What You Should Know About Recent Trends in 401(k) Fee Litigation


litigation-6-25-18.pngParticipation in 401(k) plans has grown astronomically since they came into existence almost 30 years ago. Today, tens of millions of employees participate in 401(k) plans, and total assets under management exceed $7 trillion. It is little wonder that 401(k) plans have increasingly become targets for litigation over the last decade. In 2017 alone, dozens of new cases were filed against 401(k) plans, with settlements collectively exceeding $145 million. Litigation has also extended to substantively similar 403(b) plans. It is therefore important for plan sponsors and administrators to be aware of recent litigation trends and take appropriate steps to minimize litigation risks.

Basis of 401(k) Fee Litigation
401(k) plans are “employee welfare benefit plans” governed by the Employer Retirement Income Security Act (“ERISA”) and, as such, must be managed exclusively for the benefit of plan participants. Plan sponsors and administrators (collectively “plan fiduciaries”) are accordingly subject to a fiduciary duty—which courts refer to as “the highest duty known to law”—requiring them to act prudently (i.e. with the “care, skill, and prudence” of a prudent person) and loyally (i.e. only for the benefit of plan participants) towards plan participants. Practically, this means that plan fiduciaries must carefully consider the expenses of the plan; and the type and cost of investment options.

Common Allegations in 401(k) Fee Suits
Flowing from the fiduciary duties owed, fee suits commonly allege that plan fiduciaries:

  • Should have offered substantively identical but less expensive investment options;
  • Did not obtain the best possible price from plan service providers; and
  • Failed to adequately monitor the cost of investments and administrative expenses over time.
  • Poor investment performance (though many courts have found that poor performance alone does not indicate that the fiduciary’s decision-making process was flawed); and
  • Prohibited transactions claims, as ERISA prohibits fiduciaries from making payments to “parties in interest” from plan assets (though often, courts have found that exemptions clearly applied to permit payments).

Recent Trends in 401(k) Fee Litigation
Recent trends indicate the plaintiffs’ bar has broadened their sights: increasingly targeting other defendants apart from larger 401(k) plans, and alleging new bases of breach.

Plaintiffs’ Bar Increasing Targets of Litigation
Historically, plaintiffs have targeted larger 401(k) plans. Recent settlement successes against 401(k) plans have buoyed the plaintiffs’ bar, and smaller plans are increasingly targeted. Large universities, which offer 403(b) plans, are also increasingly targeted. In August 2016, a dozen suits were filed against universities. In 2017 and 2018, new suits have continued to be filed with regularity against universities.

Recent Bases of Fiduciary Breach
There has been an uptick of claims targeting investment options. Plaintiffs are challenging proprietary funds (wherein fiduciaries include their own proprietary funds in the 401(k) plan), alleging that those investments benefit the fiduciary at the expense of plan participants. Plaintiffs are also targeting money market funds, claiming that the plans should have offered stable value funds instead; as the latter serves the same purpose but yields highest interest rates.

What Can I Do to Minimize Litigation Risk?
Unfortunately, there is no magic bullet. Plaintiffs’ firms are savvy, and whether plan fiduciaries have discharged their fiduciary duties is often a fact-sensitive inquiry; meaning that early resolution of litigation (i.e. at the motion to dismiss stage), is not always possible.

However, ERISA does not impose a duty on fiduciaries to achieve perfect outcomes. As long as fiduciaries consistently strive to make decisions in the best interests of plan participants, they have a good chance of demonstrating that they have discharged their fiduciary duties when challenged in court. In other words: process, process, process. Brotherston v. Putnam Investments, LLC, 2017 WL 1196648 (D. Mass. Mar. 30, 2017) illustrates this. There, plaintiffs claimed that Putnam’s proprietary products were too expensive and that Putnam lacked a fiduciary process. The court had the opportunity to review Putnam’s processes post-discovery, and found that there was no evidence to show that Putnam had breached its fiduciary duties by placing its interests ahead of participants, or that a reasonable fiduciary “in the shoes of” Putnam would have chosen a different investment lineup.

