Speaker: Retirement Plan Litigation on the Rise

Chris Gaetano
Published Date:
Jun 8, 2017

Avery Neumark, the Partner-in-Charge of the firm’s Employee Benefits and Executive Compensation practice at RSSM, said at today's Employee Benefits Conference that there's been a wave of lawsuits against both private and not-for-profit entities about the quality of their retirement plans. The main driver for this wave of lawsuits, according to Neumark, are a small number of law firms going through Forms 5500, which are available under the Freedom of Information Act, and then construct a class action case which they then pitch to the plan participants. 

"They look at the audit on the 5500, they see the funds the plan offers, the options, and they come in to you or the representatives or the employees and say the plan's spending a lot of money and they could do better, these fees are too high, the options are wrong, they can choose C class investments instead of A class or this type instead, it's going all over the place," he said. 

These types of matters, he said, basically come down to breaches of the fiduciary rule, which requires that investment advisers put their clients' interests over their own, a more stringent standard than the more common suitability standard, which only requires that the investment strategy be suitable for the client. This has allowed plaintiffs to bring suit over a wide variety of things. 

Neumark said there have been cases where the plaintiffs argued that the fees being charged are excessive relative to comparative funds, or that there were more active funds (which generate more fees) than passive funds, or offering proprietary funds that pay fees to a plan sponsor affiliate, offering too many options for different funds (Neumark said that there are some mutual funds that offer 50, 60, or even 100 different options), too many record keepers on the same plan, and what he called "stock drop" cases where retirement funds are filled with company stock that suddenly drops. Basically, he said, people are suing about anything that they feel costs too much money, which leads to less cash for the plan beneficiaries. 

"I would venture to say that employees care about their retirement. If a lawyer can convince a group to start a class action and prove to them that, 'hey, you've been losing so much because of fees and record keeping and investment options,' these guys are going to go for it if it's worth it, and so the employer has to be ready to defend," he said. 

While these types of suits delivered some early victories for the plaintiffs, he said that lately they have been much less successful. He noted that just because there are excessive fees or underperformance, that does not mean the fiduciary rule was violated. The plaintiffs, he said, have to demonstrate that the fiduciary did not act prudently under the circumstances then prevailing, which can be much more difficult. 

"They can't be Monday morning quarterbacks, the courts won't look at those. They look at what happened at the time they acted, they focused on the process by which fiduciaries make their decisions, rather than at the results of those decisions," he said. 

So, he said, allocations that the fiduciary should have offered, cheaper shares of classes they should have bought, different funds they should have looked into: none of these things alone is enough to make a claim. ERISA, he said, does not require fiduciaries to pursue the cheapest possible options in all cases. It requires that they act prudently. 

Consequently, there have been a number of cases surrounding fiduciaries that have been thrown out over the past few weeks. Neumark said that on May 31 Chevron successfully defended itself from a class action lawsuit centered around poorly performing investments and high management fees, as did Wells Fargo on May 25. Principal Life Insurance also successfully defended itself from a lawsuit accusing it of reaping excessive profits from guaranteed investment products. However, he said, there have also been a few recent defeats. Neumark said that Emory University lost a case over, yet again, excessive fees and poor investment options, as did Duke University. Meanwhile, Princeton University is in the middle of defending itself from a suit saying it did not use its buying power to negotiate lower fees, and for using two record-keepers (Vanguard and TIAA) whose fees were unnecessarily high. 

Because courts will look at whether a defendant acted prudently, Neumark said the best way to defend against such suits is to be prudent. What this means, he said, is making sure there is a good mixture of funds, getting regular input from investment consultants, keeping good meeting minutes that document the reasoning behind decisions, and make sure fiduciaries are responsible people. 

"These are all types of things that have to be considered when putting the package together in the event of some type of litigation. And this really applies to all the types of points that are made," he said. 

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