401(k) Pension Litigation Draws Wins and Losses
By Mark Johnson, Ph.D., J.D.


Lawsuits over 401(k) fees have increased since 2016, according to recent news reports. As a result of the claims alleged in these ERISA litigation matters,severalretirement industry practices have come under scrutiny and criticism.


While the use of company stock to fund retirement plans has prompted many lawsuits over the past several years, newer filings often target financial services companies (or their parent company) with allegations that the plan sponsor profited through the use of their own investments or service offerings.


Excessive fees also remain a central focus in some ERISA lawsuits. In the June filing of Alana Schmitt vs. Nationwide Life Insurance Co. (Case: 2:17-cv-00558-ALM-CMV) filed in the U.S. District Court for the Southern District of Ohio, the plaintiff alleges that Nationwide’s Retirement Flexible Advantage Retirement Plans Program promotes an annual asset fee of one percent but charges smaller plans higher participant-based fees. The suit seeks class action status.


“Stock drop” cases alleging breach of fiduciary duty based either on the selection of poor investments or a decline in the price of a company stock are another form of ERISA 401(k) fiduciary litigation. Walt Disney Company and FMC Corporation were both targeted for investing in Sequoia Fund, which held stock in Valeant Pharmaceuticals. The drug company’s stock dropped more than 80% in 2016 after its pricing strategy drew public ire.


The U.S. Supreme Court outlined the requirements for assessing breach of fiduciary duty allegations for stock drop claims in a 2014 ruling onFifth Third Bancorp v. Dudenhoeffer. The District Court in the underlying matter noted that allegations of a stock drop are insufficient to state a claim under ERISA.


According to research by the Washington firm Groom Law Group, over the past decade plaintiffs’ firms have initiated nearly 100 lawsuits alleging excessive fees in 401(k)-style retirement plans against employers and other parties. Twenty-five 401(k) lawsuits were filed last year alone, setting a new annual record.


More than a decade ago 401(k) fee lawsuits generally claimed retirement plans using retail mutual funds owed a duty to use their large size to bargain for less expensive institutional share classes. The allegations in recent 401(k) lawsuits are more targeted and fact-based, now that a number of cases alleging less specific charges have been dismissed by the courts.


Recent Court Rulings in ERISA 401(k) Litigation


American Airlines and American Beacon reached a $22 million class action settlement in July over allegations that the plan sponsor benefited by offering its own mutual funds rather than lower priced alternatives.


In 2015, the U.S. Supreme Court sided with the plaintiffs in the case Tibble v. Edison (No. 13–550).The petitioners alleged that the plan sponsor breached their fiduciary duty and “acted imprudently by offering six higher priced retail-class mutual funds as Plan investments when materially identical lower priced institutional-class mutual funds were available.”


In a 401(k) lawsuit against Putnam Investments, a Massachusetts U.S. District Court judge dismissed the lawsuit after trial in April, 2017. While the court found the plan to be lacking, it held that the plaintiff failed to show how Putnam put its own interests ahead of its plan participants.


The Putnam case dismissal follows the same result of a similar case against Wells Fargo. The plaintiffs alleged a breach of fiduciary duty because Wells Fargo used its own target-date funds instead of less expensive alternatives available from the Vanguard Group and Fidelity Investments. The Minnesota District Court judge questioned plaintiffs’ efforts to compare fees and performance of proprietary funds. The plaintiffs in both the Putnam and Wells Fargo cases intend to appeal.


Fiduciary Rule Postponed


The Department of Labor (“DOL”) recently proposed a delay in compliance with the “fiduciary rule,” according to a filing with the U.S. District Court for the District of Minnesota. The current compliance date is January 1, 2018, but would be pushed back 18 months to July 1, 2019.


By way of background, in April 2016 the DOL issued a rule (commonly known as the “fiduciary rule”) intended to ensure that retirement advisers put their client’s financial interests first.


A central element of the DOL’s proposed rule is that it would classify more financial advisers as fiduciaries. The range of activities that would be considered to be “investment advice” is expanded under the rule, and could include selling mutual funds, variable and indexed annuities, or variable life products in connection with IRA or an employee benefit plan governed by ERISA.


The new DOL request also seeks fewer restrictions on transactions classified as prohibited under the pending rule, including some insurance products and IRA roll-overs.


August, 2017



ABOUT THE AUTHOR: Mark Johnson, J.D., Ph.D. Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.


ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.


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