Article

Excessive fee litigation sets sights on corporate retirement plans

Wave of litigation alleges excessive 401(k) fees violate ERISA

October 6, 2017
| United States

By Anthony Dragone

Recently plan sponsors have been subject to a wave of litigation wherein plan participants allege that plan fiduciaries have breached their fiduciary duties by charging excessive 401(k) fees in violation of the Employee Retirement Income Security Act of 1974 (ERISA). Of all the industries facing these risks, few have seen more litigation than the financial industry which has faced a barrage of lawsuits over the in-house mutual funds in their respective 401(k) plans. Currently, there are more than 20 different financial institutions facing lawsuits challenging these in-house 401(k) investments.

Recent decisions

Of these matters, to date only two have been resolved in favor of the financial institution. In one matter, the plan sponsor was successful on a motion to dismiss based on plaintiff’s lack of standing. In the other, a federal judge in Minnesota rejected the plaintiff’s argument that, because there were less expensive funds available, the plan’s fees were inherently excessive. The judge held that, even if a lower-cost fund exists, investing in a more expensive fund does not automatically result in a breach of a fiduciary duty under ERISA. The court also stated that an investment strategy is not inherently flawed solely because it underperforms a competing fund during a specified period of time.

However, these two cases seem to be the exceptions rather than the rule. The more frequent occurrence is that corporate plan sponsors have been unable to defeat these lawsuits at the motion to dismiss stage. As such, they are left to incur costly legal defenses, significant settlement payments, or both.

The reason plaintiffs’ attorneys are emboldened to bring these corporate plan sponsor cases can be illustrated by the findings in a number of federal court cases around the country:

  1. California — ERISA requires plan fiduciaries to act “solely in the interest of [plan] participants...for the exclusive purpose of (i) providing benefits to participants...and (ii) defraying reasonable expenses of administering the plan[.]” ERISA also requires plan fiduciaries to discharge their duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims.” In the case before the court, the plaintiffs alleged that defendants breached the duties of loyalty by limiting investment options to corporate-affiliated funds and continued to use those funds despite their excessive fees and poor performance. That allegation alone was sufficient to defeat the defendants’ motion to dismiss on whether the fiduciary used appropriate methods to investigate the merits of the transaction.1
  2. New York — The court, citing two other cases, stated that even if plaintiff’s allegation did not directly address “the process by which the Plan was managed, a claim alleging a breach of fiduciary duty may still survive a motion to dismiss if the court, based on circumstantial factual allegations, may reasonably infer from what is alleged that the process was flawed. For instance, the complaint may allege facts sufficient to raise a plausible inference that...a superior alternative investment was readily apparent such that an adequate investigation would have uncovered that alternative.”2

    The court then found that by failing to remove excessively costly proprietary funds, defendants breached their duties to act in the best interests of the plan. Most notable was the court’s ruling that defendants’ contention that the proprietary funds were not underperforming was insufficient since it was a factual assertion and therefore, insufficient to prevail at the motion to dismiss stage.
  3. Missouri — In a recent federal court case, the financial institution argued that the breach of fiduciary claims should be dismissed because defendants fulfilled their duties by offering an array of investment options. The judge rejected the argument holding that the complaint asserts that “Defendants violated their fiduciary obligations and affiliated themselves with funds which benefited Defendants at the expense of the Plan participants. Defendants’ defense that they offered an array of investment options does not insulate Defendants from [Plaintiffs’] claims.”3

Based on the above thresholds, it is easy to see why, of the more than 20 recent cases involving corporate plan sponsors, only two were defeated at the motion to dismiss stage. The remainder are either pending, have had their motions to dismiss denied, or have engaged in multi-million-dollar settlements.

Disclosure violations

In addition to the above issues, another issue should be of concern to plan fiduciaries. While this litigation has been primarily outside of the financial institution space to date, the decisions by two federal courts should give pause to any fiduciaries required to make appropriate and timely disclosures under ERISA.

  1. Compensatory damages not required — Plaintiff sued his plan for failure to provide disclosures in a timely manner. Defendants argued that plaintiff did not allege any damages other than the delayed receipt of the disclosure. The court found that, even absent any compensatory or monetary damages, this delay was sufficient evidence of a recoverable injury holding that “frustration, trouble, and expense are pertinent factors for the court to consider when deciding whether to impose a [statutory] penalty against the administrator.”4
  2. Informational injury — In another recent case, plaintiff argued that her plan failed to provide a summary description within the required timeframe. The court stated that the inability to obtain information was, in itself, an injury-in-fact and that “the allegations of the complaint imply that the plaintiff would have found the information contained in the automatic disclosures valuable or useful, had [timely disclosures been made]...The plaintiff’s not receiving the information in the prescribed time thus qualifies as a concrete informational injury.”5

These “failure to disclose” cases show that even in the absence of monetary loss, litigation (and all its associated costs) remains a considerable risk.

Combatting risk

Given the climate of ERISA litigation, it is more important than ever that financial institutions review their comprehensive risk programs:

  1. Insurance — Fiduciary liability insurance coverage, provided and vetted by a trusted industry professional, should respond to many of the issues raised above and provide coverage to protect plan sponsors. Moreover, as settlements and defense costs continue to increase in these types of litigation, it is also vital to review the insurance program to make sure adequate limits are in place.
  2. Risk management — Good governance and processes can help corporate plan sponsors limit liability exposure. Financial institutions should engage in fee and service benchmarking studies, which will allow fiduciaries to make necessary adjustments and document support for investment and fee decisions. The fiduciaries must pay close attention to the selection of the investment options and continue to monitor these investments throughout the life of the plan.

A strong risk management policy supported by a comprehensive insurance program can help protect plan sponsors against the high costs of litigation.


Sources

1. Urakhchin v. Allianz, Case No. 15 CV 1614 JLS (2016)

2. Moreno v. Deutsche Bank, Case No. 15 CV 9936 LGS (2016)

3. McDonald v. Edward Jones, Case No. 4:16 CV 1346 RWS (2017)

4. Brooks v. Georgia Pacific LLC, Case No. 16 CV 0676 (2017)

5. Limbach v. Weil Pump Co Inc., Case No. 2:15 CV 01531 (2017)