Over the past decade, one focus of 401(k) fee lawsuits has been to include service providers as named defendants – a shift from simply suing plan sponsors and fiduciaries working at plan sponsors. This shift began with the rise of “proprietary fund” lawsuits involving plans that use investment vehicles created by plan sponsors and their affiliates. Now, these lawsuits increasingly draw in other plan service providers, ranging from record keepers to product solutions providers, plan advisers and others.
This litigation has caused consternation for service providers in two ways. Not only are they awash in defense costs, but some use the fact that their competitors have been sued as a marketing opportunity. This is a dangerous game. Until the wave of lawsuits subsides, it seems to be only a matter of when, and not if, any given service provider in the retirement space will be sued. Assuming that, why should an adviser or an adviser aggregator care?
First, as the industry consolidates, it becomes even an more attractive target to the plaintiffs’ bar. Consolidation and aggregation leads to more size and overall financial resources backing advisers. Simply put, aggregators are large businesses with deep financial pockets – and that increases the likelihood that a defendant, if found responsible, will have the financial resources to pay a claim.
Second, as the Biden administration moves forward, many of the concepts from the 2016 fiduciary rule remain in play, even though the rule is gone. The Department of Labor has since continued to maintain a high level of service provider investigations. The Securities and Exchange Commission is focused on Regulation Best Interest compliance. Further, the Biden administration, DOL and SEC are likely to issue additional compliance guidance that could affect advisers and aggregators. Simply put, where the Biden administration moves is yet to be determined, although its further consideration of fiduciary compliance is a given, at this point.
Given this reality, the question often turns to, what should an aggregator do?
It is important that the Employee Retirement Income Security Act, securities regulations and other laws are not all about “no,” but that process matters. Even where a product, solution or offering is on strong legal footing, it is essential to carefully vet communications and materials on an ongoing basis to help proactively address potential challenges.
There is no one silver bullet solution, but stepping cautiously with a strong compliance process holds great potential for advisers, aggregators and their solutions.
David Levine is a principal at Groom Law Group and co-chair of the firm’s employer-focused practice.
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