SCOTUS 9-0 ERISA decision – confirms my view on Annuities as Prohibited Transactions
By Chris Tobe, CFA, CAIA
The Supreme Court ruled unanimously in favor of 401(k) Transparency, while also placing the burden of proof on plan sponsors alleging that they are protected under an exception to the Prohibited Transaction rules. This rule facilitates forcing disclosures on conflicts of interest and hidden fees.[i] Investments that the managers have the potential for a conflict of interest are labeled “Parties of Interest” in the DOL/IRS 5500 forms attached financials for ERISA plans. These parties in interest have the burden of proof that they have an exemption from the Prohibited Transactions rules.
Fixed Annuities, known as IPG’s, are prevalent in large ERISA DC plans. The largest IPG is TIAA Retirement Choice Annuity which is central in the Cornell plan and, along with Fidelity, the focus of the SCOTUS decision.
I believe that all annuities are prohibited transactions due to the inherent conflict of interest issues, and in most cases, the annuity issuer and annuity salesperson are labeled in plans as parties in interest. Prohibited transaction exemptions are subject to meeting certain requirements. But the DOL does not even attempt to enforce them. Many plans just blindly accept the claims of annuity salesmen that these contracts have a “get out of jail free card” in the form of a PTE.
Prohibited Transactions Exemption PTE 84-24
Annuities for decades have claimed Prohibited transaction exemptions behind PTE 84-24. However, plans are responsible for verifying that the prohibited transaction exemptions apply to the insurance products they put in their plans. This SCOTUS decision and future similar cases may force accountability for the first time.
ERISA PTE 84-24, which is based on the Restatement of Trust, states the annuities must meet the following requirements called the Impartial Conduct Standards and Written Disclosures and Policies and Procedures backing up these standards. Most annuities I have seen do not even come close.
The Impartial Conduct Standards have 4 major obligations. A. Care Obligation B. Loyalty Obligation C. Reasonable compensation limitation D. No materially misleading statements (including by omission)
Care Obligation This obligation reflects the care, skill, prudence, and diligence – similar to Prudent Person Fiduciary standard. Diversification is one of the most basic fiduciary duties. Fixed annuities flunk this with single entity credit and liquidity risk. Diligence is nearly impossible with misleading, nontransparent contracts, and the lack of plan/participant ownership of securities.[ii] The Federal Reserve in 1992 exposed the weak state regulatory and reserve claims.[iii]
Loyalty Obligation Annuity contracts are designed to avoid all fiduciary obligation with no loyalty to participants. Secret kickbacks and commissions place the financial interests of the Insurers and their affiliates over those of retirement investors. In most cases, the annuity investor has little chance of even breaking even on the investment. The exemption requires the advisor to show their loyalty with a “Fiduciary Acknowledgement Disclosure.” Annuity contracts avoid any fiduciary language or responsibility.
Reasonable compensation limitation Annuities have a total lack of disclosure of profits, fees and compensation – effectively denying any chance for a prospective purchaser to make an “informed decision.” They also have secret kickback commissions.[iv] A number of lawsuits have settled with claims of excessive secret fees and spreads. An insurance executive bragged at a conference of fees over 200 basis points (2%) in 2013. [v]
No materially misleading statements (including by omission) Annuities have numerous material misleading statements, including the total lack of disclosure of spread/fees. They claim principal protection, but some fixed annuity contracts recently have “broken the buck” and violated their contracts. The written disclosures under weak state regulations omit critical information on risks and fees also prevents any opportunity for an “informed decision.”
GOING FORWARD
While Annuities are by far the largest area involved, I believe SCOTUS’ Cunningham decision will result in some significant consequwemces:
ERISA class action 401k litigation will explode especially against conflicted products like annuities[vi]
Plans are now talking about taking legal action against vendors, who tricked them into these non-transparent products[vii]
Plans will be more reluctant to take on non-transparent products like annuities[viii]
Plans will be more reluctant to take on non-transparent products like crypto and private equity[ix]
Plans will be more reluctant to do non-transparent administrative practices like revenue sharing[x]
Plan Sponsors with fixed annuity contracts should demand : 1. A MFN clause to make sure they have the best rate. A MNF (Most Favored Nation) clause is a clause that states that money managers are getting the lowest fee for their pension clients. 2. A downgrade lause that allows liquidity at full book value if the insurance company issuing the annuity is downgraded.
Annuities are clearly prohibited transactions that do not qualify for an exemption but have used their lobbying power in Washington and in states, to exempt themselves from all accountability. This recent SCOTUS decision may help get accountability and transparency in plans through litigation.
“Cerulli Edge—U.S. Retirement Edition,” finds that as of 2024, 91% of asset managers believe guaranteed lifetime income options carry a negative stigma. “Annuities continue to face perception issues due to high fees, complexity, lack of transparency, and concerns about insurer solvency, all of which deter plan participants,” says Idin Eftekhari, a senior analyst at Cerulli. “The tradeoff between liquidity and a guaranteed income stream is unappealing for many participants.[iii]
The argument that you need annuities to provide lifetime income is debunked as well.
Cerulli also points to lower cost transparent liquid methods of providing monthly income called “structured drawdown strategies” as superior alternatives to annuities.[iv]
Annuities are a Fiduciary Breach
I wrote in 2022 that all annuities are a fiduciary breach [v] While Guaranteed Income Annuities are still small in 401(k)s, I believe they are being used to justify even worse annuity products like IPG Fixed Annuities and Index annuities. Immediate Participation Guarantee (IPG) is a Group fixed annuity contract (GAC) written to a group of investors in a DC Plan and not individuals. [v]
IPG group annuities have no maturity, and set whatever rate they want without a set formula.
