Lawsuits filed against employers for allowing excessive fees to be charged in their 401(k) plans have, until fairly recently, targeted only the largest entities, those with more than $1 billion in their retirement plans.
However, lawsuits filed in recent weeks have moved down market to smaller plans that 401(k) advisers are much more likely to count among their client base.
Employers TriHealth Inc. and Adidas America Inc., which respectively sponsor a
$462 million and
$630 million 401(k) plan, were sued last month. Greystar Management Services, which has a
$188 million retirement plan, and West Corp., which has a
$361 million plan, were sued in May.
"It's highly unusual to see smaller plans like these facing excessive-fee litigation," said Duane Thompson, senior policy analyst at fi360 Inc.
"A lot of advisers advise small plans," Mr. Thompson added. "They're wondering, 'Am I going to be a target or is my client's plan going to be a target?'"
Sean Deviney, director of retirement plan consulting at Provenance Wealth Advisors, said the trend is something advisers should be cognizant of especially since they may also be roped into the litigation.
"You still have to pay to defend yourself," he said. "For the adviser community, we're on the hook regardless of the size of the plan."
Excessive-fee lawsuits
have proliferated over the past decade and a half, since attorney Jerome Schlichter brought a tranche of lawsuits against such large corporations Caterpillar, General Dynamics, International Paper and Lockheed Martin Corp.
The vast majority of cases and settlements to date have involved the largest 401(k) plans with billions of dollars in assets. Health insurer Anthem Inc., which has a $7 billion 401(k) plan, recently
agreed to pay $23.7 million to settle its case, for example.
Prior to the Adidas, Greystar, TriHealth and West Corp. lawsuits, there were some hints that such 401(k) lawsuits may be working their way to smaller plans. A $25 million 401(k) plan sponsored by employer Checksmart Financial and a $9 million plan sponsored by LaMettry's Collision Inc.
were each sued in 2016. Independent broker-dealer Cetera Advisor Networks was
named as a co-defendant in the Checksmart case. Both lawsuits were ultimately dismissed.
Gucci America Inc.
settled an excessive-fee case for $1.2 million in June. Its 401(k) plan had approximately $140 million.
Legal experts believe plaintiffs' attorneys will only keep suing small plans if they can extract settlements large enough to justify the time and effort of bringing litigation.
"I don't think there's a trend yet, but it certainly bears watching," Mr. Thompson said.
Paul Sommerstad, a partner at Cerity Partners, has retirement-plan clients ranging in size from around $5 million in assets to $3 billion. The litigation around smaller plans, he said, has reinforced that advisers' processes should effectively be identical regardless of plan size to limit potential liability. That's especially true since regulators such as the Department of Labor and
Internal Revenue Service, not just plaintiffs' attorneys, are also scrutinizing small 401(k) plans, he said.
"You can't ignore that the DOL, IRS and regulatory bodies are also out there looking to get fees and find openings for sponsors that don't have their fiduciary governance processes buttoned up and documented," said Mr. Sommerstad.
