Litigation: The New Reality for Defined Contribution Plans

By Randy Myers


For the past decade, sponsoring or servicing a retirement savings plan has been fraught with litigation risk. It could get worse.

The targeting of retirement plans by the plaintiffs’ bar began in earnest in September 2006 when the St. Louis-based law firm of Schlichter Bogard & Denton filed lawsuits against several high-profile 401(k) plans. Most of the suits alleged the plans had been paying excessive fees to service providers, to the detriment of plan participants. The Schlichter firm has not prevailed yet in any of these cases, but it has collected more than $300 million in settlements. In the years since, more lawsuits have followed, not only against 401(k) plans but also, more recently, 403(b) plans. These suits allege a range of violations of the Employee Retirement Income Security Act (ERISA), including the increasingly popular claim that plans offered too many actively managed funds and not enough passively managed funds.

Now, plan sponsors, and their vendors and advisors, could be facing even more potential liability as a result of a new fiduciary rule handed down earlier this year by the Department of Labor. Scheduled to become applicable on April 10, 2017, the rule broadens the definition of a plan fiduciary under ERISA to cover anyone who makes investment recommendations to a retirement plan sponsor, plan participant, or owner of an Individual Retirement Account.

“The rule is intended to expand the universe of people who are subject to fiduciary responsibility,” said Eric Mattson, a Partner, Class Action Litigation, for the law firm of Sidley Austin LLP, during a presentation at the 2016 SVIA Fall Forum in Washington, D.C. “And just like night follows day, litigation follows fiduciary status.”

The most recent ERISA lawsuits have targeted 403(b) plans at prominent private universities such as Yale, the Massachusetts Institute of Technology, and New York University. The suits are similar to the 401(k) lawsuits, but with some new twists. Among other things, Mattson said, they contend that the plans offered too many investment options, which made them confusing for participants, and that they used multiple recordkeepers instead of one, incurring higher-than-necessary expenses. “There’s a whole menu of claims and theories in these lawsuits that have not yet been tested, because 403(b) plans tend to have different structures than 401(k) plans,” Mattson said.

One of the problems for fiduciaries in this new legal environment, Mattson said, is that guidance on what it means to be a fiduciary is not as explicit as it could be. At a high level, fiduciaries have duties of loyalty and prudence to their retirement plans and plan participants. Typically, this has been interpreted to mean that fiduciaries should make sure investment options offered are prudent, and that fees are not excessive. But attorneys say that guidance is muddy. In Tibble v. Edison International in 2015, Mattson noted, the U.S. Supreme Court confirmed that fiduciaries have a continuing duty “of some kind” to monitor investments and remove imprudent ones, and to conduct a regular review of investments, with the nature and timing of those reviews contingent on the circumstances. “Good luck advising plans on exactly what they are supposed to do,” Mattson said of those instructions. He added that if nothing else, it means fiduciaries cannot—if they ever could—just “set and forget” a lineup of investment options for a retirement plan.

Where stable value has been an issue in retirement-plan lawsuits, Mattson said claims often have revolved around the idea that plans breached their fiduciary duty by offering participants a money market fund rather than a higher-yielding stable value fund. To date, he said, courts have generally not bought into this argument. Defendants have successfully argued that they chose money market funds after thoughtful consideration of the pros and cons of each type of investment.

In one case, Mattson added, the plaintiffs argued that because the stable value provider had sole and exclusive discretion to determine its product’s crediting rate—and to set that rate below its internal rate of return—the provider was guaranteeing itself a substantial profit and not disclosing this to participants. Like many other defense attorneys, Mattson said he does not put much stock in this argument, but he noted that there has been no ruling in the case to date. He also noted that the more a crediting rate relies on a stated formula, the less risk a stable value provider should run.

In still another case, Mattson said, plaintiffs have argued that a stable value fund invested too conservatively, leading to lower-than-necessary returns for investors. That case is continuing to wind its way through the court system.

What should fiduciaries do in the wake of all this litigation? Some things are obvious, Mattson said, advising that they:

  • Conduct regular reviews of their investment lineup
  • Adopt an investment policy statement
  • Show their work (show they went through processes and thought about what they were doing in making decisions)
  • Consider expenses
  • Consider the performance of investment options
  • Consider the effect of changes to an investment fund
  • Consider hiring a consultant, or perhaps a formal fiduciary investment advisor
  • Consider offering a stable value fund as a plan investment option instead of, or in addition to, a money market fund.