401(k) Specialist Issue 1 - 2021 - 40

I
38
If it seems like just about every week you hear
about another lawsuit being brought against a
401(k) fiduciary, the reality is it's actually much
more than that.
Over 90 lawsuits were filed against defined contribution
plans for excessive fees alone in 2020
according to fiduciary liability insurance provider
Euclid Specialty, while a Bloomberg Law analysis
found only about 20 were filed in all of 2019.
Groom Law Group found just over 200
new ERISA class actions were filed in 2020,
an all-time record that represents an 80%
increase over the number filed in 2019 and
more than double the number filed in 2018.
" As 2021 begins, this trend shows no sign
of slowing down, with important developing
issues related to fee and performance
litigation for smaller retirement plans, " states
a Jan. 3, 2021, Groom Law Group article on
the topic.
The spike in cases, Bloomberg Law said,
can be explained by the maturing body of
law under the Employee Retirement Income
Security Act (ERISA), an emerging blueprint
for filing and litigating cases, new tools
available to plaintiffs' attorneys, and even the
global pandemic.
This growing threat of litigation is leading
to another trend-one of fiduciaries outsourcing
plan investment responsibility.
Fiduciaries are personally liable for losses
caused by their fiduciary breach, and advice
from their plan vendors about investments is
not fiduciary advice required to be in their
best interests, points out Carol Buckmann, a
highly respected employee benefits and ERISA
attorney who is a co-founding partner of
Cohen & Buckmann in New York.
Buckmann recently wrote a blog about
why fiduciaries should consider outsourcing
plan investment responsibility, opining that
plan sponsor fiduciaries who take a " do-ityourself "
approach to plan investments face
huge potential exposure for underperforming
investments and excessive plan fees, and
ISSUE 1 2021 | 401kSpecialist.com
should at least consider outsourcing their
investment responsibilities to an investment
manager or outsourced chief investment
officer (OCIO).
She cited a recent survey by Callan that
found 21.6% of surveyed 401(k) plans hired
an investment manager described in Section
3(38) of ERISA to manage plan investments,
up from 15.9% in 2018. A different survey
by PGIM indicates that 15% of defined
contribution plans and 24% of mid-sized
defined contribution plans had outsourced
chief investment officers (OCIOs). " There is
a trend toward outsourcing, and the surprise
is that more plan sponsors haven't chosen an
outsourcing option in light of their potential
liability if they adopt a 'do-it-yourself'
approach, " Buckmann said.
In an interview with 401(k) Specialist,
Buckmann said it's not only the biggest plans
that risk litigation anymore.
" Plaintiff's counsel started with the largest
plans, but their targets have moved down
to smaller plans over time, " Buckmann said.
" Claims will typically go back six years (the
usual statute of limitations for fiduciary
breach), and claim damages for excessive fees
and lost investment return, and these can be
substantial amounts even for medium-sized
and smaller plans. "
Excessive Fee Risks
Lawsuits are being brought against 401(k)
fiduciaries, primarily from a handful of law
firms specializing in class action 401(k) lawsuits,
for a variety of reasons.
They almost always fall into one of three
categories-excessive fees, inappropriate
investment options and self-dealing. But it's
clear the recent rise in litigation has been
particularly focused on fees.
" These lawsuits allege that defined contribution
plan administrative and investment
fees are too high, and that any investment
performance that lags any plaintiff-asserted
benchmark-a moving target-is actionable
negligence that should generate huge
indemnity payments and high attorney fees
to the firms bringing these lawsuits, " Euclid
Specialty wrote in a December 2020 white
paper, further stating the rise in cases is the
result of opportunistic attorneys rather than
true discontent among participants.
The finding for or against a plan fiduciary
doesn't always hinge on whether fees are too
high, but whether any decisions were arrived
at following a prudent process and with participants'
interests at heart. ERISA requires
that fiduciaries follow a careful, prudent process
to ensure that plans pay no more than
reasonable fees for necessary services.
These lawsuits (and perhaps the mere threat
of them) have been accompanied by an increase
in the use of passive investment options and a
fall in investment and administrative fees.
" Excessive fees can cover recordkeeping
and service provider fees as well as investments,
so I would say that is probably the
biggest risk today. Plans that don't have
passive index fund options are a target as both
having excessive fees and being inappropriate
investment options, " Buckmann said. " But
I think we are going to see more of a focus
on target-date fund selection and claims that
inappropriate target-date funds were picked in
the future, both because these funds represent
a large percentage of assets in most plans and
also that they unfortunately often get selected
without much investigation of their performance
compared to peer target-date funds. "
Why Some Resist Outsourcing
With 401(k) lawsuits surging and increasingly
targeting smaller plans, why would
a plan sponsor want to keep going the
" D-I-Y " road and not take steps to better
protect themselves against litigation risks?
Beyond some newer plan sponsors without
http://www.401kSpecialist.com
401(k) Specialist Issue 1 - 2021

Table of Contents for the Digital Edition of 401(k) Specialist Issue 1 - 2021
