Liticaphobia – Fear of lawsuits
The fear of a class-action lawsuit looms large in the daily life of a plan sponsor. The fear of law suits has become so great it now is a primary consideration when making decisions about the company defined contribution plan.
We have been reporting on the tsunami of class-action lawsuits brought by aggressive law firms against plan sponsors for over a year now. The latest research from Cerulli Associates titled: US Retirement Markets 2016: Preparing For a New World Post-Conflict of Interest Rule, validates the fears of plan sponsors saying that over half of plan sponsors surveyed considered the threat of litigation when making decisions about their plan.
The new DOL Rule has added to the fear of lawsuits as participant lawsuits (accelerated by highly aggressive law firms) exploded to unprecedented levels is 2016. Once seen as a necessary evil of the corporate ecosphere, helping to reduce fees, increase transparency, discourage conflicts of interest and limit the use of company stock in a DC plan, lawsuits are now seen as money-makers for law firms.
New areas of concentration have also emerged, once the province of 401(k)’s, law firms have recently begun to target not-for-profit organizations and 403(b)’s such as those used by universities. This year Cornell and Columbia universities were sued for excessive fees in their retirement plans.
The Cerulli study noted that the fear of litigation influenced plan design and investment options. Specifically, a significant number of respondents reported choosing a passive investment option for the qualified default investment alternative (QDIA) versus and actively managed option due to lower fees and ease of managing by fiduciaries.
Surely, the unintended consequences of tighter regulation (and ensuing litigation) has brought us a more sanitary environment within company-sponsored retirement plans at a time where innovation and more advisor involvement is probably needed most.
