How (Not) to Get Sued By 401(k) Tort Terror Jerry Schlichter

401k lawsuit, fiduciary, DOL, Schlichter
Image credit: David Johnson

Industry crusader or sector pariah? Tort terror Jerome Schlichter causes angst and anxiety about long-held 401(k) industry practices, and makes a heck of a living doing so. Here’s how employers, 401(k) plan sponsors and advisors steer clear.


Likeable Lawyer?

Ranks up there with “government organization” and “terribly pleased” in the list of clichéd oxymorons. But Jerome Schlichter wasn’t what we expected.

If the name sounds familiar, it’s because the St. Louis-based managing partner of law firm Schlichter, Bogard & Denton is on a tear (putting it mildly). Ameriprise Financial, Lockheed Martin, Fidelity Investments, Tibble v. Edison(!)—yeah, that guy. They’re just a fraction of the firms to feel his legal wrath over their failure to properly execute their fiduciary duties to employees, specifically in company 401(k) plans.

Heck, he took $57 million off Boeing in a settlement the day before our interview, accusing the aviation mega-giant of offering “imprudent investment options” in its 401(k) and “passing on excessive fees” to employees.

He even named Vanguard in his most recent high-fee fiduciary suit, although he emphasizes the fund company is only referenced, not a target. Crazy? Sure, like a fox.

After causing all this excitement, what we expected was the celebrity-lawyer stereotype— bold, loud, brash. What we got was the soft-spoken Schlichter, who was measured, deliberate and far more self-effacing than we would have imagined. Which makes him all the more dangerous.

We understand and are therefore wary of being “handled,” something we’ve experienced dozens of times. It doesn’t matter if it’s political hacks and their false flattery or superstar portfolio managers and their false modesty. However, after speaking with Schlichter, one really does get the sense it’s about helping American workers by holding employers accountable for fiduciary best practices (that and the hundreds of millions of dollars he’s won on behalf of his clients). Either way, if your plan isn’t buttoned up, he’s coming for you, as well as anyone else listed on the 5500.

One odd point is the support he’s received from inside the industry. Far from circling the wagons and hunkering down, a healthy portion of advisors and other interested stakeholders are cheering him on, which only adds to the surreal nature of what’s happening.

We wondered whether the rise of the fiduciary issue and education in the public consciousness coincided with the legal action he’s brought.

“No,” he bluntly stated.

Not at all?

“Over 10 years ago, we started getting more and more questions from people who were concerned about whether or not they would have enough money to retire,” Schlichter said. “They also expressed concern about trying to figure out what’s going on in their plan and figuring out fees. So we started looking into it because we were getting questions from our clients.”

The result was a nine month dig into industry practices before ever filing any case. Not surprisingly, there weren’t a whole lot of people willing to talk because, according to Schlichter, they were benefiting from the practices. However, what was surprising was that in the 30-year history of 401(k)s there had never been a lawsuit over excessive fees, and the Department of Labor had never brought an enforcement action for an infraction.

As Schlichter put it, “401(k)s and excessive fees were off in a dark closet.”

“Trillions of dollars of assets went into this, with no enforcement action and compounded by the fact that the employers’ money wasn’t at stake, so there was no built-in incentive to watch things. It was remarkable to learn that.”

Part of the reason a suit had never been brought was the “opaque” nature of 401(k) plans themselves. It’s staggeringly risky and demanding of resources with hundreds of thousands or even millions of documents that have to be reviewed, and an outlay of expense upfront.

“The attorneys got paid, but we didn’t,” he noted. “There was the need for very knowledgeable experts in finance, investment management, fiduciary practices, record keeping and so on, with many of those not willing to talk because of their involvement in the industry.”

Nonetheless, it appears to have been worth it. Schlichter proudly pointed to accolades from AARP, John Bogle, “multiple federal judges” and more. As a result of the cases he’s brought, he claimed, fees are dramatically falling across the industry as a whole. He’s even got the attention of the Department of Labor at a time when it’s just about to act on its proposed fiduciary rule.

“It’s a great relationship,” he said matter-of-factly. “They asked me to come to Washington D.C. after we filed the initial cases to explain what we’re doing and they’ve been very open about learning more. They’ve filed multiple amicus briefs with the courts that support our positions. They understand that these cases are developing the law that’s going to define the parameters of behavior for employers [acting as plan sponsors].”

Asked for a particularly egregious example of a fiduciary breach, he gave us an anecdote instead, one involving perhaps the second most famous case behind Tibble—ABB Inc. and Fidelity Investments.