Annuities are contracts that are an ERISA Prohibited Transaction. Annuity providers claim their products are subject to Prohibited Transaction Exemption 84-4, but I have found that most annuities I have seen do not qualify for the exemption.[vi]
Annuity contracts are regulated by weak state insurance commissioners, and most plan sponsors are clueless to that fact. The National Association of Insurance Commissioners (NAIC) sets weak national standards, but some state insurance commissioners have even weaker regulations. NAIC’s prime goal is to prevent any national regulation or transparency as evidenced in this letter to Congress. [vii] NAIC is currently trying to hide insurers Risk Based Capital (RBC) scores to hide significant risk from consumers. [viii]
There is an attempt to hide annuities in Target Date Funds in weak state regulated CIT’s in which I testified on to the DOL Advisory Committee in July 2024.[ix]
Annuity contracts shift all the fiduciary burden from themselves to the plan. Thus, the burden of proof is on plan sponsors regarding if their plan annuity qualifies for an exemption from being classified as a prohibited transaction.[x]
Annuities Credit & Liquidity Risk High & Getting Higher
A recent Federal Reserve paper exposes poor state & offshore regulation of Life Insurance companies that issue Annuities. The FED’s main problem is the hiding and understating of credit, liquidity & leverage risks.[xi]
The FED economists contend that life and annuity issuers make investments in what amount to loans to risky firms look stronger by funneling the weak loans through arrangements — such as business development companies, broadly syndicated loan pools, collateralized loan obligations, middle-market CLOs and joint venture loan funds — that qualify for higher credit ratings.[xii]“These arrangements seek to shift portfolio allocations towards risky corporate debt while exploiting loopholes stemming from rating agency methodologies and accounting standards.”[xiii]
Insurance risk experts Larry Rybka, Thomas Gober, Dick Weber Michelle Gordon highlight the addition of risks from Reinsurance in a recent trade publication. Rybka says The life insurance and annuities industry, he said, has become “like the Wild West.” Carriers are abusing reinsurance,”[xiv] “It’s a shell game and, in general, the regulators are not paying attention,” said Dick Weber,[xv]Gober says It’s not just offshore reinsurers that can largely skirt U.S. accounting standards, he said. There are also “captive” reinsurance companies within the U.S. mostly in Vermont, South Carolina, and Delaware. “The lack of transparency with these affiliated reinsurance companies, both captive and offshore, is the single biggest threat to U.S. policyholders and annuitants,” said Gober.[xvi]
Michelle Gordon says that advisors should check the creditworthiness of any insurance companies they recommend to clients, she said, though most don’t or can’t because of lax ratings standards. “The non-codification of insurance advisement results in sub-optimization of consumer protections,” she said.[xvii]
Fiduciaries should be aware of these risks and have a duty to defend and justify these risks if they put annuities in their plans.
Crypto, Private Equity, and Annuity contracts are impossible to Benchmark because of a lack of transparency accountability and liquidity. Valid Benchmarks require investable securities. These issues make it nearly impossible for any of these contracts to be exempted from being a prohibited transaction in an ERISA plan. [i]
According to the CFA Institute, a valid benchmark should meet the following criteria:
Specified in advance: The benchmark is defined before the evaluation period begins.
Measurable: The benchmark’s return can be calculated regularly and in a timely manner.
Unambiguous: The identities and weights of the securities in the benchmark are clearly defined.
Reflective of current investment opinions: The manager is knowledgeable about the securities in the benchmark and their factor exposures.
Accountable: The manager is aware of and accepts responsibility for the benchmark’s performance and constituents.
Investable: The assets of the underlying index are available for purchase by investors.
These attributes are impossible for contract-based investments like Crypto, Private Equity, and Annuities since you do not own any securities. There is no accountability, they are ambiguous and use different forms of accounting than securities.
Benchmarks can work when you compare a security-based active investment fund with a security-based index fund as highlighted in Brotherston vs. Putnam.[ii]
These are one sided contracts, not securities, in favor of the vendor and to the detriment of the investor. Looking at these from an ERISA particularly 401(k) context these contracts have severe fiduciary issues which I feel prevent them from an exemption from prohibited transaction rules. The Burden of Proof is on the Plan Sponsor to document that these contracts are not Prohibited Transactions.[iii]
I think the conflicted contract nature of these investments allows them to manipulate or avoid benchmarks altogether. While plan sponsors should never have entered into these contracts in the first place, how do you hold them accountable for the damages they have caused participants. If you compare them against benchmarks to the lower risk investments they should have invested in, it conceals the damages. You must find comparable contracts with the same types of high risk to find the actual damages.
Annuity Contracts
I wrote last month that Annuities should not be allowed in 401(k)s as Prohibited Transactions. Annuities are a Fiduciary Breach for 4 basic reasons. [iv]
Structure -weak cherry-picked state regulated contracts, not securities and useless reserves [viii]
These breaches make it impossible for most annuity products to qualify for exemptions to Prohibited Transactions which need to fill these 4 major obligations. [ix]
A. Care Obligation
B. Loyalty Obligation
C. Reasonable compensation limitation
D. No materially misleading statements (including by omission
I do not believe few if any annuities meet these 4 obligations, and the
burden of proof is on the plan sponsor that the annuities they use in their ERISA plans have a valid exemption. [x]
I have extensive experience showing damage by annuity contracts in large 401(k) and 403(b) plans. These are primarily fixed annuity IPG contracts within the broad category of stable value with no maturity and discretion by the insurer to pay rates that maximize their profits, at the detriment of participants. Some Fixed Annuity providers will claim money markets as a benchmark, despite having over 20 times the risk. The Federal Thrift Savings Plan has a high-quality stable value product, the G fund which they state is impossible to benchmark. [xi]
Single entity Fixed annuity providers have attempted to compare to the diversified Hueler Stable Alue Index despite having 10 times the risk. The proper comparable has been to other IPG fixed annuities with single entity risk, which has used in over a dozen cases specifically comparables like TIAA and MassMutual cited in detail in 2 ERISA Hospital Cases: Columbus, GA and Norton Hospital.
