Birth of a Cottage Industry

In the first 25 years that 401(k) plans existed, there had never been a lawsuit over excessive fees, and the Department of Labor had never brought an enforcement action for an infraction.

“401(k)s and excessive fees were off in a dark closet,” Jerome Schlichter, managing partner of St. Louis-based law firm Schlichter, Bogard & Denton, told 401(k) Specialist in a 2016 interview.

That is until Schlichter and his firm took an interest, after he said they were getting an increasing number of questions from clients concerned about fees and what was going on with their 401(k) plans. If Ted Benna is the “Father of the 401k,” then Schlichter is the “Father of the 401(k) Lawsuit.”

His firm was the first to file cases alleging excessive fees in 401(k) and 403(b) plans, and the firm proudly proclaims on its website that it has “successfully obtained relief valued at more than $1.5 billion on behalf of retirement plan participants—often by bringing lawsuits that other firms were unwilling to bring.”

By 2006, Schlichter, Bogard & Denton filed a wave of class action lawsuits against giant corporations including Lockheed Martin, Northrop Grumman and many more alleging the payment of excessive investment management and plan administration fees from the 401(k) plan’s investment options violated the Employee Retirement Income Security Act of 1974 (ERISA).

Schlichter argued for the plaintiffs in decade-long saga of Tibble v. Edison, obtaining a unanimous 9-0 decision in the first 401k case ever to make it to the Supreme Court. He also achieved a $62 million settlement in Abbot v. Lockheed Martin, the largest ever in a 401(k) case involving excessive fee allegations.

Schlichter also brought the high-profile case against Northwestern University, where the Supreme Court recently reversed the decision of the Seventh Circuit, likely ensuring a continuing flow of 401(k) and 403(b) excessive fee cases, and making it harder for plan sponsor fiduciaries to win motions to dismiss from lower courts moving forward.

In an example of a typical excessive fee case, Schlichter Bogard & Denton filed suit in 2020 against Pentegra on behalf of over 27,000 participants across nearly 250 financial institutions in the $2.1 billion Pentegra Defined Contribution Plan. The lawsuit alleges, among other things, that Defendants breached their fiduciary duties under ERISA by failing to monitor recordkeeping fees and charging excessive—and consistently rising—administrative fees, despite their considerable bargaining power and duty to solicit competitive bids.

Per a recent post on the Schlichter Bogard & Denton website, the lawsuit further alleges that such fees constitute prohibited transactions, and that, as alleged in the complaint, “from 2014 to 2018, Defendants caused over $50 million in direct payments to be taken from the Plan and paid to Pentegra.” Also at issue is Pentegra’s alleged failure to utilize lower-cost share classes, causing the plan to suffer millions of dollars in excessive investment management fees.

The U.S. District Court for the Southern District of New York on March 23, 2022 allowed the case to move forward despite Pentegra’s filed Motion to Dismiss, concluding in its Memorandum Opinion and Order that plan participants had laid out a case that Pentegra “breached [its] fiduciary duties…with respect to the Plan’s recordkeeping, administrative, and investment management fees[;] engaged in prohibited transactions…[;] and that the Board of Directors and its individual members breached their duty to monitor fiduciaries.”

This follows the playbook. Retirement plan excessive fee lawsuits typically include claims of investment management fees, administrative fees and recordkeeping fees being too high.

“Recordkeeping is essentially the gateway drug for plaintiff law firms trying to cash in on excessive fee litigation,” writes Daniel Aronowitz, Managing Principal and owner of Euclid Fiduciary, a leading fiduciary liability insurance underwriting company, in a recent whitepaper titled, “Debunking Recordkeeping Fee Theories in ‘Excessive’ Fee Cases.”

Plaintiff lawyers argue that excessive 401(k) fee litigation has been good for workers by driving down plan fees and boosting 401(k) plan performance. Indeed, large 401(k) plan fees (1,000 participants/$50,000,000 assets) declined from 0.90% to 0.88% over the past year and are down from 0.95% in 2017, according to the latest edition of the 401(k) Averages Book.

Small plan (100 participants/$5,000,000 assets) fees declined from 1.20% to 1.19% over the past year and are down from 1.25% in 2017.

But the Euclid Fiduciary whitepaper claims the real goal of these lawsuits is to pressure plan sponsors into settling excessive fee lawsuits to avoid or minimize even more costly litigation expenses. They seek to survive a motion to dismiss and then leverage settlement pressure based on high discovery costs and often inflated damage models.

The whitepaper—which aims to provide context on which cases defense attorneys should file motion to dismiss and which they should not—covers what it calls the most common misleading tactics used by plaintiff law firms to allege excessive plan administration fees. It claims many of the current purported excessive fee cases “are based on pure conjecture, improper benchmarks, and misleading facts. In some cases, the recordkeeping fees alleged are just plain false. And in most cases, the purported recordkeeping benchmarks have no support in reality. But plaintiffs will continue this shameless business model until courts apply a more stringent pleading standard to weed out meritless and implausible cases.”

While cases brought by Schlichter Bogard & Denton have accounted for many of the biggest settlements to date, newer entrants such as Capozzi Adler PC have become even more active in the space, bringing dozens of new and nearly identical claims against plan sponsors in recent years.

Asked by 401k Specialist to comment on various criticisms of the “cottage industry,” Donald R. Reavey, Esq., a key member of Capozzi Adler’s ERISA Fiduciary Practice Group, said, “We have no comment beyond what’s in the pleadings on file with the various Courts.”

Motions to Dismiss Denied in Recent Cases

In mid-April, a District Court in Connecticut denied Xerox Corporation’s motion to dismiss a breach of fiduciary duty lawsuit against its 401(k) plan fiduciaries, meaning the case will proceed. The suit alleges the company mismanaged its $4.3 billion 401(k) plan by hiring an expensive, in-house recordkeeper to manage the plan.

That recordkeeper charged steadily increasing annual fees far above the allegedly reasonable fee of $35 per person, and the allegations are enough to allow an inference that Xerox didn’t fulfill its fiduciary duties under ERISA, Judge Sarala V. Nagala said.

The Xerox 401(k) plan had between 21,000 and 30,000 participants and $3.6 billion and $4.3 billion in assets from 2015 through 2019. Plaintiffs allege that plans of this size should be able to negotiate lower recordkeeping fees because of their scale, the complaint states.

Then in what Trucker Huss called “a rather surprising move,” the Ninth Circuit Court of Appeals in April issued two short decisions within the span of a week, which reversed lower court dismissals in 401(k) fee cases brought against Salesforce.com, Inc. and Trader Joe’s Company.

“While both of these Ninth Circuit decisions will be unpublished, meaning lower courts are not required to follow them, they may still be cited as persuasive authority and could impact fee litigation in the Ninth Circuit by potentially making it more difficult for plan fiduciaries to obtain dismissals early in litigation,” the Trucker Huss post said.

While the Chamber would obviously like to see more cases dismissed, there’s value in bringing attention to the impact that the surge of litigation has had on retirement plans, making them more expensive to administer, the Chamber argues.

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