging”—with data from Bloomberg’s Bureau of National Affairs indicating that more than 100 new 401(k) complaints were filed in 2016–2017; that’s the highest two-year total since 2008–2009.

Why are so many suits suddenly being brought again?

The brief cites three chief reasons: inappropriate investment options, excessive fees and self-dealing.

Since 401(k)s are “relatively new,” and were never intended to be the sole means of saving for retirement when they were devised, there are still plenty of questions, the report says, that remain unanswered about the legal obligations of plan fiduciaries.

The law is clear on the need for plans to be administered for the “sole benefit” of participants, but it’s short on details about how that’s to be done, such as how plan fiduciaries should select the type and number of investment options—the need to follow a prudent process—or figure out what constitutes a reasonable level of fees.

That fee issue has been driving recent lawsuits, the brief says, while past suits paid more attention to investments. That’s driven the rise of low-cost index funds, seen as less vulnerable to litigation, and also served to depress investment and administrative fees.

But lawsuits overall could also be causing plan administrators to be wary of innovative plan options, such as lifetime income products, lest they be opening themselves up to a date in court.