When Plaintiffs Win, Law Firms Cash In
ERISA litigation, because of its complexity, can be more expensive than most. At the risk of oversimplifying the issue of attorney fees in excessive fee cases, plaintiff law firms often take the cases on a contingency basis and typically receive about one-third of the total amount of any settlement reached.
Contingency fee arrangements can vary considerably in their terms and often reflect different percentages depending upon whether the case goes to trial or settles pre-trial. Contingency arrangements also discourage frivolous lawsuits, as an attorney is not likely to take a case if they don’t see a good chance of recovery.
In one recent ERISA excessive fee case, Costco Wholesale Corp. agreed to pay $5.1 million to settle claims by a participant in the company 401k that plan fiduciaries violated their ERISA duties by charging “unreasonably” high recordkeeping and administrative fees and keeping certain investments even though less expensive and better-performing similar investments were available.
The class action settlement affecting about 250,000 people calls for a $3.2 million reduction in administrative fees for participants who have active accounts when the settlement becomes final. Former participants and current participants with inactive accounts will share in a payment of $400,000. Meanwhile, attorneys’ fees, subject to court approval, are $1.5 million.
“When I looked at the recovery, on the high end it probably was going to be about $25 per participant. And the attorney’s fees were $1.3 million… I’m not sure what more they want for participants other than a settlement with attorney’s fees.”
Chantel Sheaks, U.S. Chamber of Commerce
Sheaks said sometimes when she analyzes settlements in cases they look big and substantial for participants. But when you break it down to a per-participant basis, not so much.
Take the recent $3.9 million settlement in Hill v. Mercy Health Corp. “When I looked at the recovery, on the high end it probably was going to be about $25 per participant. And the attorney’s fees were $1.3 million,” Sheaks said, lamenting that the plaintiff attorneys in these claim they’re coming after plan fiduciaries to secure lower fees and better investments. “I’m not sure what more they want for participants other than a settlement with attorney’s fees.”
In the previously mentioned Abbott v. Lockheed Martin case, the attorney fee award for Schlichter, Bogard & Denton in 2015 was close to one-third ($22 million) of the $62 million settlement fund, and was warranted because of the firm’s “exceptional commitment and perseverance in representing employees and retirees seeking to improve their retirement plans,” according to the settlement. The court found that the fee award only reflected approximately 20% of the full value of the settlement, when the settlement’s non-monetary component was considered.
In an example of settlement in a smaller recent case, brought by participant-plaintiffs Kristal M. Khan, Michelle R. Ballinger and George A. Craan on behalf of participants in the PTC 401k Plan, a mostly cash settlement of $1,725,000 also meant a payment to the plaintiffs’ attorneys (in this case Capozzi Adler) of no more than $575,000—one-third of the gross settlement amount.
No End In Sight
As long as the law firms are able to enjoy a reasonable success rate in obtaining settlements in excessive 401k fee cases, they will continue to seek them out.
Plaintiff-side lawyers profess to say they will weed out the vast majority of potential cases early on and file only ones that deserve time and investment, as they often take years to resolve. They say the cases are too labor-intensive for them to waste time suing well-managed plans.
But advocates for fiduciaries say well-managed plans still get sued regularly.
“Unfortunately we keep seeing these claims filed again and again, and many of these plans they are going after—from a professional viewpoint—are very well-managed plans. The investments are some of the most popular investments,” Sheaks said.
“The simple fact remains that most large defined contribution retirement plans in this country have low recordkeeping fees—fees that are often five to 10 times lower than the recordkeeping fees in most under $100 million small-asset plans,” Euclid Fiduciary’s Aronowitz writes in his whitepaper. “But given the rampant misrepresentations of actual fee levels in the excess fee lawsuit claims, federal courts have not been given the proper perspective or context to make informed decisions on threshold pleading motions.”
SEE ALSO:
• How Fiduciaries Can Help Protect Themselves from Excessive Fee Litigation
• Hughes v. Northwestern Bottom Line: Harder to Dismiss Cases
• Hughes v. Northwestern: A Missed Opportunity to Establish a Workable Pleading Standard
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
They ruined Disney, too.
As SCOTUS pointed out in its Hughes decision, each individual investment option within a plan just be prudent. Cost-inefficient investments are not prudent. And yet, plan sponsors continue to load 401(k) plans with cost-inefficient actively managed mutual funds. By focusing on the cost-efficiency issue, cost relative to return, rather than just costs alone, the ERISA plaintiff’s bar can easily satisfy the applicable plausibility pleading standard, resulting in increased litigation success. Plan sponsors must also learn to assess the cost-efficiency of plan investment options using simple metrics such as the Active Management Value Ratio™.
The gist of this article is that plaintiff attorneys calculate fees incorrectly based on aggregate data on Form 5500 filings. This just highlights the fact that fee transparency has a long way to go.
When I read the line, “‘For the most part, these lawsuits have netted an impressive early win rate for plaintiffs,’ the Bloomberg Law analysis found” I wondered where that came from because I hadn’t seen wins by the plaintiffs. But I see now that Bloomberg Law is considering a win to be a case that wasn’t dismissed. Or where a plan sponsor settled. I guess from the plaintiffs’ attorney, that would be a win. I expect we would see a different ‘win’ ratio if more of these cases actually went to a jury.
Did I misunderstand the article or Bloomberg Law’s position?