Excessive fee lawsuits. Breach of fiduciary duty claims. Stock drop cases. Numerous lawsuits have been filed against employer-sponsored retirement plans in the past few years because plan participants are getting more savvy about things like fees and fiduciary duty, thanks in part to the Department of Labors recent focus on both issues.
And even when cases arent decided in favor of the plaintiffs, they still shed light on subjects many employers and plan participants never paid attention to before.
I think it is fair to say they have already had an impact, says Jeff Capwell, a partner with McGuireWoods in Charlotte, N.C. and head of the firms employee benefits and executive compensation practice.
Also see: Swarm of litigation rocks 401(k) space
Participants are reading articles in newspapers and hearing they are paying way too much for their 401(k) investments, he says. They hear that they should be asking questions and looking for backup information and making sure the people who run their plan are as interested in this as they are and are looking out for their best interest.
Recent cases heard by the Supreme Court have played a major role in many companies rethinking their employee stock ownership plans and whether or not they are paying too much for retail class shares when identical lower cost institutional shares are available.
In Tibble v. Edison International, plan participants sued their employer because Edison included six high-cost retail-class investments in the companys 401(k) plan even though identical, lower cost institutional funds were available. The district court essentially agreed with the plaintiffs that fiduciaries for the plan had been negligent in their oversight of the plan, but said that they couldnt sue over three of the investments because they were installed in the plan more than six years before the employees decided to sue. There is a six-year statute of limitations for suits under the Employee Retirement Income Security Act of 1974.
The case went to the U.S. Supreme Court and was heard by the justices at the end of February. They were to determine if the plaintiffs were within their right to include those other three investments, even though they were put in place more than six years prior to the suit.
There will be some additional fallout because the Supreme Court is dealing with a statute of limitations issue, but if you read the oral arguments from the case, a lot of argument was about what is required of fiduciaries for reviewing and monitoring plan investments, Capwell says. I hope the court doesnt get into the substantive obligations of a fiduciary and focuses on the question at hand, which is when does the statute of limitations run on a claim related to alleged imprudent investments in a plan? Were waiting to see what happens.
Cases like Tibble have already gotten plan fiduciaries and participants alike focused on fee issues, he adds. There wasnt much interest in fees before the Department of Labor issued its fee disclosure regulations.
I dont think many people from a participant perspective focused on fees and expenses, he says.
The recordkeepers who provide plans are also more focused on what their expenses are and the ways they can run plans on a less costly basis for participants, Capwell adds.
Another case heard by the Supreme Court, Fifth Third Bancorp v. Dudenhoeffer, also affects how plan fiduciaries do their job. Participants in the Fifth Third Bancorp retirement plan filed a class action suit against the bank in 2008 in federal court in Cincinnati claiming that their employer knew its stock was a risky investment because the bank had changed from being a conservative lender to a subprime lender. Between 2007 and 2009, the companys stock dropped from about $40 per share down to $10 a share, costing employees millions in retirement savings.
When the Supreme Court heard the case, the justices threw out the notion that you could presume that company stock was a prudent investment, Capwell says. It is subject to the same level of scrutiny under the plan, regardless if the plan document says you shall invest in company stock. That doesnt give the fiduciary a special pass on their fiduciary duty to monitor.
Capwell says that he hasnt seen a lot of companies ditching their company stock as an investment in their plans yet, but the case law is still evolving in this area so we may see some employers say it is time to get out [and] why have this anymore? It is an impossible type of investment to control risk for, because it is a single security and it is going to fluctuate more than anything else.
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