ERISA plaintiff lawyers looking for the next generation of 401(k) and 403(b) cases may be looking in the wrong place.
The biggest opportunities may not be another mega-plan lawsuit over a few basis points of mutual-fund expenses or forfeitures.
They may be sitting quietly inside mid-sized retirement plans—especially hospitals and other plans dominated by insurance companies.
I recently discussed exactly this with Jeffrey Snyder on Broadcast Retirement Network’s “Retirement Risk Radar: Fresh ERISA Litigation Highlights.” The interview focuses on fixed annuities, hidden insurer spreads, private credit, target-date funds, CIT transparency and emerging ERISA litigation theories. BRN says its programming reaches an audience of more than 2.31 million and is syndicated through major websites and news outlets.
Watch the interview:
Retirement Risk Radar: Fresh ERISA Litigation Highlights — YouTube
The basic message to the plaintiff bar is simple:
There Are Potential Cases Everywhere
I have worked with ERISA plaintiff firms investigating and filing more than 40 fixed-annuity excessive-fee and prohibited-transaction cases.
I don’t think we’ve exhausted the market.
I think we’ve barely started.
I reviewed the Form 5500s for 9,404 ERISA defined-contribution plans with more than $100 million in assets. After screening out much of the lower-cost Vanguard/Fidelity/State Street/Schwab universe and concentrating on the insurance-heavy market, I reviewed roughly 4,000 plans.
I identified:
3,568 plans with more than $211 BILLION in fixed-annuity assets.
And that doesn’t include the enormous universe of plans below $100 million.
More Than 40 Fixed Annuity Cases Filed. Just Scratching the Surface
The Plaintiff May Not Even Know He Owns an Annuity
This is one reason these cases haven’t already flooded the courts.
Ask a participant whether his 401(k) owns an insurance-company general-account annuity and he will probably say no.
Ask whether he owns the:
Fixed Account.
Guaranteed Fund.
Stable Value Fund.
Capital Preservation Account.
Now you may have something. The participant sees an account balance and an interest rate.
What he generally doesn’t see is the economics behind it. If the insurer earns 5%, 6%, or more on the assets supporting the contract while crediting participants 2% or 3%, the participant doesn’t receive a mutual-fund-style expense ratio showing the insurer’s economic spread.
That difference can dwarf the investment-management fee disputes that have dominated 401(k) litigation.
A 200-basis-point differential on $50 million is $1 million a year or $6 million in damages over a 6 year class period
That is where plaintiff lawyers should be looking.
Hospitals May Be the Target-Rich Environment
Hospitals deserve special attention.
After years of mergers, acquisitions and recordkeeper changes, some hospital systems have accumulated what I call “Hospital Zombie Funds.”
One acquired hospital brings a VALIC contract. Another brings Lincoln. Another has MetLife.
Twenty years later, the retirement program can resemble an archaeological dig of legacy insurance contracts, separate accounts and forgotten investment options. My review of dozens of hospital plans found examples of tiny legacy investments, sometimes with very few participants remaining.
Hospital Zombie Funds: The Hidden Retirement Plan Time Bomb No One Is Talking About
The litigation question practically writes itself:
Who is monitoring these investments?
ERISA’s continuing duty to monitor doesn’t disappear because an investment came into the plan through a merger.
And insurance contracts can create an especially interesting discovery trail because getting out may involve surrender charges, market-value adjustments, withdrawal restrictions or negotiated termination provisions.
That creates another question:
Did the fiduciaries retain the investment because it was prudent—or because terminating the contract would expose how expensive the original decision had become?
Then find a participant.
The participant often has no idea that the boring-looking “fixed” option inside the plan may be one of its most economically interesting investments.
:
Who got paid?
That can move the case beyond a conventional prudence claim and into potentially much more consequential conflict and prohibited-transaction issues. The precise claim, of course, depends on the particular contract, parties, transactions and facts.
Don’t Ignore the Target-Date Fund
The next frontier may be even larger.
As I discussed on Retirement Risk Radar, plaintiff lawyers should also start looking underneath target-date funds.
The familiar mutual-fund wrapper increasingly competes with collective investment trusts and other structures that can make it harder to see the underlying economics.
If a target-date vehicle begins holding:
private equity + private credit + annuities + affiliated products
the fiduciary investigation should not stop with the target-date fund’s headline fee.
The question becomes:
What contracts and compensation arrangements are hiding underneath it?
That’s where tomorrow’s cases may come from.
The Cases Are Out There. The Bottleneck Is Finding Plaintiffs.
That is the irony. After more than 40 fixed-annuity cases, my biggest concern isn’t that we’re running out of defendants. It’s the opposite.
My Form 5500 review identified 3,568 plans and $211 billion of fixed-annuity assets just among plans over $100 million.
The hard part is connecting potentially problematic plans with participants who have standing to challenge them. So my message to ERISA plaintiff lawyers is straightforward:
Stop assuming the best cases are necessarily at the biggest companies.
Look at the $100 million-to-$1 billion plans. Look at hospitals.
Look at insurance-heavy 401(k)s and 403(b)s.
Follow the contracts. Follow the money.
The plaintiff bar hasn’t exhausted the next generation of ERISA investment litigation.
It may not even have found 5% of it yet.
The CommonSense 401k Project 