Outside voices and views for advisers

Recent class-action surge ups the ante for 401(k) advice

Retirement plan advisers should make sure they have their bases covered to prevent litigation for fiduciary breaches

Jan 21, 2016 @ 10:49 am

By Blaine F. Aikin

+ Zoom

All eyes may be on the Labor Department's fiduciary rule, but don't forget the courts.

Eleven major class-action lawsuits were filed in federal courts around the country against 401(k) sponsors or providers of retirement products in the fourth quarter of 2015. All involve alleged fiduciary breach claims of, among other things, excessive fees benefiting service providers in violation of the Employee Retirement Income and Security Act of 1974 (ERISA).

Most of the defendants are industry brand names, including Allianz, BB&T, Deutsche Bank, Fidelity, Insperity, New York Life, Prudential, Putnam and TIAA-CREF. All of the suits seek class-action status and millions of dollars in damages.

While Congress, the DOL and the Securities and Exchange Commission define the boundaries for fiduciary advice and shape its contours, it's the court system where the rubber meets the road and factual issues are sorted out. The courts play a critical role in articulating what the fiduciary standard means in practical terms. In a crucial recent case in point, the U.S. Supreme Court affirmed an ongoing fiduciary duty to monitor investment options in Tibble v. Edison.

The most recent wave of suits hearkens back 10 years to an earlier surge of excessive fee cases. Although some of those cases were thrown out, others survived and met success at the appellate court level, resulting in multimillion-dollar settlements.

(Related read: Fiduciary liability unclear when selecting and monitoring default retirement investments)

This time around, it appears that the plaintiffs' bar has honed cases based on their experience of what has worked in the past and are making more sophisticated arguments. For example, some of the suits allege that plan fiduciaries acted imprudently by not considering the lower costs of collective trusts or even separate accounts or used inappropriate benchmarks to make the disputed investment option appear more competitive, and argue that per participant record-keeping costs were unreasonable.

High-profile lawsuits should not escape the attention of fiduciaries, especially those serving large plans, which are typically the focus of litigation. While the current filings all involve claims of unreasonable fees, a deeper vetting of fiduciary issues in the courts provides case study material on specific areas that warrant elevated attention.

Stable value funds, long a staple of many 401(k) plans and popular for providing higher returns than money market funds, are one type of investment option being placed under the microscope. One of the more common complaints is that the product providers are retaining unreasonable fees.

One of the suits argues that defendants were using a “microscopically low-yielding money market fund” without considering a stable value option. But once added, plaintiffs argued it was an imprudent selection.

Revenue-sharing between service providers is another target in the new wave of litigation. Although legal, the practice does raise red flags. Participants argue, in some cases, that payments bore no relationship to the services offered.

Target date funds are an area that some observers believe will be the next frontier in litigation. One of the December suits involves proprietary funds that participants claim were “untested…with no performance history” and were added to the plan only days after their inception. Participants argue that the absence of a performance history “is wholly contrary to the most basic prudent fiduciary practices.”

Fiduciary status is also being brought into dispute, with participants arguing for the broadest interpretation. There is some speculation that the mid-2000s wave of fee litigation and questions about fiduciary accountability caught the DOL's attention and contributed to its decision to propose the initial fiduciary rule in 2010 as well as other fee disclosure rules.

The final DOL rule will not impact the current cases, but certainly will raise questions of whether the expanded definition of a fiduciary will make it easier to snare other service providers with fiduciary accountability if and when the rule goes into effect.

(More on fiduciary: The 3 biggest fiduciary stories of 2015)

While all of this sounds like horrible news for ERISA fiduciaries, it is important to keep in mind that these cases are generally hard for plaintiffs to win if sound fiduciary practices are in place.

ERISA does not judge investment performance in hindsight, so some of the arguments over imprudent selection may easily fail. Courts also have been unreceptive to arguments attempting to assign fiduciary accountability to service providers that do not exercise discretion or render specific investment advice.

The cases that have been won generally involve egregious fiduciary breaches such as using retail classes of funds for plans that could easily have chosen directly comparable institutional shares. Wasting plan assets in this way is clearly imprudent.

Responsible plan fiduciaries, including retirement plan advisers, should make sure they have their bases covered. Understand fiduciary obligations imposed in law and regulation. Have and follow a sound investment policy statement and plan governing documents. Perform rigorous investment and service provider due diligence and monitor these selections. Don't waste plan money by incurring unnecessary expenses. Be alert to conflicts of interest and mitigate them in the investors' interest. Document all decision-making processes.

Prudent practices not only provide a solid defense, they prevent litigation in the first place.

Blaine F. Aikin is executive chairman of fi360 Inc.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Oct 03


Adviser compensation & staffing: Strategies and research to build a top-performing firm

Competition for established talent in the advice industry is at an all-time high — and the industry's top firms are using compensation and staffing strategies that will likely lead to both short- and long-term success.In this... Learn more

Featured video


Vanguard's Joe Davis: Prepare for lower expected returns

The next five years will be more challenging for the markets than the past five, according to Joe Davis, global chief economist at Vanguard. Here's why it's more important than ever to stay reasonable with return expectations and stick to the plan.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Jerry Schlichter's fee lawsuits have left an indelible mark on the 401(k) industry

After a decade of litigation, fees are lower and retirement plans are more transparent. But have the lawsuits gone too far?

10 best financial adviser jokes

How many financial advisers does it take to screw in a lightbulb?

With margins crashing, broker-dealers look to merge: report

Increased regulation is straining profit margins among broker-dealers, sending many of them into the arms of their bigger brethren.

Hackers may have profited from SEC breach

The hack of the agency's Edgar filing system occurred in 2016, but the regulator didn't conclude until last month that the cybercriminals may have used their bounty to make illicit trades.

Top 10 financial firms ranked by investor satisfaction

Find out which firm took the top slot for overall investor satisfaction for the second year in a row.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print