For the past few years, we have been reading about litigation against large employers and financial institutions regarding fees charged to participant accounts in 401(k) plans. These lawsuits generally allege a breach of fiduciary duty under ERISA by selecting poorly performing funds that carry higher expenses than similar investment alternatives.
This litigation has led to some significant settlements, including a $62 million settlement by Lockheed Martin Corp., a $57 million settlement by Boeing, and a $31 million settlement by Massachusetts Mutual Life Insurance Co. Up to this time, the profile of defendants has been large corporations sponsoring plans with significant assets and using major financial institutions as their financial providers. Two recent developments indicate that the landscape is changing.
In the past month, major universities sponsoring 403(b) plans have been targeted in a series of lawsuits. 403(b) plans are essentially the 401(k) equivalent for governmental and tax-exempt entities. The Wall Street Journal has estimated the 403(b) market at $900 billion. 403(b) plans typically charge higher fees than 401(k) plans. Additionally, the 403(b) marketplace is managed by a few major providers, the largest of which are TIAA-CREF, Fidelity Investments and MetLife. Targets of the recent lawsuits include Duke, Cornell, Northwestern, Harvard, Columbia and the University of Southern California.
The other, more troubling development for plan sponsors is the spread of 401(k) litigation to the small employer market. Smaller employers have believed that they are unlikely to be sued, but that changed when the sponsor of a $9 million 401(k) plan was sued in Minnesota in May 2016. The 114-participant plan invested in mutual funds offered by Voya Financial Advisors (formerly ING). The suit alleged the sponsor selected funds that charged excessive fees and failed to monitor the investments.
Although the lawsuit was subsequently withdrawn without explanation, more litigation in this area can be expected as plaintiffs’ attorneys become more familiar with ERISA and the theories behind this area of litigation. In a future blog post, we will discuss best practices to reduce the risk of becoming a defendant in 401(k) fee litigation.