401k Plan Lawsuits Subject to Shifting Standards

Secure Act Changes401k plan lawsuits have experienced a steady increase.  The majority of claims have focused on fee violations, imprudent choices regarding investments or plan design, fiduciary negligence, or forbidden transactions.  In the recent case of Khan v. PTC, Inc., the plaintiffs asserted that the fiduciaries of the PTC 401(k) did not adequately or prudently review the plan’s investment fees.  In addition, the plaintiffs also claimed that the 401(k) plan fiduciaries kept certain funds in the plan’s lineup despite the fact that there were similar investment options that cost less and/or had better historical performance.

What sets this case apart from other 401(k) plan lawsuits is that it centers around a smaller retirement plan than those that have been brought to litigation in recent history.  Khan v. PTC, Inc. illustrates that the standard is shifting for the size of 401k plan lawsuits plans viewed as large enough to bring to court.  Until now, plan sponsors with less than $1 billion in assets may have made the assumption that they rarely had to worry about litigation.  However, this case shows that sponsors can no longer rest quite so assured.  It also highlights that retirement plan committees and plan sponsors must keep in mind basic fiduciary governance in all of their plan-related activities.

Another important takeaway from this case is that the bar has changed exactly what plaintiffs need to plead in order to proceed to trial.  Khan v. PTC, Inc. establishes that the plaintiffs only need to plead that the plan sponsor did not monitor the retirement plan committee closely enough to discern that the committee acted imprudently and made unwise investment decisions on the plan’s behalf.  This shift is noteworthy, as it could create a further increase in the number of class action 401(k) plan lawsuits, and could lead to some unfounded cases being brought to litigation.

Finally, it’s also critical to note that plan sponsors must pay careful attention to the delegation of fiduciary responsibilities to a fiduciary committee from a company’s board.  Formally delegating these responsibilities is key in establishing fiduciary accountability should a 401(k) plan lawsuit proceed to litigation.  With official delegation procedures, board members are held less accountable than in the case of Khan v. PTC, Inc., where they were considered as involved as the committee members themselves.  If they had formally delegated the responsibilities to the fiduciary committee, board members would only be able to be asked about their oversight of the committee, not their involvement with the decisions.

What should plan sponsors take away from all of this?  The prevailing theme appears to indicate a trend toward more liberal pleading standards for plaintiffs in 401(k) lawsuits.  In addition, plan sponsors must continue to monitor basic fiduciary governance practices as the bar continues to change.


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