Predicting Future 401(k) Litigation Risk by Size of Plans

by Chris Tobe, CFA CAIA

The 401(k) market differs greatly by size.  85 percent of 401k plans (534 out of 631 thousand defined contribution plans) (DC Plans) are under $5 million in size.  The DOL is overwhelmed with the 534 thousand plans under $5 million, of which there are enough bad actors doing engaged in highly questionable activities, such as taking participants’ money for personal use, that they have not touched the excessive fees issue, leaving it to the legal community to address such concerns.  Less than 1 percent of DC Plans are over $200 million in assets and are generally cost effective to litigate.

However, less than 1 percent is still nearly 4000 plans with over $200 million each in assets.   However, within this 4000, differences vary greatly by size as well.   My best guess is that less than 500 actions have been filed according to what I have found.   I still believe there is room for around 2500 more actions to be filed over the next decade.      

An August 2022 Bloomberg article cites $150 million in settlements over the last 3 years. Bloomberg puts the number filed at around 200 since 2019 so my estimates may be conservative.[i]  Bloomberg notes that decisions issued in the seven months since the US Supreme Court Hughes decision have tended to favor plaintiffs over defendants. Bloomberg predicts that “employers negotiating future settlements may be facing higher price tags than the $1 million to $5 million range seen over the past few years.” This Bloomberg article shows a growing pace of ERISA litigation.

An August 2022 article by Fred Barstein of 401kTV also predicts the rapid growth of litigation in smaller 401(k) plans. [ii]

401(k) plans of $3 billion and more assets
According to my data base there are 334 plans over $3 billion in assets.  This has been the most litigated group, with well over 100 actions filed. There is still a high probability of 100 or more cases coming from this group, perhaps even more if there is double dipping, as many earlier litigating plans have gone halfway at best in lowering fees.

For larger plan administrative costs, fees above $50 a head, or even one high fee option, may be enough to trigger a suit. This could apply to plans that have already been litigated once and did not adequately cut costs the first time. Does every plan option have to been prudent even those who go through to the brokerage window?  If so, this could this be litigated as high fee funds and even Crypto Currency are in widely held brokerage windows.

Many of the largest plans unitize investments with defined benefit plans. Will the new level of transparency go through to target date funds with underlying alternatives like Private Equity?  Alternative contracts typically contain multiple fiduciary breaches, excessive fees along with liquidity and other breaches. 

401(k) plans of $1b – $3 billion

There are an estimated 717 plans between $1-$3 billion, with probably 200 that have been litigated, leaving room for maybe 300 more. 

There are lots of plans with administrative costs above $50 a head, or even more with at least one high fee option, along with all the other attributes like brokerage windows like the largest plans.

401(k) plans of $500m – $1 billion
There are 961 plans between $500m $1 billion, with probably only 50 or less cases litigated.  This area will probably have the most explosive growth, with well over 600 plans with high fee providers. There are many higher fee insurance recordkeepers in this group and conflicted consultants, along with share class violations in many funds.

401(k) plans of $200m – $500m
There are 2259 plans between $200-$500 million. 2022 will start to see a great growth in litigation in this area.      Plans in this group who start fixing their plans could greatly minimize their chances of litigation. I still guess that over 1500 plans could be subject to litigation. There are even more higher fee insurance recordkeepers in this group and conflicted consultants, along with share class violations in many funds.

403(b) plans
ERISA 403(b) plans include: not-for-profit hospitals, and not-for-profit universities, private not-for-profit K-12 schools. Non-ERISA 403(b) plans include public K-12 schools, public universities and some university related hospitals.

The largest 30 or so private universities 403(b)s have already been hit with litigation.  Northwestern is typical with 3 different recordkeepers Fidelity, Vanguard, & TIAA.  This portion of the 403(b) market with multiple recordkeepers is unique as almost all 401(k), which is more oriented toward single record keeper, so all could be litigated around administrative costs.   Fidelity and TIAA also have high-cost options and TIAA has high-cost higher risk annuity options as well.  The next 100 or so private universities will be at great risk of litigation.

The big wave of 403(b) litigation will probably be hospitals.   While they typically only have one recordkeeper, they are much more likely than 401(k) plans of the same size to use higher fee (especially insurance company) based platforms.

401(k) plans of $50m – $200m
There are an estimated 8646 plans between $50-$200 million. I predict litigation will be low in 2022 as there are so many larger targets.  However, over the next decade it could pick up.   This gives plans in this size range time to clean up their plans, giving maximum value to participants while minimizing litigation risk in the future.

Higher fee insurance recordkeepers, conflicted consultants along with multiple share class violations, are rampant in this group with much higher percentage.

401(k) plans of $20-$50m and $5-20m
There are an estimated 14915 plans between $20-$50 million and an estimated 69343 plans between $5-$20 million. I predict that litigation involving these plans will be rare during the next 5 years, as there are so many larger targets, but over the next decade it could pick up.   This gives plans in this size range time to clean up their plans, giving maximum value to participants while minimizing litigation risk in the future.

Parting Thoughts
401(k) litigation is only in its infancy, with only 15-20 percent of the 3000 potential largest complaints filed. This number could triple if the litigation goes down to plans from $50-$200 million.   All of the controversy now is mostly in the largest cases being litigated.   Most of these smaller cases are much more clear-cut regarding potential fiduciary violations.

Plans can fix themselves or wait to be sued. Unfortunately, many are close-minded, relying solely on conflicted advice from brokers and insurance agents that tell plans that they are OK when they actually are not. Many plans will be in for a rude awakening. 


[i] https://news.bloomberglaw.com/litigation/suits-over-401k-fees-nab-150-million-in-accords-big-and-small?context=search&index=0  
[ii] https://www.wealthmanagement.com/rpa-edge/why-lawsuits-against-rpas-smaller-dc-plans-are-inevitable

Contact Info: 542-648-1303, tobech348@gmail.com, christobe.com

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