The Dramatic Rise in Excessive 401k Fee Litigation—And Who’s Fighting It

Few words strike fear into the hearts of 401(k) plan fiduciaries more than “excessive fee lawsuit.”

At least 19 employers sued over 401(k) plan fees since 2020 have signed class settlements with a combined value of more than $68 million, according to a recent analysis of the explosion in retirement plan litigation conducted by Bloomberg Law.

Most settlements have ranged between $500,000 and $4 million, the analysis notes, with one big exception: the $32.5 million class settlement Wells Fargo & Co. signed on April 4, 2022, to resolve a proposed class action from workers alleging it violated ERISA through mismanagement of its employee 401(k) plan.

More than 170 lawsuits challenging retirement plan fees have been filed in federal courts since 2020, mostly by five law firms—and one in particular: Harrisburg, Pa.-based Capozzi Adler, which the U.S. Chamber of Commerce said in an amicus brief in the Hughes v. Northwestern case is behind nearly half of all recent ERISA lawsuits.

“The lawsuits typically follow a familiar playbook, often with cookie-cutter complaints,” said the brief. “Lawyers frequently find a plan sponsor to sue, advertise for current or former employees willing to serve as plaintiffs, and pursue the litigation.”

For the most part, these lawsuits have netted an impressive early win rate for plaintiffs, the Bloomberg Law analysis found.

“Dozens of courts have ruled in these lawsuits, and they’ve largely favored employees and their lawyers,” says an April 5 article on Bloomberg Law. “Of the cases filed since 2020, more than 50 have at least partially survived a motion to dismiss, and only about a dozen have been dismissed.”

In response to motions to dismiss, courts have issued inconsistent rulings on nearly identical allegations, with many complaints withstanding dismissal in whole or in part. And by surviving motions to dismiss, plaintiffs have generated over a billion dollars in recoveries through settlement, with over $350 million of the proceeds earmarked for attorneys’ fees, according to a recent article written for 401(k) Specialist by Proskauer Partner Myron D. Rumeld, co-chair of the Firm’s ERISA Litigation Practice, and associates Tulio D. Chirinos and Dan Wesson.

These recoveries come despite the fact that, in the seven cases that actually proceeded to trial, plaintiffs have prevailed on only two of the many claims that were asserted in these cases.

Various proposed class actions in ERISA cases are currently pending in more than half of U.S. federal district courts. And it’s not just the jumbo plans that are getting sued anymore. Historically, the vast majority of plans being sued had over $1 billion in plan assets. Recently, sponsors with much smaller plans are being targeted.

401(k)-focused advisors working in concert with plan fiduciaries need to stay abreast of the excessive fee litigation environment, which has seen a number of recent developments—perhaps none more significant than the recent Supreme Court decision in Hughes v. Northwestern, which hasn’t exactly brought the level of clarity many had hoped to see. Advisors and plan sponsors had hoped the Supreme Court would take the opportunity to enunciate clear, limiting pleading standards that would discourage cases with little or no merit. That didn’t happen.

As the firm of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. wrote in the National Law Review after the decision in February: “The Supreme Court’s decision, which is both brief (a mere eight pages) and unanimous (8–0 with Justice Barrett taking no part), dashes any hopes for a stricter pleading standard in ERISA excessive fees cases. This is in our view unfortunate. These cases are being filed in increasingly large numbers. The proximate consequence of the decision is to further raise the compliance bar.”

Chamber Chimes In

While that small handful of law firms continues to aggressively seek out new cases, plan fiduciaries have found a staunch (if somewhat unlikely) defender in the aforementioned U.S. Chamber of Commerce, the world’s largest business federation representing the interests of more than three million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations.

The Washington, D.C.-based Chamber has taken a keen interest in the proliferation of excessive fee lawsuits, urging judges to reject the “cookie cutter” lawsuits they say hurts retirement plans and plan participants while enriching lawyers.

“We first saw that they were going after the mega plans, and then we saw the mega 403b plans. And then we just saw the birth of a cottage industry and we were seeing copycat strike suits that really were just aimed at a settlement, to a point where we would see even some of the same typos in the complaints,” said Chantel Sheaks, Vice President, Retirement Policy at the Chamber.

Sheaks spoke at length with 401(k) Specialist recently to explain a somewhat unusual campaign the Chamber is actively waging: filing amicus briefs in the early stages of many excessive fee ERISA lawsuits with a goal of getting the cases dismissed before they get to summary judgments or settlements.

Among cases where the Chamber has filed briefs urging courts to dismiss 401(k) fee lawsuits are Xerox Corp., Kroger Co., Voya Financial Inc., Humana Inc., Exelon Corp., and the American National Red Cross.

Why did the U.S. Chamber of Commerce decide to get involved in this niche issue? Because this cottage industry popped up—and the Chamber says it’s making it tougher for companies to offer employees a retirement plan.

“This is why we decided to do this. Providing a retirement plan is voluntary,” Sheaks said. “My job is to make it easier for employers to provide good benefits. Pure and simple. That’s my job. And that’s the biggest reason we wanted to do this. Because this is NOT making it easier for an employer to provide a good retirement benefit.”

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