According to an article by Chris Carosa, industry expert on all things fiduciary, 401(k) lawsuits have had and will continue to have a greater impact on changing behavior by plan sponsors than the DOL’s conflict of interest rule. It’s hard for government regulators, especially in Washington, to think that attorneys have more power to move a market especially when it comes to a highly regulated one like defined contribution plans, but the results are hard to deny.
Jerry Schlichter, whose law firm started the wave of 401(k) lawsuits in 2014, noted that when he reviewed 401(k) plans he was shocked at many of the practices, especially around negotiating plan fees and wondered why the DOL had not taken action. His early efforts galvanized the market, with high profile cases like Abbott v. Lockheed Martin Corp ($62M awarded to plaintiffs), Beesley v. International Paper Company ($30M), and Spano v. Boeing ($57M) taking the industry by storm and paving the way for the recent rash of 401(k) lawsuits.
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Plan sponsors are starting to understand revenue sharing where a percentage of the investments fees paid by participants are used to subsidize the cost of running the plan. Because these fees are not paid directly to the various service providers, it can be hard to determine the actual cost which is why the DOL promulgated 408(b)(2) and 404(a)(5) requiring more complete fee disclosure. And though these rules helped, they did not have the expected impact as plan sponsors were overwhelmed by massive amounts of paperwork they could barely understand.
So while the press continues to focus on the DOL’s conflict of interest rule, plan sponsors seem to be responding more to the 401(k) lawsuits. Because if lawyers think that Vanguard and their plan sponsor clients are charging participants too much to run the DC plan, there’s a lot of plans out there that are vulnerable. And with all due respect to the DOL and their attempts to eliminate inherent conflicts, the question is whether they will have the resources and authority to enforce the rule leading many experts to believe that plaintiff’s attorneys will step in to fill the void.
