Lessons From Litigation: Trio of Recent Cases Highlights Ongoing Issues

Fiduciaries have had a lot of opportunities to learn more about their responsibilities over the past several years. We're now more than eight years past the settlement in Wal-Mart v. Braden, more than seven years past the effective date of the 408(b)(2) regulations and the initial award of damages in Tussey v. ABB, Inc., and nearly five years removed from the United States Supreme Court's Tibble v. Edison Int'l opinion. Moreover, the last several years of developments occurred against the backdrop of the on-again, off-again Department of Labor fiduciary rule.

Yet a trio of recent 401(k) fee lawsuits reflects that many retirement plans - large ones, in fact - continue to operate under an outdated framework that presents risks to participants and fiduciaries. This month's newsletter recaps the lessons we can learn from those cases.

Harmon v. Shell Oil Co. 

This lawsuit relates to a mega plan - the kind of plan that we would expect to have moved beyond these age-old issues. The nation's leading 401(k) fee litigation plaintiff's firm alleges in the complaint, however, that the plan sponsor failed to evolve with the marketplace. Here is the recurring argument, in a nutshell, from the complaint:

Multi-billion-dollar-defined contribution plans, like the Plan, have tremendous bargaining power to obtain high-quality, low-cost administrative, managed account, and investment management services. But instead of using the Plan's bargaining power to benefit participants and beneficiaries, Shell Defendants allowed unreasonable expenses to be charged to participants for administration of the Plan and managed account services, failed to even monitor numerous funds in the Plan at all, and retained poorly performing investments that similarly situated fiduciaries removed from their plans. 

More specifically, the complaint asserts that, despite the plan's assets exceeding $10.5 billion, the plan fiduciaries: 

• retained over 300 designated investment options, most of which were the recordkeeper's proprietary products;
• permitted the recordkeeper to automatically make available those funds, without any initial screening performed by the fiduciaries;
• retained this "haphazard" menu of investment options without conducting ongoing quantitative or qualitative monitoring;
• failed to perform a recordkeeper benchmarking exercise; and
• as a result of those failures, cost the participants millions of dollars.

Marks v. Trader Joe's Co

By comparison, Trader Joe's plan of roughly $1.6 billion in plan assets may seem small. But plaintiffs assert that it features some of the same large issues. Among the highlights of this complaint:

• The fiduciaries permitted the plan's recordkeeper to be paid through a combination of direct payments, revenue sharing payments, and the difference between (i) the higher costs of the share classes used, and (ii) the lower costs of the institutional share classes otherwise available.
• This reliance on revenue sharing and retaining expensive share classes resulted in excessive fees, perhaps as high as $140 per participant per year compared to an alleged market rate closer to $40 per participant.
• The fiduciaries failed to undertake a competitive recordkeeper benchmarking exercise.
• All the while, the fiduciaries failed to "monitor and control" recordkeeping costs. 

Glasscock v. Serco, Inc. 

The third of the three recent lawsuits takes yet another step down in terms of plan size (to around $335 million), but diligently addresses some investment and structural issues that apparently continue to run rampant. In particular, the Serco complaint alleges:

• Of the plan's 30 investment options, 21 offered a cheaper share class from the one selected by the plan, as detailed line-by-line in a two-and-a-half page chart.
• Each of those 21 options delivered superior investment performance than the more expensive version used in the plan, as also detailed in a lengthy chart.
• The plan's recordkeeping expenses were also excessive, arguably greater than over 90% of comparative plans.
• There is no justification for these higher expenses

What We Learn

The ongoing litigation highlights that not all fiduciaries have stepped into the era of institutional share class investment options, non-proprietary investment selection, and transparent recordkeeping not dependent on revenue sharing. In days gone by, the use of high-cost proprietary funds seemed to make sense, in part because many simply did not - and, due to a lack of transparency, arguably could not - know better. But those times have indeed changed. We will watch with great interest as these three large employers defend themselves against the various allegations, particularly because most of the allegations rest upon the absence of a prudent process. Will they be able to present facts supporting the existence of a prudent process? We shall see.