Are 401(k) plans sued? What are the most common ERISA lawsuits?
According to the Center for Retirement Research at Boston College, there were 107 lawsuits filed in 2017 against 401(k) plans. It is important to understand the causes and potential consequences of these lawsuits, since 73% of workers in 2016 were offered a workplace retirement plan.
There are three main reasons for lawsuits:
- Inappropriate investment choices
- Excessive fees
- Self-dealing
The DOL notes only that fiduciaries should exercise a prudent process when selecting investments “so as to minimize the risk of large losses.” Lawsuits come up when funds consistently deliver poor performance compared to the benchmarks.
Keeping an updated, current file denoting the meetings with the 401(k) plan’s Financial Advisor, making at least annual changes to the investment line up and having participants educational meetings well documented is the minimum standard the plan sponsors should be performing and documenting.
Excessive fees are another reason for 401(k) lawsuits. Here, too, the DOL denotes fiduciaries should employ a prudent process, select funds that charge no more than a reasonable fee and periodically assess whether that fee is still reasonable by comparing the fees to funds with similar risk/return and asset class characteristics. In addition to this, the Center notes the fiduciary must ensure it has taken steps to select the lowest-cost share class of a given fund.
If the sponsor/fiduciary can fall victim to a lawsuit by selecting retail share classes when an otherwise identical but lower-cost institutional share class is available. Fiduciaries need to educate themselves as to the investments and the costs being charged for them as they are ultimately the responsible party.
Sponsors/fiduciaries must also review the administrative fees, which include record keeping fees, annually for reasonableness. This can be done by leveraging the plan’s size to negotiate lower administrative costs, ensuring the plan’s record keeping fees do not subsidize services other than the retirement plan and asking the making sure the reporting of fees are transparent.
Consequences of Litigation
The lawsuits are being mitigated by the sponsors/fiduciaries, by going to low-cost passive mutual fund options, which also track very closely to their benchmarks. In addition, fiduciaries have been demanding better fee disclosure from service providers, and this resulted in lower fees.
The downside, however, according to the DOL, is that fiduciaries may stay clear of new innovations out of fiduciary fear, such as investment vehicles that provide lifetime income streams.
For more information on common ERISA lawsuits please contact your LSL Advisor at 714-569-1000.
