The 'Terror' of 401(k) Litigation

So much of our lives have been disrupted by the COVID-19 pandemic—but the pace of 401(k) litigation, it seems, has, if anything, accelerated.

Now, some may find the label “terror” in the title extreme. In fact, it hadn’t really occurred to me until I read the response of defendants to a suit slapped on Genentech Inc. and the plan fiduciaries of its $7.6 billion 401(k) plan in early October. In a response to that excessive fee suit, the defendants’ attorneys referred to this suit—and others like it—as “an in terrorem attack on fiduciaries and employers seeking sweeping monetary and injunctive relief geared toward disrupting employee benefit relationships and causing protracted, expensive litigation.” 

“In terrorem,” Latin for “into/about fear,” has a legal context—a legal threat, really—one generally voiced in hope of compelling an action (or lack of action) without resorting to a lawsuit or criminal prosecution. It normally arises in regard to a provision in a will which threatens that if anyone challenges the legality of the will or any part of it, then that person will be cut off or given only a dollar, rather than what is left to them in the will. 

While that may (or may not) be an accurate characterization of that particular litigation, the motivations of the plaintiffs’ bar on these matters are surely as diverse as the plans and plan designs they challenge, if not the experience, expertise and expectations of the individual firms themselves. Indeed, having had the opportunity to discuss these matters with a few over the years, I am persuaded that some at least are indeed fighting what they honestly believe is the “good fight.”[i] They see evidence of inattentive fiduciaries manipulated (or motivated) by unscrupulous providers, sometimes over a period of years, if not decades, all to the financial detriment of participants who must work (and save) all the more to compensate for the “theft.”  

However, in the process they have sought to create presumptions of imprudence that (IMO) aren’t. They’d have us (or more precisely, a judge) believe that active management is not only inherently inferior to passive approaches, but unacceptable, that RFPs not only must be conducted, but at a minimum must be conducted on a 3-year cycle, to accept that recordkeeping fees are prudent only if assessed as a function of participant count (as though size and complexity of the plan’s investments and design shouldn’t be a consideration), that extrapolated averages of published plan fees are sufficient to set a benchmark of reasonability, that a stable value option is superior to money market, except when money market is better than stable value, that they provide too many options for participants to choose from… or too few. Indeed, as the defendants in the Genentech response note, “Fiduciaries that manage 401(k) plans are getting sued no matter what they do.”  

When the dust “settles” in these cases—sometimes over decades, but of late more rapidly—most still produce nothing but a monetary “arrangement”—the amount nearly always significantly less than the damages alleged, and the per participant recovery relatively small.[ii] The plaintiffs’ attorneys get somewhere between 25% and a third of that recovery—which is deemed reasonable[iii] since they often labor long and without compensation until a settlement or adjudication is reached, though it is often tens of millions of dollars when it happens. 

Those suits that do go to trial generally seem to turn out in favor of the plan fiduciary(ies), either because the substance behind the plaintiffs’ claims is found to be insufficient, or the actions of the plan fiduciaries are determined to clear the admittedly high bar of ERISA’s prudence. It’s easy to overlook that result because, as human beings, we are inclined to see a settlement in manners as heinous as those alleged as an admission of culpability, if not guilt, whatever the legal disclaimers. Regardless, while the proceeds that flow to the plaintiffs’ counsel surely offset the investment of time and effort getting to that point, there’s little question that some of it simply goes to funding the next suit… 

As with any apparently profitable enterprise, this current wave of 401(k) litigation has attracted new entrants—and copycats—not only in actions, but in the very language employed in their filings. Based on their record to date, it’s doubtful that they will enjoy much success under the full scrutiny of adjudication—but then, that may not be their objective.  

Ultimately it takes time, patience—and yes, money—to stand up to this threat. 

But here’s hoping that, knowing the threat exists, plan fiduciaries continue to take the time to be thoughtful, deliberate and, yes, prudent in the exercise of their critical duties, that they take the time to document that work—that they do so with the involvement and engagement of wise counsel—that they find ways to share the fruits of that diligence with those they serve—and that in so doing, they deprive the plaintiffs’ bar of any rational basis upon which to bring, much less prevail in, these pursuits.

- Nevin E. Adams, JD

 

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[i] There’s no question that 401(k) fees have declined over the years—and while the plaintiffs’ bar would surely like—and some are, perhaps entitled—to claim credit for at least some of that, fees decline for any number of reasons, though plan fiduciaries, writ large, are more sensitive to the issue these days. Then again, the costs of this litigation are being paid by someone, and insurers have not traditionally been known to long absorb the impact of such things to their bottom line—indeed, some have already taken to asking pointed questions of employers in the course of questionnaires that would seem to have little to do directly with the insurance coverage sought. 

[ii] The named plaintiff(s) generally are accorded $10,000 to $25,000 each for their time and trouble in representing the class.

[iii] Though that never takes into account the time, effort, expense and opportunity costs for the employers that must devote time and treasure to the litigation.