Lawsuits against 401(k) sponsors have been pervasive this year, with nearly 100 new cases alleging breaches of fiduciary duties in connection with the fees workers incur.
That trend has coincided with a steep rise in cost for fiduciary liability insurance and a lower ceiling on limits, meaning that some employers must now seek multiple policies for the same level of coverage they once had.
Plaintiffs’ attorneys have focused their efforts on large retirement plans, including those of Trader Joe’s, Costco, Estee Lauder, RR Donnelley, MGM Resorts, Teva Pharmaceuticals and L Brands. Financial services firms have not been immune, with companies such as ADP, Allstate, Liberty Mutual, John Hancock and Pentegra being targeted.
One of the most recent cases was filed Dec. 4 against Centerra Group and Aon Hewitt Investment Consulting. That case, brought by Schlichter Bogard & Denton, alleges breach of fiduciary duties related to underperforming investment options and higher-than-necessary administrative costs.
But many of the new cases this year have been brought on behalf of plaintiffs by law firm Capozzi Adler, which has filed dozens of similar complaints against plan fiduciaries. That firm declined to comment for this story.
The common allegations in 401(k) excessive-fee cases involve the costs participants pay for record keeping and investment management. That includes allegedly excessive per-participants record keeping fees and revenue-sharing arrangements, in which such costs are paid as a percentage of fees from mutual funds on the plan menu.
Claims around investment management often relate to underperforming funds, share classes that are not the cheapest available, the use of actively managed funds rather than passive ones and not opting for collective investment trusts in lieu of mutual funds. Fees for managed-account services have also been raised in several lawsuits this year.
Over time, insurance companies collectively have paid out more than $1 billion to settle these cases and have spent more than $250 million in attorney’s fees defending them, according to a whitepaper published this month by Euclid Specialty Managers.
This year, there have been roughly 95 cases filed, and of them about a dozen have either been settled or dismissed, according to an estimate from Groom Law Group.
That volume of new claims is higher than usual, though so is the number that have been disissed, said David Levine, principal at the law firm. Whether many of the defendants in the recent wave of cases are able to get claims dismissed at an early stage will influence how likely other defendants will be to fight claims rather than settle, Levine said.
“The courts require a degree of specificity and fact to be alleged in these complaints. To the extent that a complaint doesn’t have that much detail in it, you are likely to see people fighting them more, before they settle,” he said.
Many of the new cases this year are “copy-cat” or “cookie-cutter” lawsuits that differ from earlier 401(k) litigation, Euclid’s whitepaper read.
“The lawsuits are generated by lawyers who are taking advantage of a weakness in the ERISA fiduciary regulatory framework that allows easy access to courts. The litigation bar is very low,” according to the study. “Plaintiff firms only have to claim negligence; assert a purported benchmark; and then hope to survive a motion to dismiss to leverage the crushing cost of litigation and huge damage models, coupled with the fear of individual liability under ERISA fiduciary law.”