401(k) settlements went way up in 2023

The number of new class-action lawsuits involving 401(k) plans dropped last year, but settlements in that line of litigation reached a record high.

In no small part that was due to massive payouts in cases against Ruane Cunniff & Goldfarb ($124.6 million), General Electric ($61 million) and Verizon ($30 million). But the number of settlements also rose considerably, at 42, compared with 31 in 2022, 26 in 2021 and just 12 in 2020, according to a report this week from Euclid Fiduciary President Daniel Aronowitz.

In addition to the extraordinarily big settlements, there were a lot of small ones, part of a trend over the past few years as more plaintiffs’ firms have brought cases seeking quick payouts, Aronowitz noted. That has led to the average settlement amount decreasing.

“This is due to the lower quality of the recent cases and the federal appellate decisions that have demonstrated that certain appellate courts will enforce a meaningful benchmark requirement comparing services for excess record-keeping claims,” Aronowitz wrote. “There is also a perception that the prolific plaintiff firms are willing to take a cost-of-defense settlement in a business model of churning cases.”

In the middle of last year, one plaintiff firm new to 401(k) litigation had a novel approach: contacting plan sponsors before any litigation was filed and implying that they should settle.

CASE VOLUME

There were at least 48 new cases involving fees or investment performance in defined-contribution plans last year, down from 89 in 2022, 60 in 2021 and 101 in 2020, according to Euclid.

“Those filings are very cyclical,” said Ian Morrison, partner at law firm Seyfarth Shaw. “Some of it has to do with capacity at the plaintiffs’ firms. They file new suits when they have the horsepower to deal with them.”

Part of the dip is likely because the firms that filed cases in rapid succession in prior years have had to focus on the ones they have been litigating, rather than pursuing new ones, Aronowitz wrote.

Among the cases filed over the past couple of years, the size of the plan targeted has gone down, although there were some very large plans at the center of new lawsuits last year.

“There’s been a trend toward pursuing smaller plans and smaller claims,” Morrison said, explaining that some firms have focused on 401(k) record-keeping fees alone, which generally have smaller potential payouts than investment-related retirement plan cases. Part of the motivation is that plan sponsors may be more inclined to quickly settle such cases, as the cost of defending against the claims is often higher than the relatively small settlements.

“I think that will continue, as long as people keep paying settlements,” Morrison said.

Yet, another trend has been that cases have been going to trial. And defendants have had notable success.

Last year, Yale University and B. Braun Medical were successful in defending themselves, for example.

“Although the jury found that Yale fiduciaries ‘breached their duty of prudence by allowing unreasonable record-keeping and administrative fees’ to be charged to participants, they determined that plaintiffs did not prove any damages because ‘a fiduciary following a prudent process could have made the same decisions as to record-keeping and administrative fees as the defendants,’” a WTW report this week by Lawrence Fine and John Orr noted.

A ruling last year in the 9^th Circuit in a case against AT&T appears to make it easier for plaintiffs to bring claims around prohibited transactions, contrasting with a separate ruling in the 2^nd Circuit in a case against Cornell, Morrison noted. Although the orders differ, there could be an uptick in plaintiffs pursuing prohibited-transaction-related claims, he said.

NEW THEORY

A law firm in California last year filed cases against four employers, alleging that they violated the Employee Retirement Income Security Act by using forfeited plan assets from participants in part to pay for future employer contributions to the plans. Those suits have targeted Thermo Fisher Scientific, Intuit, Qualcomm and Clorox, the WTW report noted.

However, such assets – the money that participants forfeit when they leave jobs before being fully vested in the employer contributions – have been used that way for some time.

“They’re basically challenging a settled practice, where the IRS regulations permit you to use forfeited money to offset employer contributions,” Morrison said. The plaintiffs are arguing that such assets should instead only be used to offset the plan costs that are otherwise paid for by participants, he noted. If that theory gets any traction in court, there could be more cases, he said.

A recurring theme in ERISA litigation is plaintiff firms targeting plans that use new products, contending that plans should not be taking on anything without a track record, he said. That can be a deterrent for plan sponsors to try innovative offerings from the financial services industry.

ESG UP IN THE AIR

There was an entirely new kind of case filed last year against American Airlines, in which a pilot claimed the plan ran afoul of ERISA by making mutual funds using ESG considerations available to participants. However, the airline has countered that the pilot was not invested in any of the funds identified in the case.

“[An] amended complaint takes a new tact, alleging that the plan should have eliminated the option for participants to select ESG-themed investments in the brokerage link, and should have divested from BlackRock investments in the plan because BlackRock has voted proxies to promote ESG corporate mandates,” Aronowitz wrote.

Few retirement plans take stances on ESG matters, meaning that there will likely not be much additional litigation in that area, Morrison said.

PLANS TARGETED

Although there were fewer cases filed last year compared with prior years, some of the new litigation has targeted plans with more than $1 billion in assets, Aronowitz noted.

“The overwhelming trend was to sue jumbo plans with a higher potential for damages or to leverage a settlement,” he wrote.

Because so many big companies have faced lawsuits over fees within their plans, it’s hard to see how they could all be overpriced, he said.

“Thirty-three percent of large plans in America have been sued for alleged excessive fees in the last eight years. If you just focus on plans with assets over $1 billion or more, more than 50 percent of these plans have now been sued for purported excess fees,” he wrote. “Any cynic of the plaintiffs’ bar would discern that many plans are being unfairly sued, because [those percentages of plans] … cannot possibly have excessive fees.”