Thus, while obtaining early judgment may be difficult, establishing a robust process to consistently monitor the plan’s investment selection and plan expenses is key to demonstrating discharge of fiduciary duties and increasing the odds of success on a dispositive motion later in the litigation.

FDIC Lawsuits Increase in Fourth Quarter, Many Target Smaller Banks and Thrifts


cstone-dec12-wp.pngThis is the fourth in a series of reports that analyzes the characteristics of professional liability lawsuits filed by the Federal Deposit Insurance Corporation (FDIC) against directors and officers of failed financial institutions.

Report Summary

  • The pace of FDIC D&O lawsuit filings has increased in the fourth quarter of 2012 compared to earlier in the year. The number of lawsuits filed in 2012 exceeds the total filed in 2010 and 2011.
  • On December 7, three former officers of IndyMac’s Homebuilder Division were found liable for $169 million in damages in connection with 23 loans. This was the first FDIC D&O lawsuit associated with the 2008 financial crisis to go to trial.
  • While there has been a continued decline in FDIC seizures throughout 2012, the number of problem financial institutions has not declined as rapidly.
  • Institutions that are subject to D&O litigation have historically been larger (in terms of assets) with higher estimated costs of failure than the average failed financial institution. The FDIC’s recently filed D&O lawsuits have targeted smaller institutions.
  • Named defendants primarily continue to be CEOs, then (in declining order of frequency) chief credit officers, chief loan officers, chief operating officers, chief financial officers, and chief banking officers. Outside directors continue to be named along with inside directors in a large majority of the new filings.
  • Regulatory management ratings and composite CAMELS (capital adequacy, asset quality, management, earnings, liquidity, sensitivity to market risk) ratings of institutions that are subject to D&O lawsuits do not appear to have deteriorated until one to two years before failure.

Fewer Directors and Officers Get Sued; Pace of Bank Failures has Slowed


cornerstone-0912-wp.pngThis is the third in a series of reports that examines statistics and offers commentary on the characteristics of professional liability lawsuits filed to date by the Federal Deposit Insurance Corporation against directors and officers of failed financial institutions.

  • In our May 2012 report, we had observed a decline in the seizures of banks and thrifts by the FDIC in 2012 relative to 2011 and 2010 levels. This decline has continued during the past four months. In the past four months, the FDIC seized 19 financial institutions. The pace of seizures in May through August is slightly less than the first four months of 2012, when the FDIC seized 22 institutions.
  • FDIC seizures in 2012 continue to be concentrated in the Southeast. Nine of the 41 institutions that failed this year were in Georgia. Since 2007, 84 institutions in Georgia have been seized, representing 18 percent of all failures. Florida has the second highest financial institution failure rate, with five failures in 2012 and 63 failures since 2007. Illinois and California follow, with 53 and 39 failures, respectively, since 2007.
  • Based on the FDIC’s estimates at the time of seizure, California—where financial institution failures have cost $21 billion since 2007—has the highest total estimated failure cost. Florida and Georgia each have more than $10 billion in estimated failure costs, followed by Illinois, Puerto Rico, and Texas.
  • While the pace of D&O lawsuits has increased in 2012 relative to previous years, the FDIC has filed new lawsuits in the past four months at a significantly slower rate than in the first four months of the year. Only three lawsuits were filed in the last four months compared with 11 in the first four months of the year.
  • To date, 7 percent of financial institutions that have failed since 2007 have been the subject of FDIC lawsuits. These lawsuits generally have targeted larger failed institutions and those with a higher estimated cost of failure. The 31 financial institutions targeted in lawsuits had median total assets of $836 million, more than 3.5 times the median size of all failed institutions and more than five times the median size of institutions active at mid-year 2012.
  • Defendants named in the 32 lawsuits the FDIC has filed since 2007 included 266 former officers and directors.

For a full copy of the latest report, click here.