Private Equity Contracts
Private Equity contracts have mostly been contained in non-ERISA plans but this may be changing. Economic and Policy Research’s Eileen Appelbaum said “Much as private equity firms may wish it were different, they have been mostly unable to worm their way into workers’ 401(k)s and abscond with their retirement savings,”[xii]
Private Equity flunks all the impartial conduct standards in numerous ways.
Private equity offering documents generally prominently state (in capital, bold letters) that an investment in a private equity fund is speculative, involves a high degree of risk, and is suitable only for persons who are willing and able to assume the risk of losing their entire investment. Can engage in borrowing, or leverage, on a moderate or unlimited basis. No assurance of diversification since funds generally reserve the right to invest 100 percent of their assets in one investment. Heightened offshore legal, regulatory, operational and custody risk.[xiii]
Private Equity has a myriad of conflicts of interest, self-dealing practices. The investment manager determines the value of the securities held by the fund. Such a valuation affects both reported fund performance as well as the calculation of the management fee and any performance fee payable to the manager. [xiv]
Private Equity has business practices that may violate ERISA. Private equity fund offering documents often disclose that investors agree to permit managers to withhold complete and timely disclosure of material information regarding assets in their funds. Further, the fund may have agreed to permit the investment manager to retain absolute discretion to provide certain mystery investors with greater information and the managers are not required to disclose such arrangements. As a result, the fund you invest in is at risk that other unknown investors are profiting at its expense—stealing from you. [xv]
Plan sponsors will have a tough time justifying Private Equity as being exempted as a prohibited transaction given these facts. With such a lack of controls on the contracts, benchmarks are mostly useless.
Private Equity Benchmarks have been manipulated in U.S. public pensions to get higher bonuses not only for the Private Equity managers but for public government staff. [xvi] Private Equity benchmarks typically add a premium of 2%-6% to small cap index for leverage and liquidity. I think the high end of this range could be appropriate for damage comparisons given the fiduciary issues of the assets.
Crypto Contracts
Crypto has not been used extensively in ERISA plans as of now, but it is increasing.[xvii]
It was first discovered in Brokerage Windows, in which plans feel they have less fiduciary accountability. Companies running Brokerage Windows have been paid $millions by Crypto companies to put their options on their Brokerage Window Platform. In the article, “401(k)s with Bitcoin Should Expect Lawsuits: Lawyers,” the trade publication “Ignites” quotes Jerry Schlichter as saying that. Any employer who would follow the Fidelity lead by offering cryptocurrency and a 401(k) plan is exposing itself to very serious risk of a fiduciary breach…. As an unproven, highly volatile investment, Bitcoin would test the prudence standard under the Employee Retirement Income Security Act….The account will carry a fee of up to 90 basis points plus undisclosed commission fees, which would be 20 times as much as a simple index fund. Any 401(k) plans with a brokerage window will be subject to severe fiduciary liability unless they can prove they have provided 100% prudent options. This will most likely lead to much more litigation and many more settlements, as the cost of proving 100% prudent options will be extremely expensive. [xviii]
Burden of proof is on plan sponsors that Prohibited Transactions crypto in their plans qualify for a Prohibited Transaction Exemption. I have seen no evidence that any form of Crypto has met the qualifications for an exemption.
The Department of Labor in 2022 severely questions the reliability and accuracy of cryptocurrency valuations. A major concern is that cryptocurrency market intermediaries may not adopt consistent accounting treatment and may not be subject to the same reporting and data integrity requirements with respect to pricing as other intermediaries working with more traditional investment products.[xix]Under that guidance, which the DOL issued last month (April 22), employers could be responsible for risky crypto trades their workers make in workplace 401(k)s. The DOL’s employee benefits enforcement agency will launch what it’s calling “an investigative program” that requires plan officials to “square their actions with their duties of prudence and loyalty” if they allow crypto investments in self-directed accounts, according to the guidance.[xx]
The CFA institute writes. The unfortunate reality is that none of the proposed valuation models are as sound or academically defensible as traditional discounted cash flow analysis is for equities or interest and credit models are for debt. This should not come as a surprise. Crypto assets are more similar to commodities or currencies than to cash-flow producing instruments, such as equities or debt, and valuation frameworks for commodities and currencies are challenging. Custody is challenging and there is significant technological risk. As recently as 2018, researchers uncovered a bug in the bitcoin code that, if left unchecked and exploited, could have led to significant (theoretically infinite) inflation in the issuance of new bitcoin [xxi]
The lack of any valuation parameters makes benchmarks impossible. Comparisons should be flexible. One of the main comparisons should be the most popular Crypto asset Bitcoin.
Corrupt Structures
Crypto, Private Equity and Annuities in ERISA plan are mostly hidden in corrupt structures. Besides brokerage windows poorly state regulated separate account annuity products and Collective investment Trusts are places to hide these prohibited assets.
Over 50% of 401(k) assets are in Target Date Funds which are made up of underlying funds. This allows for less transparency of the underlying funds.
However, historically the largest structure for Target Date Funds has been SEC registered Mutual Funds. Mutual Funds have transparency and fiduciary standards that do not allow Crypto, Private Equity and Annuities. [xxii] Federal OCC regulated Collective Investment Trusts (CITs) have transparency and fiduciary standards that do not allow Crypto, Private Equity and Annuities.[xxiii] However, many state regulated CIT’s have weak or no transparency or fiduciary standards, so you can allow Crypto, Private Equity and Annuities.
Currently I believe the biggest threat of prohibited investments like Crypto, Private Equity and Annuities will be hidden in target date funds structured as state regulated CIT’s that I outlined in my DOL Advisory testimony in July 2024.[xxiv]
Conclusions
Since Crypto, Private Equity, Annuity contracts are impossible to Benchmark you need to use Comparables. To make valid comparisons you have to compare them to other prohibited transactions that are materially similar, and looking at those similar funds with the best performance is valid for damages.
