401k Lawsuits: A Big and Booming Industry

Perhaps adding fuel to the fire, the Wall Street Journal (subscription required) highlighted the rash of lawsuits filed against 401k and 403b plan sponsors and providers. With lawsuits now a top concern by plan sponsors according to a recent Pimco survey, the prognosis is that there is more to come with 25 cases filed in 2016.

Since 2006 according to the Groom Law Group, 90 lawsuits focused on defined contribution plans have been filed with rich settlements led by the $140 million settlement paid by Nationwide (see top 10 defined contribution lawsuit settlements and awards) are attracting more and more law firms learning from each other and the courts on how to either win a case or get big settlements. And while most cases have been filed either against larger defined contribution plans or service providers, a small Ohio based personal injury law firm recently filed a suit alleging excessive in a $1.1 million plan with 27 participants although the named defendant was Nationwide.

Recent settlements against plan sponsors like American Airlines and NYLife alleging the improper use of proprietary funds have shined a bright light on the use of affiliated investments although some cases like the ones against Putnam and Wells Fargo have been dismissed because plaintiffs failed to show that fees were unreasonable even if they were affiliated.

Smaller plan sponsors and their advisors, most of whom are or will be acting as a fiduciary, should pay close attention before smaller law firms, like the one in Ohio, start suing plans and their advisors copying the successful cases now being settled against larger organizations.

Along with the sole benefit rule, plan fiduciaries must ensure that fees are reasonable through a prudent, documented process. Proprietary funds of the plan’s record keeper, especially target date funds or whatever is used as the default option, should raise red flags and must be evaluated independently from the other services being provided.

And for staff on Investment Committees or those acting as a plan fiduciary, getting ERISA insurance to protect them also seems prudent with personal assets at risk under ERISA.

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