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.”
Next page: Birth of a Cottage Industry
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.”
Daniel Aronowitz, in a recent Euclid Fiduciary white paper
“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.
Next page: Fiduciary Liability Insurance Rates Skyrocket
Fiduciary Liability Insurance Rates Skyrocket
A significant byproduct of these lawsuits? Fiduciary liability insurance rates have skyrocketed.
In its Hughes v. Northwestern amicus brief, the U.S. Chamber writes, “The massive and unpredictable risks of ERISA class-action litigation have ‘wreaked havoc on the market for fiduciary liability insurance,’ pushing fiduciary insurers ‘to raise insurance premiums, increase policyholder deductibles, and restrict exposure with reduced insurance limits.’ The burden is falling on plan sponsors, not insurers.”
A 2021 MarshMcLennan Agency report found there has been an 80% increase in ERISA-related litigation, which is driving rates. Fiduciary liability insurance carriers have responded by increasing policy rates by 15%-20% and implementing stricter underwriting requirements or even outright denying renewals.
While Sheaks notes the number of 401(k) plans overall is increasing—a good thing, she says, because Americans need access to retirement plans—the flip side is “it’s almost like this unlimited untapped resource for this cottage industry to go after. We have over 600,000 401k plans in the U.S. I don’t know of any other plaintiff-side target that big. That’s the frightening part,” Sheaks said.
“This has really upended the fiduciary liability insurance industry,” Sheaks added, noting there used to be very low deductibles but not anymore. For a lot of these settlements, it’s not just the insurer that’s paying; it’s the employer as well because the deductibles are so high.
“If I’m an employer and I just had to pay $35 million in a settlement for the 401k, that money has to come out of somewhere,” Sheaks said. “And we’ll see employers maybe reconsidering, ‘Well, maybe I won’t subsidize the fees. Maybe I’ll have less of a match. Maybe I take it out of wages. Or maybe I just don’t have a plan altogether.’”
These are the type of outcomes the Chamber is fighting against.
Focus on Educating Courts
As a big part of its strategy to avoid those outcomes and fight the wave of plaintiff suits, Sheaks said the U.S. Chamber of Commerce is seeking to better educate the courts on ERISA litigation.
“At the District Court level, these judges are being thrown everything. The topics are immense. For some reason, many people think that ERISA cases are really just too complex to dismiss early on, so we decided we needed to educate the courts about ERISA,” Sheaks said. “We’re really trying to get past all the smoke and mirrors that the plaintiffs are creating.”
That smoke and mirrors she refers to? The Chamber said in the Hughes v. Northwwestern amicus brief that the lawsuits generally compare the fees or performance of particular investments against the fees or performance of one or more of the thousands of alternative investments available in the market. Or they compare the fees paid to a plan’s recordkeeper to the recordkeeping fees paid by a different plan or reported in a median survey of some subset of plans. Then they ask courts to infer from those outcomes that plan fiduciaries’ decision-making process must have been inadequate, and they seek millions of dollars in “losses” from the individuals serving as fiduciaries.
“They’ll cherry-pick investments,” Sheaks said of the plaintiff suits. “There are hundreds of thousands of investments out there. There’s always something better, and there’s always something worse. What we’re trying to do is really break it down and educate the courts on just that. You can dismiss the pleading standards.”
In most ERISA cases, Euclid Fiduciary’s Aronowitz notes in his whitepaper, plaintiff attorneys pull fee data from Form 5500s, which they know includes transaction fees beyond plan recordkeeping. Sheaks agrees.
“They’ll go to the Form 5500, look for the service provider and look for the fees and then divide that number by the number of participants, and say ‘Oh, that’s the fee.’ It’s really high,” Sheaks said. “And they pick these random numbers with no basis of what an average fee should be. It used to be $65, then it was $50. Now it’s randomly $35.”
The Euclid whitepaper points out that in Hughes v. Northwestern, the Supreme Court held that all excessive fee claims based on circumstantial evidence must be subjected to context-based scrutiny in order to survive as a plausible lawsuit. “The only credible way to meet this context-based plausibility standard is if the fees are egregious based on a reliable, third-party benchmark. Fees within a reasonable range of established benchmarks—not plaintiff-manufactured benchmarks—are not plausible under the Supreme Court pleadings standard,” the whitepaper states.
“In a claim of excessive fees, the only context that makes sense is if the fees are actually excessive at the threshold stage of the case,” the whitepaper continues. “Discovery and the gateway to settlements should not be allowed for plaintiffs who have filed illegitimate and unsupported claims of excess fees.”
Sheaks said she thinks once the courts start looking at this in that context-specific light, “you will see a lot more [cases] being dismissed at that motion-to-dismiss level” rather than going on for summary judgment or settlement.
A recent post from ERISA and employee benefits law firm Trucker Huss explains that a motion to dismiss challenges the quality of a plaintiff’s allegations at the beginning of a case before any discovery is taken and seeks to have the plaintiff’s claims dismissed on grounds that they are legally insufficient. If the plaintiff defeats that motion, it does not mean their case will be successful, but only that they are permitted to proceed to discovery to try to obtain evidence that supports their claims.
Next page: When Plaintiffs Win, Law Firms Cash In
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