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Bracing for the next wave of 401(k) lawsuits

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SAN DIEGO – Punitive damages aren’t allowed under the Employee Retirement Income Security Act, so whoever came up with “401(k) Fee Lawsuits: The Next Tobacco?” as the title for a Sunday afternoon workshop at the 2015 NAPA Summit was aiming for titillation.

On the other hand, the 10 largest class-action settlements in claims brought under ERISA topped $1.3 billion in 2014, almost 10 times the sum of the biggest settlements from the previous year.

In two of the biggest, a $480 million settlement was reached in August in a class-action filed by retired UAW workers, while a $415 million settlement was announced the following month in a case against ING Life Insurance & Annuity Co.

This year may not match 2014 but it won’t be without at least a few more headline-generating settlements. We’ve already seen Lockheed Martin Corp.’s agreement last month to pay $62 million to end a lawsuit over claims it shortchanged 120,000 workers and retirees who participated in its pension plans.

The plaintiffs in that case accused the defense contractor of subjecting them to excessive management fees and leaving those who invested in the company stock fund with returns that were worse than if they’d bought shares on the open market.

Still, I agree when ERISA lawyer Bradford Campbell suggests that the workshop title is “perhaps a bit hyperbolic.” On the other hand, that doesn’t mean there haven’t been and don’t continue to be some pretty significant ERISA cases moving through court dockets.

If you can afford him, Campbell’s probably one of the better attorneys to know if you’ve been hit with ERISA litigation or, better yet, wanting to do all you can to avoid becoming the target of – as NAPA puts it – “a growing and better informed plaintiffs’ bar.”

A member of the K Street staff of Drinker Biddle & Reath, Campbell headed the Employee Benefits Security Administration during the last couple of years of the George W. Bush administration.

From where he now stands, we’re in an ERISA litigation lull at the moment, after a wave of cases, many of them brought by St. Louis homeboy Jerry Schlichter.

Looking ahead, it may be that the Tibble case before the U.S. Supreme Court serves as a tipping point, potentially setting off a round of lawsuits based not on excessive fee claims but on whether fiduciaries failed in their duty to monitor investment options in a plan menu.

Whatever happens, this lull won’t last long, Campbell thinks. “There’s a retrenching now … and the plaintiff’s bar is deciding what next to do. I do think it’s (the next wave is) coming. There’s enough money there to keep them interested.”

That’s only good news to black-hearted journalists and the lawyers who defend sponsors.

So, what’s an advisor to do? How best to help sponsors avoid a legal battle that can be expensive even without the potential of punitive damages?

Campbell offers a few quick tips, none of which may be terribly original but which sponsors seem to overlook with dangerous regularity:

Review your plan fees. Are they equitably allocated among participants? That includes recordkeeping costs. If 10 percent of participants are paying 90 percent of the cost, there’s a problem.

Disclosure, disclosure, disclosure. The 404(a)(5) regulation of 2012 was designed to ensure everything is as clearly spelled out to participants as possible, including revenue-sharing deals. Failing to live up to the minimum requirements behind 404(a)(5) is just asking for trouble.

The investment policy statement. There’s no room for debate on this point, Campbell says. The IPS cannot be ambiguous in any way. It should spell out what the process was in choosing and evaluating investment options. And every sponsor needs one, regardless of size.

Because it limits relief to “equitable remedies,” aiming to make plans whole rather than opening them up to punitive damages, ERISA doesn’t present what Campbell calls a “tort lottery.”

That’s the good news. But with so much still at stake, any advisor sitting in on a single hour-long workshop at a conference should appreciate there’s a lot more work ahead if they want to properly protect their sponsors and participants alike.

See also:

Will a revised fiduciary rule change advisor behavior?

Wall Street steps up attack on 401(k) broker rule

Fiduciary v. suitability at Supreme Court, DOL


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