401(k) lawsuits on the rise as participants target fees, conflicts of interest and data privacy
Attorneys for both plaintiffs and employers anticipate that the pace of litigation will remain high in coming months. But new litigation trends have also emerged.
With Americans spending more time at home due to Covid-19-related lockdowns this past year, they weren’t just busy perfecting their sourdough recipes and TikTok dance videos. It seems they also had time to dig into their 401(k) plans, and many didn’t like what they saw. 2020 was a bumper year for litigation under the Employee Retirement Income Security Act (ERISA), the statute that governs 401(k)s and other retirement plans.
According to the Groom Law Group, a law firm based in Washington, D.C. that defends employers, there were more than 200 ERISA class actions filed this past calendar year, an all-time high. It was an 80% increase over 2019 and more than double the number of 2018.
The suits range from alleging bad fund choices, to poor plan designs and underperformance, though excessive fees remained a central theme. Nearly half of the cases were brought by one plaintiff’s firm, Capozzi Adler of Harrisburg, Pennsylvania.
“It’s been the perfect storm of better information, much more sophisticated plaintiffs’ lawyers (who’ve had success) and people having more time on their hands,” says Paul Secunda, partner with Walcheske & Luzi, a Wisconsin-based law firm that represents plan participants in lawsuits. Secunda now has 13 cases, though he says he reviewed over 50 cases in the past year alone.
Excessive fees
While each case is unique, the majority of 401(k) litigation continues to be charges of excessive fees.
For example, plan participants filed a class action against Costco 401(k) Retirement Plan., alleging that the membership warehouse club authorized its $15.5 billion plan to pay high recordkeeping fees, among other issues.
Meanwhile, a suit against Estee Lauder 401(k) Plan alleged that the cosmetic company’s plan was large enough to have substantial bargaining power on expenses but failed to do so. The plaintiffs contend that participants in large plans should pay roughly $5 per participant per year for recordkeeping, but Estee Lauder participants paid between $48 to $126 per participant per year.
To be sure, 401(k) fees have declined over the years, a development that observers such as Boston College’s Center for Retirement Research credits to litigation in the past decade and a half. The average total 401(k) fee was 0.92% in 2017, according to the latest analysis by BrightScope and the Investment Company Institute. In 2009, plan fees totalled 1.02%. But the average participant pays 0.58% (compared to 0.65% in 2009) since participants and assets tend to be concentrated in larger, lower cost plans.
Despite those positive trends, excessive fees continue to plague many plans and participants, particularly in smaller plans. Plans with less than $1 million in assets have total fees of 1.44%. But many participants don’t have a firm grasp of what these fees are or how they’re calculated.
In fact, according to a survey by the National Association of Plan Participants, 58% of participants believe they don’t pay any fees at all for their defined contribution plans.
Copycat suits
The furious pace of litigation has brought charges of “copycat” lawsuits. Critics contend that many of the filings contain verbatim text from other suits.
“If you took 90% of the complaints that got filed last year, compared, they would be very similar,” says Stacey C.S. Cerrone, principal with New Orleans-based firm Jackson Lewis, which represents employers.
Other observers go further, contending that some filings are simply cut-and-paste jobs, replete with the same errors.
Plaintiffs’ attorneys cry foul: “That’s a convenient way for defense to diminish the merits of litigation,” says Jim Miller, partner with Shepherd Finkelman Miller & Shah, LLP in Chester, Connecticut. “Some of our complaints are similar because we’re challenging similar issues across different plans.”
Future looks similar…sort of
Attorneys for both plaintiffs and employers anticipate that the pace of litigation will remain high in coming months, with plaintiffs continuing to allege excessive fees and conflicts of interest. “There have been a lot of successful settlements and judgements,” says Ben Grosz, partner with Washington, D.C.-based law firm Ivins, Phillips and Barker. “That inspires firms to invest in more cases and inspires other firms to get into this area, so I would expect this trend to continue.”
But new litigation trends have also emerged. One case, filed by famed firm Schlichter, Bogard & Denton of St. Louis on behalf of four participant plaintiffs, accuses Shell Oil Co’s 401(k) plan of not protecting participant data and allowing its recordkeeper, Fidelity, to use it to cross-sell its products, among other issues.
The filing alleges that Fidelity shares participant data with salespeople at its affiliated companies. In addition, that data is uploaded into Salesforce and that data is shared across all Fidelity affiliates. Fidelity then uses that data to sell nonplan financial services.
“The data issue is not going away,” notes Levine.
Small employers take note
Historically, excessive fee lawsuits targeted large plans because of financial incentive for plaintiffs’ attorneys. But in recent years, litigation has gone after smaller plan sponsors too.
“It’s become easier for plaintiffs’ counsel to find numbers on small plans,” notes Cerrone. “As we move more and more online it’s easier to find information on plans of all sizes.”
Smaller plans don’t always have dedicated professionals to vet plans and perform due diligence.
“I would say that [smaller] plan sponsors are woefully uninformed and not sufficiently educated,” says Miller of Shepherd Finkelman Miller & Shah.
Plan sponsors should heed fiduciary best practices, says Cerrone. “You need to look at your fees, and you need to be benchmarking your fees and investments,” she says.
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