ABB is the Swiss company that purchased the assets of Westinghouse. ABB had what Fidelity called a “Cadillac arrangement,” according to Schlichter. They were using Fidelity as the record keeper in their 401(k) plan, as the record keeper for an executive’s defined benefit pension plan, the administrative record keeper for the health and welfare plan and payroll processing.

“We discovered—based on Fidelity’s own records—that the three corporate plans on which Fidelity was performing services were provided to ABB at a loss, while the work on the employees’ 401k plan, where the employees assets were involved, was providing more than 50 percent profit. Major conflict of interest. The law requires that the employer run the 401k plan for the sole benefit of the employees. That’s a pretty simple concept but a very rigid duty. The same duty that any trustee has when managing someone else’s money. We alleged, and the court found, that ABB was using its employees’ retirement assets to subsidize its own corporate expenses. That’s outrageous.”

We wondered if the complexity of these plans—the opaqueness to which Schlichter himself referred—was responsible; a sincere willingness on the part of plan sponsors to do right that nonetheless strayed into accidental violations.

He didn’t buy it.

“These are practices beyond just being so-called asleep at the switch,” he said, his voice rising. “This is deliberately benefitting from the employees’ retirement assets.”

We asked about the advice he would offer 401(k) advisors to ensure guys like him never darken their door. Despite the fact he wouldn’t personally benefit from giving up the goods, he had a few at the ready.

“The beacon that should guide any 401(k) plan advisor, as well as employer, is to operate the plan for the exclusive benefit of your employees and retirees,” Schlichter explained. “Follow that beacon, and if there are any gray areas or any doubts, you come back to that beacon and let that be your standard.”

The Boy Scout, Pollyanna-nature of his advice started to bug us, so we pushed back. The plans still have to pay expenses, right? It’s a race to the bottom with fees and it won’t be cost-effective to provide 401(k) advice and how, specifically will Tibble’s “duty to monitor” be interpreted and how will the DOL’s fiduciary rule be implemented and …?

He waited patiently as we spun ourselves out.

“The employer’s duty is that simple,” he calmly responded. “It’s the duty of a trustee handling someone else’s money. The advisor presumably is going to make their money by providing advice to the employee for a fee. The advisor should steer clear of having a financial interest in the products that are placed into the plan. If the advisor’s getting a benefit from advising about certain products being in the plan, that’s a red flag for legal exposure.”

His other advice should be 401(k) 101, but sadly it’s not, even in this litigious day-and-age—document, document, document.

“Plan advisors and sponsors can’t go through the motions. They shouldn’t be setting regular quarterly meetings at 4:30 on Friday when everybody’s looking at their watch to get out of there. No weekend document dumps. And large plans or even medium-size plans should not be paying retail fees—period.”

We asked him if his pipeline was full, and how long he expected cases like these to occur. His answer was the first indication of a lawyerly dodge; diplomatic, and absolutely not what we wanted.

“I would say it remains to be seen. It certainly is a different climate recently, as employers have worked hard to do the right thing. These cases will come to an end and there will be a point when they do presumably, but we’re not there yet. The trend is moving in a very good direction for American workers. If that trend continues, employers will recruit good employees and help them build retirement assets. So it’s a win-win.”

We ended with a bit of color, and asked about the thrill (as well as pomp and pageantry) of arguing before the Supreme Court in Tibble. It was a proud moment for Schlichter, who mentioned the antique writing quill given to lawyers at the case’s conclusion, the tough questioning from recently-deceased Antonin Scalia and more.

“The Supreme Court accepts very, very few cases and had never taken a 401(k) excessive fee case because there weren’t any,” he said with a smile. “It was seen by some as a technical issue about the statute of limitations, but it was really about whether or not after a certain amount of time, plan sponsors can go to sleep and ignore it for the rest of time. The ruling of the [lesser] court had been, yes, that’s what they can do. You could have a Bernie Madoff in your plan and if it got through the six years you’d be immunized from any further scrutiny. It was clear to a lot of observers that the Court was skeptical of Edison’s claim.”

It’s a ruling (lesson?) that of course applies to plan advisors as well, probably even more so. Specifically, advisors should not make the assumption that “they can have their advice on auto-pilot.”

“They’ve got to dig in and look at the details,” Schlichter concluded. “That will probably involve asking some difficult questions of the employer, and the employer may not be happy to answer. The advisor also has to correct conflicts-of-interest and revenue sharing they might have engaged in in the past. They need to come clean because it will come to light, even for small plans. That’s a good thing. 401(k) plans are no longer off in a dark closet. I suggest that advisors embrace that and move forward. If they do, they’ll do well.”

John Sullivan
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.

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