A growing number of lawsuits have targeted 401(k) and pension plans. These lawsuits are driven by a number of factors such as the 2008 financial crisis, a recent decision by the U.S. Supreme Court, some larger cases on the topic settling for significant sums, and an increased focus on lower management fees. As plaintiffs’ attorneys noticed the reductions in plan fees and the successful litigation on the part of large plans, they begin to use these negotiated reductions as evidence against smaller plans. These cases argue that, previously, fiduciaries had not been paying attention as plan fees crept out of control. There is now a clear pattern for ERISA litigation, making it profitable to pursue smaller plans.
Tibble v. Edison International
The start of many of these fiduciary lawsuits was a U.S. Supreme Court decision in May of 2015, Tibble v. Edison International. The court affirmed that plan fiduciaries have an ongoing responsibility towards the plan and towards the investments of the plan. In essence, the Plaintiffs alleged that Edison International had offered high-priced mutual funds offerings as part of their 401(k) plans when there were lower-cost, identical funds available. Edison argued that the lawsuit was barred by a six-year statute of limitations set by ERISA for breaches of fiduciary duty. Edison won at the circuit court level. The case was taken up by the Supreme Court with the specific question of whether, in this situation, the statute of limitations would apply. The court found that:
“ERISA’s fiduciary duty is ‘derived from the common law of trusts,’ which provides that a trustee has a continuing duty—separate and apart from the duty to exercise prudence in selecting investments at the outset—to monitor, and remove imprudent, trust investments. So long as a plaintiff’s claim alleging breach of the continuing duty of prudence occurred within six years of suit, the claim is timely.” 135 S. Ct. 1823 (May 18, 2015)
Impact of Supreme Court Ruling and Other Factors
With this clear ruling from the Supreme Court, plaintiff’s lawyers now knew they would have greater success bringing claims against ERISA plans. Between the $7.25 million final judgement on Tibble and several larger settlements in the $20 to $60 million range, lawyers are now economically incentivized to scrutinize 401(k) and similar plan offerings for potential fiduciary liability. Further, thanks to Tibble, it is harder to get such cases thrown out before the discovery phase. This gives lawyers a chance to truly dig into corporate and plan data and decisions.
The effect of this increased litigation has led towards smaller and smaller plans, with recent litigation being against plans as small as $10 million in assets. Any litigation can be both lengthy and costly, as well as distracting for a business.