Name it, and it’s probably getting sued—a large corporation, top university, healthcare organization; all due to the fiduciary practices (or lack thereof) in the retirement plans they offer and manage for employees. As we’ve said many times, the Vatican is probably next.
Defendants sometimes prevail, as did Prudential recently over lawyers for Ferguson Enterprises 401k participants, but without a doubt, 401k lawsuits are in full swing. TV stations in small markets are increasingly inundated with ads from familiar local personal injury lawyers, timed for just after dinner.
Consider just one lawyer’s ad in Colorado—complete with ominous music and a deep-sounding voiceover to helpfully match the words flashing across the screen. It was forwarded to us with a note, “Here they come!”
“Attention 401k investors. Do you have a 401k from a current or former employer? If so, you may be entitled to money damages depending on what plan you invested in. To find out more you need to call us now at the following number. Your 401k may have been mismanaged, you may be entitled to compensation, but you have to call. Call us at the following number.”
The website is the same, only more ambiguous.
“Many employees have a retirement plan through their employer. Depending on how your plan and investments were managed you may be entitled to money compensation. If you have a plan through your employer, please contact our office.” [Emphasis ours]
They’re encouraging anyone who simply has a 401k plan to call. The clear inference? Contact us; we’ll find something (anything).
“It’s not just the commercials on television,” says Marcia Wagner with The Wagner Law Group. “Billboards are cropping up that essentially say the same thing. I guess they’re running out of tobacco and asbestos claims and need something new, and the tort bar is much more aware of these kinds of claims.”
Plan sponsors and advisors, both big and small, are just now waking up to the problems 401k fiduciary breaches can cause.
“The lawyers’ pipelines are full, and this will be a generational thing,” she adds.
As noted, most cases up until recently involved large plans sponsored by even larger companies—think Boeing, Lockheed Martin, Chevron, but claims filed over the past year are increasingly and decidedly down market.
“ERISA doesn’t discriminate,” Wagner adds. “It doesn’t matter if it’s a $5 million dollar plan or a $500 million plan.”
It’s a hard wake-up call for advisors and plan sponsors of smaller 401ks who thought they were too small to get noticed, and could therefore skate by.
“It’s a problem for a number of reasons,” notes tort-bar bogeyman Jerome Schlichter, managing partner with St. Louis-based Schlichter, Bogard and Denton, best known for prevailing in front of the Supreme Court in Tibble vs. Edison, who’s on a personal mission to sue every company and non-profit in America.
“Yes, the court cases that we’ve brought have been against large plans, but first of all, the DOL now has its eyes on fees in a way that they never did when we started this nine years ago. It could bring a case without regard to costs, and private lawyers are, of course, looking at this more and more in smaller plans.”
And it’s not just the money, which can be accounted for. Fiduciary insurance to protect against lawsuits is now available, of which many companies are taking full advantage. The other serious risk is to the advisor and plan sponsor’s reputation.
“Reputational risk is a serious risk,” Schlichter emphasizes. “If there’s a plan that they’re advising on that has egregious facts that come out, whether it be in the mediaor due to a court case, if they haven’t been doing their job that reputational risk will affect their whole business.”
Thankfully, many smaller retirement plans sponsors and advisors are getting the message, although it’s taken some time to get through. More than half expressed concern over potential lawsuits in a recent survey from Boston-based research behemoth Cerulli Associates, with one-quarter (less than $100 million in 401(k) assets) describing themselves as “very concerned.”
However, an unfortunate byproduct of this “rash of litigation,” it found, is that it will stifle innovation in the 401k market, and development of new solutions could stop at the very moment the retiree demographic needs them most. It’s just one reason for the extreme flow of assets out of actively managed products and into those that are passively managed.
“It’s interesting to note that nearly one-quarter of plan sponsors select passive investment options because they are ‘easier for a fiduciary to monitor,’” Jessica Sclafani, associate director at Cerulli, explained. “This reasoning is inextricably tied up with the mistaken view of some plan sponsors that passive is a way to mitigate their own fiduciary liability.”
Plan sponsors simply feel they have little to gain by appearing “different” from their peers due to the risk of being sued, and as advisors become increasingly fee conscious, some view passive options as a way to drive down overall plan expenses, which in turn demonstrates their value to the plan.
It’s something she calls “a common misconception.” Retirement plan sponsors have a fiduciary duty to do what is in the best interest of the plan’s participants and their beneficiaries, she notes, and if they’re choosing a passive investment option simply because it’s less fiduciary work for them, “this is not in line with the spirit of ERISA.”
Any mention of fees naturally leads to a discussion of revenue sharing, whether it’s 12b-1 fees for sales and marketing functions, so-called “indirect fees” for record-keeping services or a host of others, they’d better be reasonable, or else. The practice something that was off in a “dark closet” until lawyers like Schlichter brought it to light, specifically plans that kept participants in higher cost retail shares when the plan qualified for breakpoints and lower-cost institutional share.
“First of all, revenue sharing is not a violation of the law,” he explains, somewhat surprisingly. “It’s whether or not the revenue sharing produces that excessive fee. When you have an asset-based charge for record-keeping, and record-keeping does not have anything to do with assets [size], that is where you run into problems, especially if those are paid for with revenue-sharing agreement.”
The practice was condoned, often with a wink and a nod, for decades, with little worry or forethought to the explosion of litigation now seen. It makes for an awkward conversation between 401(k) advisors who were aware of, and benefited from the practice and smaller plan sponsors, in particular, who were not.
What’s to be done if a retirement advisor finds themselves in such a situation? An awkward conversation might be uncomfortable, but not as uncomfortable as a sizable jury award. “It’s never too late to fix it,” Wagner says.
“If a particular issue has been swept under the rug, that rug can always be lifted and cleaned underneath. And I strongly, strongly suggest that they fix it.”
“My advice is—without any question—is that you go back and recommend rebates for the plan,” agrees Schlichter. Do the right thing going forward, and advisors will be better off, even if the plan sponsor ignores their advice on behalf of participants.
“If you are on record that you advised the retirement plan sponsor to recapture the excessive fees and that any excessive amounts are rebated to the plan, you have done your job, you’ve protected yourself, and you are going to be better off,” he says, before adding with a smile, “Plus, you’ll probably sleep better at night.”