I want to applaud the Biden Administration on bringing Annuity Junk fees into the light of day to protect investors.
I want to focus on the effect of annuity junk fees in current ERISA protected defined contribution plans (I will address401(k) and 403(b) and cover rollover junk annuity fees in another article.) While the White House release mentions the savings in current plans from index annuities, I think that fixed annuities savings could be much larger over $9 billion a year. (It is important to note that fixed annuities and index annuities in government defined contribution plans in both 457 and 403(b) are not protected by ERISA and add to many more billions of dollars.)
My $9 billion a year comes from industry figures on General Account fixed annuities at $386 billion and separate account fixed annuities at $76 billion in ERISA defined contribution assets. [i]
However, it is important to note that the largest provider of fixed annuities in defined contribution plans (governed by ERISA) is TIAA, which has substantially lower fees and commissions, than the other mainstream insurance providers
Fixed annuities for the most part do not disclose fees and are rate based. For example, when a similar competitive fixed annuity in a plan like TIAA pays 4% many insurers only pay 2% – pocketing the spread. Bloomberg quoted an insurance executive bragging about these hidden 2%+ in fees at a Wall Street conference.[ii] These hidden spread fees have the same negative effect on investors that disclosed mutual fund fees have.
HOW DO I KNOW THIS I currently consult on excessive fees in insurance products. I spent 7 years making insurance products for Transamerica Life (TA), one of the largest U.S. insurance companies. I was an officer of seven different TA companies governed by four different states. I saw the need for federal intervention, as insurers had the ability to select the state regulator with the loosest regulations and lowest capital requirements.
RISKS One of the most basic fiduciary principles is diversification. Annuities make a mockery of this principle with their single entity credit and liquidity risk. [iii]
After the first annuity risk crisis in 1992 the Federal Reserve wrote a major paper on the weakness of state regulations in the insurance area. [iv]
In 2008 Federal Reserve Chairman Ben Bernanke said about these annuity products “workers whose 401(k) plans had purchased $40 billion of insurance from AIG against the risk that their stable-value funds would decline in value would have seen that insurance disappear.”[v]Even when the federal government steped up to control risk in annuity products after the 2008 financial crisis, the insurance industry used its immense lobbying ability to thwart regulations and maximize profits. [vi]
ACCOUNTABILITY In light of recent money market rates of over 5%, these low 2-3% annuity rates in 401(k)’s in far riskier products are especially troubling, costing investors billions of dollars in retirement savings while taking much higher risks.
Hopefully, these junk fee rules will slow the growth of these high fee high risk products inside of 401k plans. The latest con game is selling annuities under the guise of Guaranteed Income. [vii]
Hopefully, this junk annuity initiative will expose some of the 401(k) target date funds which are burying index and fixed annuities inside weakly state regulated Collective Investment Trusts (CIT)s. [viii]
Hopefully, 401(k) consultants who claim to be somewhat independent will be exposed by showing how they use their insurance licenses for additional backdoor commissions.[ix]
Hopefully, within 401(k) plans they will either replace fixed annuities with diversified lower risk synthetic stable value products or at the minimum pay competitive rates like TIAA. [x]
This Biden Annuity Junk Fee initiative will save retirement investors billions. Please do not let the Insurance Industry water it down to line their own pockets.
Chris Tobe, CFA, CAIA is a national expert on excessive fees in retirement plans. He has written 4 books and dozens of articles on transparency, excessive fees & corruption in investments. His own firm Tobe Consulting has advised on over 70 ERISA legal cases on behalf of investors who have lost money through risky and/or high fee investments. He serves as Chief Investment Officer for a minority woman owned pension consulting firm out of New Orleans the Hackett Robertson Tobe group
The Investment Policy Statement (IPS) for a pension plan or other investment pool is a critical element in the governance and is a main fiduciary control on investments.
As stated in the IFEBP Investment Policy Handbook, “If an employee benefit plan does not have an investment policy statement, it does not have an investment policy.”[i] Chris Carosa, in his Forbes column, says a “401(k) IPS is a legal document that serves as the solid compliance backbone of the plan”.[ii]Josh Itzoe in his book, the Fiduciary Formula, says about an IPS, “I believe a written investment policy is the only way to demonstrate a thoughtful process and make well informed, prudent investment decisions consistent with the fiduciary requirements imposed by ERISA.” [iii]
A major U.S. regional ERISA law firm for plans remarked,
Since most plans maintain an IPS, not having one can be seen as ‘outside the lines’ and may subject the plan’s fiduciary compliance to greater scrutiny. In fact, it is not hard to imagine a plaintiff’s firm arguing that a plan’s failure to have an IPS is de facto evidence of a fiduciary breach.[iv]
In the CFA standards for Pension Trustees says “Effective trustees develop and implement comprehensive written investment policies that guide the investment decisions of the plan (the “policies”).” [v]The CFA Code assumes any investments of any size will have an Investment Policy Statement (IPS).
The Society for Human Resources Management (SHRM) outlined the percentage of defined contribution plans with an Investment Policy Statement. Basically 90% for plans over $50mm in 2008, most likely much higher today[ii] The complete breakdown was as follows:
$10 million or less – 68%
$10 million to $50 million – 78%
$50 million to $500 million – 90%
$500 million to $1 billion – 89%
More than $1 billion – 92%
I believe any plan without an IPS is in fiduciary breach and they should be reviewed annually. [i].
by James W. Watkins, III, J.D., CFP Board Emeritus™ member, AWMA®
Recent developments in the 401(k) and 403(b) litigation arena suggest that a major change is coming to said landscapes, none more so than the amicus brief that the Department of Labor’s (DOL) recently filed with the 11th Circuit in connection with Pizarro v. Home Depot, Inc. (Home Depot).
But first, a little background. First, in Hughes v. Northwestern University1, SCOTUS upheld the provisions of ERISA Section 404(a) by ruling that each individual investment option within a plan must be legally prudent. Then, in Forman v. TriHealth, Inc.2, the Sixth Circuit suggested that dismissal of 401(k) actions based on the alleged cost of discovery to plans is premature and inequitable, Chief Judge Sutton stating that
“This wait-and-see approach also makes sense given that discovery holds the promise of sharpening this process-based inquiry. Maybe TriHealth “investigated its alternatives and made a considered decision to offer retail shares rather than institutional shares” because “the excess cost of the retail shares paid for the recordkeeping fees under [TriHealth’s] revenue-sharing model….” Or maybe these considerations never entered the decision-making process. In the absence of discovery or some other explanation that would make an inference of imprudence implausible, we cannot dismiss the case on this ground. Nor is this an area in which the runaway costs of discovery necessarily cloud the picture. An attentive district court judge ought to be able to keep discovery within reasonable bounds given that the inquiry is narrow and ought to be readily answerable.”3
“The fact that other courts have not suggested the use of “controlled” discovery has always interested me, it that is seems perfect for 401(k)/403(b) litigation. In controlled discovery, the plaintiffs would submit all discovery requests to the court for approval. As Judge Sutton suggested, since the only discovery that would be needed at this preliminary stage would be regarding whether the plan complied with the legal independent and objective investigation and evaluation requirement, the discovery request could be as simple as “any and all materials relied upon by the plan sponsor in determining that each investment option with the plan was legally prudent, including, but limited to reports, analyses, third-party research and analyses, notes, advertisements, articles, books, magazines and other publications.”4
The DOL Amicus Brief On February 10, 2023, the DOL filed an amicus brief (DOL brief) with the 11th Circuit in connection with the Home Depot case. I believe that the DOL’s amicus brief may be instrumental in finally creating a universal and equitable application of the ERISA in the legal system.
As a fiduciary risk management counsel, I am actually more interested in the macro aspects of the amicus brief since it would have a much broader national application. For that reason, I am not going to get into the specifics of the Home Depot case. The amicus brief gave a brief analysis of the issues involved in the case. The brief identified the question before the 11th Circuit:
“Whether, in an action for fiduciary breach under 29 U.S.C. § 1109(a), once the plaintiff establishes a breach and a related plan loss, the burden shifts to the fiduciary to prove the loss is not attributable to the fiduciary’s breach.”
The brief then addressed the issues with the district court’s ruling and the issues that the 11th Circuit should consider.
“The district court did not grapple with whether to import trust law’s burden shifting rule because it erroneously that this Court in Willett had already decided that plaintiffs exclusively bear the loss-causation burden in ERISA cases. But Willett did not even consider burden shifting, let alone reject it. If anything, Eleventh Circuit precedent—including Willett itself—supports applying trust law’s burden shifting rule to ERISA fiduciary breach cases.”5
“While Willett did not explicitly address burden shifting, other Eleventh Circuit cases have endorsed the rationale behind it. This Court has long acknowledged that ERISA “embod[ies] a tailored law of trusts” and has cautioned that courts should engage in a thorough analysis before determining that a “prominent feature of trust law” does not apply where ERISA is silent. Useden, 947 F.2d at 1580, 1581 (recognizing the “incorporation of procedural trust law principles” in ERISA). To determine whether a rule should be incorporated into ERISA’s common law, the Eleventh Circuit instructs that “courts must examine whether the rule, if adopted, would further ERISA’s scheme and goals.” 6
“Moreover, by adopting burden shifting, this Court would promote uniformity in the governance of ERISA plans by aligning with its sister circuits that already apply a burden-shifting framework for proving loss causation in ERISA fiduciary breach cases.”7
As I said, I believe that the DOL’s amicus has a far greater implications for 401(k)/403(b) litigation. The DOL’s amicus brief essentially adopted the earlier argument of both the 1st Circuit Court of Appeals in their Brotherston decision, and the Solicitor General in its amicus brief to SCOTUS. All three noted that trust law supports the idea that in cases involving a fiduciary relationship, the general rule that a plaintiff must prove all part of its cases, is replaced by shifting the burden of proof as to causation to the fiduciary/plan sponsor.
“As the Supreme Court and this Court have recognized, where ERISA is silent, principles of trust law—from which ERISA is derived—should guide the development of federal common law under ERISA. Trust law provides that once a beneficiary establishes a fiduciary breach and a related loss, the burden on causation shifts to the fiduciary to show that the loss was not caused by the breach. That is why five circuits have held that once an ERISA plaintiff proves a fiduciary breach and a related loss to the plan, the burden shifts to the fiduciary to prove the loss would have occurred even if it had acted prudently.”8
“When a statute is silent on how to assign the burden of proof, the “default rule” in civil litigation is that “plaintiffs bear the burden of persuasion regarding the essential aspects of their claims.” But “[t]he ordinary default rule, of course, admits of exceptions.” Id. One such exception is found in the common law of trusts, from which ERISA’s fiduciary standards derive. Tibble v. Edison Int’l, 575 U.S. 523, 528 (2015). Trust law provides that “when a beneficiary has succeeded in proving that the trustee has committed a breach of trust and that a related loss has occurred, the burden shifts to the trustee to prove that the loss would have occurred in the absence of the breach.”9 (citing Restatement (Third) of Trusts § 100 cmt. f}.
“As Judge Friendly explained, ‘Courts do not take kindly to arguments by fiduciaries who have breached their obligations that, if they had not done this, everything would have been the same.’”10
“This burden-shifting framework reflects the trust law principle that “as between innocent beneficiaries and a defaulting fiduciary, the latter should bear the risk of uncertainty as to the consequences of its breach of duty.” Trust law requires breaching fiduciaries to bear the risk of proving loss causation because fiduciaries often possess superior knowledge to plan participants and beneficiaries as to how their plans are run.”11 (citing Restatement (Third) of Trusts § 100 cmt. f.)
Citing Brotherston, the amicus brief notes that
“Given that an ‘ERISA fiduciary often . . . has available many options from which to build a portfolio of investments available to beneficiaries,’ the First Circuit reasoned that ‘it makes little sense to have the plaintiff hazard a guess as to what the fiduciary would have done had it not breached its duty in selecting investment vehicles, only to be told ‘guess again.”” The court thus held that “once an ERISA plaintiff has shown a breach of fiduciary duty and loss to the plan, the burden shifts to the fiduciary to prove that such loss was not caused by its breach.'”12
“[T]rust law’s burden-shifting rule ‘comports with the structure and purpose of ERISA,’ which is “to protect ‘the interests of participants in employee benefit plans and their beneficiaries.’ To require that the plaintiff—who has already proven a breach and a related loss—also prove that the loss would not have occurred absent the breach ‘would provide an unfair advantage to a defendant who has already been shown to have engaged in wrongful conduct, minimizing the fiduciary provisions’ deterrent effect.’”13
The amicus brief went on to address the general position of federal circuit court jurisdictions with regard to shifting the burden of proof on causation in ERISA actions.
“The First, Second, Fourth, Fifth, and Eighth Circuits unequivocally hold that, once a plaintiff has proven a breach of fiduciary duty and a related loss to the plan, the burden shifts to the fiduciary to prove that the loss was not caused by the breach.14
Going Forward As I said earlier, I believe the DOL’s amicus brief has the potential to have a significant impact in 401(k) and 403(b) litigation, especially when combined with the Northwestern and TriHealth factors. While I see numerous issues that plan sponsors will need to consider, I believe that three key issues that will need to be considered are selection of and reliance on third-party consultants, reconsideration of fiduciary disclaimer clauses, and inclusion of annuities in pension plans, in any form.
While the district court cited the 6th, 9th and 10th circuits in support of not shifting the burden of proof as to causation, the DOL pointed out that in the cases cited by the district court, “the Sixth and Ninth Circuit cases did not directly address loss causation at all.”15 As for the 10th Circuit’s refusal to adopt shifting the burden of proof on causation, the DOL pointed out that the 10th Circuit’s position was purportedly based on the 11th Circuit’s misinterpretation of of its own decision in Willett.16
1. Selection and Reliance on Third-Party Consultants It continues to amaze me that plan sponsors blindly rely on the advice of mutual funds and insurance agents rather than experienced ERISA attorneys. Despite the warnings of the courts that such practices are in clear violation of ERISA, the courts have warned plan sponsors that such practices are impractical.
“A determination whether a fiduciary’s reliance on an expert advisor is justified is informed by many factors, including the expert’s reputation and experience, the extensiveness and thoroughness of the expert’s investigation, whether the expert’s opinion is supported by relevant material, and whether the expert’s methods and assumptions are appropriate to the decision at hand. One extremely important factor is whether the expert advisor truly offers independent and impartial advice.”17
“[The plan sponsor] relied on FPA, however, and FPA served as a broker, not an impartial analyst. As a broker, FPA and its employees have an incentive to close deals, not to investigate which of several policies might serve the union best. A business in FPA’s position must consider both what plan it can convince the union to accept and the size of the potential commission associated with each alternative. FPA is not an objective analyst any more than the same real estate broker can simultaneously protect the interests of “can simultaneously protect the interests of both buyer and seller or the same attorney can represent both husband and wife in a divorce.”18
Whether voluntarily or as a result of a decision by SCOTUS, I believe that there is little doubt that the Restatement’s position on the shifting of the burden of proof as to causation will become the universal rule in ERISA actions.
2. Reconsideration of Fiduciary Disclaimer Clauses They have never made sense from a fiduciary liability standpoint. They make even less sense now with the consensus position of the DOL, the 1st Circuit Court of Appeals, and the Solicitor General on the shifting of the burden of proof as to causation.
As I have explained to plan sponsors, trustees and my other fiduciary risk management clients, this is basic argument an ERISA should make in claiming that granting a plan adviser a fiduciary disclaimer clause is in itself a breach of one’s fiduciary duties.
So, you hired a plan adviser because you did not feel confident in your ability to properly evaluate the prudence of investment options for the plan; yet you agreed to provide the plan adviser with a fiduciary disclaimer clause, arguably releasing the plan provider from any liability for providing poor investment advice and harming the plan participants, resulting in the selection and evaluation being right back in your hands, and in so doing, essentially acknowledged your negligence and a breach of your fiduciary duties.
As I tell my clients, if a plan adviser feels the need to request a fiduciary disclaimer clause, in essence telling you they have no confidence in the quality of their advice, should that not raise a huge red flag for plan sponsors? Don’t go there!
3. Inclusion of Annuities in Pension Plans “Guaranteed income for life” But as my late friend, insurance adviser Peter Katt, used to say, “at what cost?”
Annuity advocates refuse to acknowledge the inherent fiduciary liability issues with annuities. With SECURE and SECURE 2.0, visions of sugarplums danced in the heads of every annuity advocate.
Annuity advocates like to try to ignore the potential fiduciary liability issues by discussing all the various “bells and whistles” that annuities offer. And I used to engage in such nonsense, forgetting the sound advice to “never argue with someone who believes their own lies.”
Even before the DOL’s amicus brief, I warned my clients that annuities were a fiduciary trap. Smart plan sponsors do not voluntarily assume unnecessary fiduciary liability exposure.
I tell my clients that whenever considering potential investment options for a pension plan or a trust, use this simple two question test:
1. Does ERISA or any other law expressly require you to include the specific investment in the plan/trust? 2. Would/Could the inclusion of the investment potentially expose you and the plan/trust to unnecessary fiduciary liability exposure?
I have been receiving calls and emails telling me that some annuity agents have been telling plan sponsors that SECURE and/or SECURE 2.0 require them to include annuities in their plans. Simply not true. I have told my clients to actually recite the two question test to any annuity agent. FYI – with regard to annuities, the answers are “no” to question number one, and “yes” to question number two.
Plan participants that want to invest in an annuity are obviously free to do so – outside the plan where there would be no potential fiduciary liability issues for a plan sponsor.
Many plan sponsors unnecessarily expose themselves to fiduciary liability exposure because they do not truly understand their fiduciary duties under ERISA. ERISA does not require a plan sponsor to offer a specific investment simply because a plan participant would like to invest in the product. Again, they are free to open a personal account outside the plan and invest in any product they are interested in.
I predict significant changes in ERISA litigation over the next two years, as SCOTUS is called on to resolve the two remaining primary issues blocking a unified standard for determining 401(k)/403(b) litigation-the ‘apples and oranges” argument and the shifting the burden of proof on causation. The 1st Circuit, the Solicitor General and the DOL have already properly decided the issues. Now all that is left is for SCOTUS to officially endorse their arguments in order to guarantee plan participants the rights and protections promised them by ERISA.
Copyright InvestSense, LLC 2023. All rights reserved.
This article is for informational purposes only, and is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.
The CFA Institute Pension Trustee Code of Conduct (Code) sets the standard for ethical behavior for a pension plan’s governing body. [i] It is a global standard that applies to both defined benefit (DB) and defined contribution (DC)plans, but I believe is consistent with ERISA fiduciary standards for 401(k) plans. The Code has 10 fundamental principles of ethical best practices. I am going to focus on 5 of them, the areas where we see many plans falling short of the standards.
Principle # 2. Act with prudence and reasonable care. The point regarding seeking appropriate levels of diversification[ii] is typically followed with most larger plans; but, we do see a number of mid-size and smaller plans taking single entity credit and liquidity risk in annuities and other insurance products. [iii] A particular non-diversified insurance product, lifetime income, is trying to break into even the largest plans, but with little success. [iv]
Another point is that service providers and consultants be independent and free of conflicts of interest. [v][vi] Again, most larger plans hire independent providers, but we do see a number of mid-size and smaller plans hire dually registered consultants who not only are registered investment providers, but are also registered as brokers or insurance agents, with the ability to get a commission. [vii]
Principle #3. Act with skill, competence, and diligence. Ignorance of a situation or an improper course of action on matters for which the trustee is responsible or should at least be aware is a violation of this code. “Trustee” in this case refers to each individual on the 401(k) committee plus the plan as a whole. We have seen many 401(k) committee members lacking awareness of the investment details in options of the plan.
Specifically, this principle points out the need ror awareness of how investments and securities are traded, their liquidity, and any other risks. Certain types of investments, such as hedge funds, private equity, or more sophisticated derivative instruments, necessitate more thorough investigation and understanding than do fundamental investments, such as straightforward and transparent equity, fixed-income, or mutual fund products. [viii]
With investments that have non-SEC regulated securities like illiquid contract-based products like crypto, [ix] private equity,[x] annuities and other insurance products, [xi] many times the 401(k) committees are not aware of the risks and hidden fees and have not thoroughly investigated them on such matters, especially those buried in target date funds and in brokerage windows.
Principle #5. Abide by all applicable laws Generally, trustees are not expected to master the nuances of technical, complex law or become experts in compliance with pension regulation. Effective trustees …consult with professional advisers retained by the plan to provide technical expertise on applicable law and regulation. [xii]
Principle #3 suggests that assets that are not straightforward and transparent securities, such as crypto, private equity and annuities/insurance products contracts, require additional legal scrutiny. I would assume that no crypto product would pass a good fiduciary law audit. I would claim that it would be the fiduciary duty of the plan going into any private equity or annuity contract (separate account or general account) – to have a side letter in which the manager/or insurance company agrees to take.
1. ERISA Fiduciary duty
2 Provide liquidity if the investment experiences difficulty. With insurance products, this can be done with a downgrade clause, i.e., “in the event that the insurance company’s debt is downgraded below investment grade by any major rating agency, the plan will be returned its contract value in cash within 30 days.”
3. “Most Favored Nation Clause, guaranteeing that the manager /insurance company does not provide a lower fee or higher rate to any other plans
Ownership of underlying securities is key to a plan’s risk exposure, especially liquidity risk, and when complex instruments are involved, it is the duty of the plan committee to get competent legal advice on these investment contracts.
Principle #7. Take actions that are consistent with policies Effective trustees develop and implement comprehensive written investment policies that guide the investment decisions of the plan (the “policies”). Most of the largest plans have Investment Policy Statements (IPS). The Code expects any plan to have them.
I believe any plan without an IPS is in fiduciary breach. I believe many conflicted consultants, as discussed in Principle #2, recommend that plans do not draft an IPS since it would expose their own conflicts. Most of the riskier assets in Principles #3 and #5, like crypto, private equity and annuities, would not be allowed under a well written IPS due to the excessive risks and hidden fees involved.
Trustees should … draft written policies that include a discussion of risk tolerances, return objectives, liquidityrequirements, liabilities, tax considerations, and any legal, regulatory, or other unique circumstances. Review and approve the plan’s investment policiesas necessary, but at least annually, to ensure that the policies remain current.[xiii]Some plans may have an Investment Policy Statement (IPS), but do not regularly review it or apply it rigorously to their investments.
Select investment options within the context of the stated mandates or strategies and appropriate asset allocation. Establish policy frameworks within which to allocate risk for both asset allocation policy risk and active riskas well as frameworks within which to monitor performance of the asset allocation policies and the risk of the overall pension plan.[xiv]
While asset allocation is a major component of DB plans – US DC plans now have over 50% of their assets in asset allocated investments, primarily target date funds.[xv] In most plans, the target date funds are the Qualified Default Investment Alternative (QDIA), which makes it essential that each target date sleave be addressed in the Investment Policy Statement.
Principle #10. Communicate with participants in a transparent manner. While the DOL forces some fee disclosure on each plan investment, it is not complete with non-securities like crypto, private equity and annuities as standalone options[xvi], in brokerage windows or inside target date funds. [xvii]
Revenue sharing is a shady non-transparent way some plans make their own participants pay for administrative costs; it does not hold up under these CFA standards in my opinion. [xviii]
Given the similarity between ERISA’s fiduciary requirements and the CFA Institute Pension Trustee Code of Conduct, 401(k) plan sponsors could greatly mitigate their litigation risk by looking at the Code. Furthermore, it is just the prudent and the right thing to do as a fiduciary.
Chris Tobe, CFA, CAIA is the Chief Investment Officer with Hackett Robertson Tobe (HRT) a minority owned SEC registered investment advisor and recently was awarded the CFA certificate in ESG investing. At HRT Tobe is leading up the institutional investment consulting practice for both DB and DC Pension plans. He also does legal expert work on pension investment cases.
Past industry experience includes consulting stints at New England Pension Consultants (NEPC) and Fund Evaluation Group. Tobe served on investment committee of the Delta Tau Delta Foundation for over 20 years served as a Trustee and on the Investment Committee for the $13 billion Kentucky Retirement Systems from 2008-12. Chris has published articles on pension investing in the Financial Analysts Journal, Journal of Investment Consulting and Plan Sponsor Magazine. Chris has been quoted in numerous publications including Forbes, Bloomberg, Reuters, Pensions & Investments and the Wall Street Journal.
Chris earned an MBA in Finance and Accounting from Indiana University Bloomington and his undergraduate degree in Economics from Tulane University. He has the taught the MBA investment course at the University of Louisville and has served as President of the CFA Society of Louisville. As a public pension trustee in, he completed both the Program for Advanced Trustee Studies at Harvard Law School and the Fiduciary College at Stanford University.
At the end of each quarterly, I update the five and ten-year Active Management Value Ratio analyses for the non-index based mutual funds in the top ten funds in “Pensions & Investments” list of most commonly used mutual funds in U.S. defined contribution.
Given the recent performance of the markets, it should come as no surprise that the 5 and 10-Year AMVR analyses of the six most popular non-index mutual funds in U.S. defined contribution plans remain relatively unchanged.
Interesting to note that for both the 5 and 10-year period, only Vanguard PRIMECAP Admiral shares managed to qualify for an AMVR ranking.
Also interesting to note the importance of factoring in a fund’s risk-adjusted returns. On the 5-year AMVR analyses, factoring in risk-adjusted returns turned AF’s Washington Mutual Fund’s incremental return from (0.90) on nominal returns, to a positive 0.13. Admittedly, a small positive number, but still a significant change.
On the 10-year AMVR analyses slide, factoring in the fund’s risk-adjusted returns turned their incremental return from (0.57) (nominal) to 0.57 (risk-adjusted.) Likewise for Fidelity Contafund, where an incremental return of (0.79) (nominal) turned into a small, yet positive, 0.09.
Overall, the song remains the same, with the majority of actively managed funds being unable to overcome the combination of the weight of higher fees and cost and high r-squared/correlation of returns number to beat the index of comparable index funds
And so, we continue to see 401(k) actions alleging a breach of fiduciary duties by plan sponsors. Of note, we are seeing an increasing number of cases focusing on target date funds (TDFs). I expect to see more actions involving TDFs, as the AMVR provides compelling evidence of the imprudence of the active versions of such funds. I will post an updated analysis of the active and index versions of both the Fidelity Freedom and TIAA-CREF Lifestyle TDFs next week
Somehow some judges are buying this fallacy that participants get better recordkeeping by paying substantially more for it. They are accepting this myth without proof and are actually blocking the transparency which would expose this truth by denying discovery.
Low-Cost recordkeeper Employee Fiduciary says “There are few industries where the phrase “you get what you pay for” is less applicable than the 401(k) industry. That’s because equally competent 401(k) providers can charge dramatically different fees for comparable administration services and investments.[i] Employee Fiduciary comes out with an example weekly on huge savings in recordkeeping. [ii]
There are no material differences in quality of recordkeeping services Fidelity at $30 a head is same service as Fidelity at $90 a head. There are really no material differences that a participant can tell between any recordkeepers, they get statements and have access to a web site. –
Smug articles gloat on how courts have blocked transparency of discovery for so called differences in record keeping quality that no participants or anyone in the industry can even measure. [iii] As attorney James Watkins says “Requiring a plaintiff to plead specific information known only to the defendant, without an opportunity to discover such specifics, is obviously just an attempt to protect plans.”
In this absurd insult to justice and transparency, some judges are putting the initial burden of proof on participants where the plan is deliberately hiding the critical information needed to fulfill that burden.
In addition, revenue sharing is an another way to help hide excessive recordkeeping fees, as some judges ignore these obvious issues. A 2021 study by experts from the Federal Reserve and leading universities says higher fees are not associated with better performance; to the contrary, “The future performance of revenue-sharing funds is weaker than that of non-sharing funds. The bulk of the under-performance is driven by higher fees, though revenue sharing funds display lower performance even after accounting for fees.”[iv]
Revenue sharing does not hold up during discovery and this has been confirmed by the fiduciary liability insurance industry, which put much higher litigation risk on plans with revenue sharing and either denying coverage or raising rates significantly. [v]
There are some instances of additional administrative services couched as education that can, in fact, be harmful to participants. Especially insurance providers, and especially in hospitals which are known to provide commissioned salespeople who actually try to push participants into higher fee funds and cross-sell them on imprudent outside investments as well.
Competitive recordkeeping costs have been established at $30 to $50 per heard for plans over $200 million in assets. There are no material differences in the quality of recordkeeping. Judges are dismissing fees double to such fees for identical services. The fact that such fees are largely ignored because they are non-transparent in no way reduces the significant harm they cause to participants.
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.
The CommonSense 401k Project 