Under the Employee Retirement Income Security Act of 1974 (ERISA), 401(k) and 403(b) benefits plan fiduciaries have certain responsibilities to plan participants. Lawsuits alleging excessive fees, bad fund choices and other claims have been on the rise against plan fiduciaries. ERISA class actions doubled from 2018 to 2020, with lawsuits filed against Estee Lauder, Costco and several other prominent companies over plan costs during the past year.
Though litigation historically focused on the largest benefits plans, lawsuits involving plans with fewer than 1,000 participants have become increasingly common.
ERISA definition of fiduciary
The goal of ERISA was to ensure that those who manage retirement plans or their assets do so solely in the interest of the plan participant, and that they make good choices with regard to the investment of assets. Under ERISA, those who exercise decision-making authority or control over the management of an employee benefits plan, including plan trustees and plan administrators, are fiduciaries. A fiduciary is defined as someone who is authorized by an agreement to act on behalf of another.
Under general legal principles, a fiduciary owes a high duty of care to the beneficiary (the plan participant). Fiduciaries must avail themselves of all relevant information and make prudent decisions based on that information. As they owe their beneficiaries a duty of loyalty, fiduciaries must avoid conflicts of interest and not use their position of confidence to further their own interests. Further, fiduciaries must maintain confidentiality and disclose all information.
Many lawsuits against plan fiduciaries center around excessive fees for record keeping or administration. Lawsuits often allege that plan fiduciaries breached their fiduciary duty by failing to monitor and control the plan’s administrative fees. This may include a failure to negotiate reasonable administrative fees, to monitor revenue paid to plan recordkeepers, or to periodically conduct recordkeeping requests for proposals to obtain more competitive services through competitive bidding.
A fiduciary duty may also be breached when investments with excessive investment management fees are included. Plan fiduciaries are expected to select the lowest-cost available share classes for retirement plan investments. A lawsuit against Anthem alleging excessive recordkeeping fees and the use of overly expensive share classes, among other claims, resulted in a $23.65 million settlement.
Poor investment choices
Other lawsuits involve poor investment performance resulting from bad decisions, such as the failure to properly diversify investments. A $79 million settlement was recently reached in a class action lawsuit brought by participants in the DST Systems Inc. 401(k) plans. The plaintiffs alleged the defendants failed to diversify investments and allowed the fund to hold excessive amounts of stock in Valeant Pharmaceuticals, whose shares dropped precipitously in 2016 amid accusations of fraud.
The plan incurred investment losses of more than $300 million tied to investments in Valeant stock. “The investment of such a significant portion of the portfolio value in one security was highly imprudent and an abject breach of fiduciary duty,” the complaint read.
Other common allegations
Other common allegations include failure to investigate investment advice given or solicit investment advice from several sources; failure to investigate quality of services in light of fees being charged; and involvement in self-dealing or kickbacks. In 2020, JPMorgan Chase & Co. agreed to pay $9 million to settle claims that the company violated ERISA by including investment options managed by company affiliates even though they were more expensive than other options.
If you believe your plan may be violating ERISA, the team Schwartz, Conroy, Hack PC can help you evaluate whether a remedy is available to you and your colleagues. Contact us today for a free consultation.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack