By Chris Tobe, CFA, CAIA

The recent Sixth Circuit decision in Johnson v. Parker-Hannifin Corp. indicates a possible 2025 trend in fiduciary litigation in favor of plan participants according to attorney Jim Watkins in his latest piece. [i]  The ruling confirms that in most cases participants do not have adequate information and disclosure until discovery and that premature dismissal is unfair to participants.

The lack of transparency and disclosures in 401(k) plans requires the discovery process to give plan participants a fair shot at recovery of damages from poorly managed plans.    This decision seems to recognize these facts and puts the burden of proof to show a prudent fiduciary process on the plan sponsor, which requires discovery.

The 401(k) type plans being litigated are a small fraction of the total 700,000 plans in the U.S.   Around 7,000 or 1% are $100 million or more in assets which are the ones currently large enough to litigate.  Of this 7000 around 5000 are low (Vanguard) to below average cost (Fidelity) recordkeepers.    This leaves around 2000 that are worth while litigating for plaintiff attorneys.  The DOL EBSA is understaffed having to cover 700,000 plans, so many participants rely on litigation or the threat of it to drive better outcomes.   My analysis is limited to these top 1% of plans.

Current Disclosures

The IRS/DOL 5500 form and accompanied financial statement is the major and primary form of public disclosure.   It lists total assets of the plan and the number of participants.  It lists an aggregate total of administrative costs.  Financials usually have a list of investment options, but does not disclose their fees, or even what share class they are so you can look up the fees.  It usually lists the recordkeeper.   Plaintiffs’ attorneys to narrow down potential poorly managed cases primarily rely on their ability to spot high fee recordkeepers and high fee funds just by their names.  There is no disclosure of administrative or fund fees or performance, so no data to show the level of damages.      

Participant statements are a mixed bag.  Some have partial fee information, some do not.  in 2012, the DOL mandated annual 404a-5 participant disclosures due to this lack of information.   Some plans include these with their quarterly statements, but many firms send it out in a separate not easy to understand piece of paper and participants typically throw it away.  However, participants can request these 404a-5 disclosures without discovery.

404a-5 disclosures essentially only provide an accurate description by ticker for the SEC registered mutual funds in the fund.  This is a small step forward because some plans do not even provide ticker (which shows share classes) on statements (or 5500) which has only one real purpose – to hide fee information.  Once the ticker is disclosed, data like performance and fees can be easily found on the internet.  So the disclosure of fees and performance on the 404a-5 is merely creating an impression of additional transparency.

I believe target date funds in SEC registered mutual funds were designed to hide fees and manipulate performance.  They bundle funds into other funds, and without sub-fund level detail,  it is nearly impossible to evaluate their performance and fees.  The aggregate fee & performance data from the 404a-5 disclosure statements is a start, but far from a complete means of evaluating funds.

404a-5 statements have totally inadequate disclosure on administrative and recordkeeping costs.  Manipulative games like Revenue Sharing makes the costs for participants nearly impossible to ascertain.   

404a-5 statements have totally inadequate disclosure on collective investment trusts (CITs), a growing sector in the large plan market, especially with target date funds. CITs often have inadequate state oversight and regulation, which requires little or no disclosure.[ii]

404a-5 statements also have totally inadequate disclosure on insurance products, especially with regard to IPG Fixed Annuities, but also regarding index annuities,and the new fad lifetime annuities.[iii]

 The 404a-5 disclosures only cover the most recent 10 year period. SEC mutual fund share class violations constitute a small fraction of the damages in current cases.

Discovery Basic

It is the current inadequate disclosures from the 5500 and 404a-5 statements that makes discovery essential.   Most of what plaintiffs need in discovery is information that really should have been disclosed already in both the 5500 and 404a-5 statements..

For the state-regulated insurance products and CIT’s, a plaintiff needs the same level of information on fees/spreads that you would receive in a SEC registered Mutual Fund.   Defense attorneys want to block this information since it can reveal prohibited transactions and hidden fees.[iv]

The 6^th Circuit stated that “The ultimate question is whether the fiduciary engaged in a reasoned decision-making process.”  [v]   401(k) plan fiduciaries hold monthly or quarterly meeting.  To determine if this was a prudent process, at a minimum, you need the minutes and materials from these meetings.    Defense attorneys want to block access to this information because it almost always reveals flaws in a plan’s oversight.   

According to attorney Watkins:

“Based upon my experience, I submit the real reason that the plans oppose any type or amount of discovery is to conceal the fact that (1) the investment committee never developed a prudent process for managing the plan, but rather blindly accepted the recommendations of the plan adviser or other conflicted, and (2) the fact that the plan never conducted the independent investigation and evaluation required under ERISA, but blindly accepted the recommendations of others.”  [vi]    

In my ownexperience, I regularly find a clueless committee without even an investment policy, driven by blind reliance on a conflicted broker or consultant who receives undisclosed hidden compensation from recommending high fee high risk products.[vii] 

This information is readily and easily available at a minimal cost to the plan and should have already been disclosed.

Additional Discovery

Administrative costs, which include record keeping costs, are totaled on the 5500 form, and you can divide this number by the amount of participants.   Many lpaintiff firms may file a claim if they find a number above $40 a participant per year.   The defense’s argument is often that number is not correct, basically that they lied on their DOL/IRS form, offering convoluted and self-serving reasons for the alleged error.    They basically want the court to take the story that what they really charged was less than what they told the DOL/IRS, hoping that the3 plaintiff and the court will take their word for it without documentation.    The participants have no access to any information on these administrative costs.   This information is convoluted and complex, so much so that few committees understand it. It needs extensive discovery to get to the details. 

Because of the lack of transparency in administrative costs. plaintiff’s need at least some limited discovery. In a recent Sixth Circuit case, Forman v. TriHealth 40 F.4th 443, 450},, Judge Sutton of the Sixth Circuit spoke out in this issue, stating that too many ERISA actions alleging a breach of fiduciary duties were being inequitably and prematurely dismissed without allowing plaintiffs any discovery whatsoever:

This is because “[n]o matter how clever or diligent, ERISA plaintiffs generally lack the inside information necessary to make out their claims in detail unless and until discovery commences. . . . If plaintiffs cannot state a claim without pleading facts which tend systemically to be in the sole possession of defendants, the remedial scheme of the statute will fail, and the crucial rights secured by ERISA will suffer.” “Plausibility requires the plaintiff to plead sufficient facts and law to allow ‘the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.. Because imprudence “is plausible, the Rules of Civil Procedure entitle” the plaintiffs “to pursue [their imprudence] claim . . . to the next stage.”

Sponsors many times select vendors that cherry-pick their own state regulator for both insurance products and most collective investment trusts (CIT)s.[viii]  Sponsors typically do not have any documentation that these products are exempt from prohibited transaction restrictions. You need extensive discovery to get the details on fees and risks in these products.  

Most discovery needed by plaintiffs is information that should be public or at least accessible to plaintiffs already, so it is essential to have it in most cases.    Some more detailed discovery is needed to accurately compute the damages. 

It is unfair to put the burden of proof on Plaintiffs who are blocked from seeing the information they need to prove damages.    The burden of proof needs to be on the plan sponsor who controls all the information. [ix]

[i] https://fiduciaryinvestsense.com/2024/11/28/fudamental-unfairness-sixth-circuit-decision-addresses-the-premature-dismissal-of-erisa-actions/

[ii] https://commonsense401kproject.com/2024/07/31/chris-tobe-dol-testimony/

[iii] https://commonsense401kproject.com/2024/11/19/burden-of-proof-is-on-plan-sponsors-hoping-to-qualifyfor-annuity-prohibited-transactions-exemption/

[iv] https://commonsense401kproject.com/2024/11/29/crypto-private-equity-annuity-contracts-are-impossible-to-benchmark/

[v] https://fiduciaryinvestsense.com/2024/11/28/fudamental-unfairness-sixth-circuit-decision-addresses-the-premature-dismissal-of-erisa-actions/

[vi] https://fiduciaryinvestsense.com/2024/11/28/fudamental-unfairness-sixth-circuit-decision-addresses-the-premature-dismissal-of-erisa-actions/

[vii] https://commonsense401kproject.com/2023/03/12/investment-policy-statements-crucial-to-fiduciary-duty/

[viii] https://commonsense401kproject.com/2024/10/10/annuities-exposed-as-prohibited-transaction-in-401k-plans/

[ix] https://commonsense401kproject.com/2024/11/19/burden-of-proof-is-on-plan-sponsors-hoping-to-qualifyfor-annuity-prohibited-transactions-exemption/