Litigation, student loans and the retirement outlook for 2022

This article is one in a series of outlooks for 2022 by the InvestmentNews team.

Fiduciary liability, and the litigation that results from it, has been a big problem for the 401(k) and 403(b) worlds — but that could change in 2022.

A pending decision by the Supreme Court will likely determine how easy it is for plaintiffs’ law firms to bring class-action lawsuits against employers over their retirement plans. Central to that case, which was filed against Northwestern University, is whether it's enough for a suing party to explain that cheaper or better options were available to a plan in order to state a claim. Without that ability, many excessive-fee cases would fall flat, failing to survive motions to dismiss.

If the justices affirm the district and appellate court orders to toss the case, that precedent could make it tougher for litigators to pursue claims. But if the high court reverses the dismissal, that decision could embolden litigators.

The lawsuit trend, which has been 15 years in the making, has made plan sponsors leery of the fiduciary liabilities of offering a 401(k) to their employees. Some will consider switching to pooled employer plans, or PEPs.

That plan type, which first became available in 2021, includes fiduciary services for plan administration and investment selection that employers don’t have to shoulder. Though some PEPs providers have focused their efforts on startup plans and small businesses, others are positioning their products as a way to take the headache out of providing a retirement plan for midsize or larger employers.

Both strategies for selling PEPs will likely become more common. Some financial services firms have sat on the sidelines, waiting to see whether the “group of plans” model is viable. Groups of plans are a different multiple-employer structure that, like PEPs, resulted from the SECURE Act.

It has been an attractive proposition for plan providers, as groups of plans will not require them to have the same level of fiduciary responsibility as PEPs do, thus putting more liability on the employers.

However, a proposed rule several months ago from the Department of Labor shot a big hole in groups of plans. Revised requirements for its Form 5500 will preclude groups of plans from having a consolidated audit, meaning that every participating employer could be required to file its own. That is, unless the DOL changes its stance on that requirement when it publishes a final rule later in 2022.

Of course, employers also increasingly have another option for retirement plan coverage, depending on where they are located. State-run automatic IRA programs are proliferating, and people who otherwise would not have any access to workplace retirement plans can benefit from that. By June 30, California’s CalSavers program will require all employers with at least five workers to either provide their own retirement plans or sign up for the state option – a deadline that will funnel many new savers into that system.

BENEFITS ON THE HORIZON

It’s worth noting that May 1 marks the end of a two-year hiatus on federal student loan payments that had been put on hold starting with the CARES Act. Many young borrowers will find themselves making payments, some for the first time — and recent surveys have indicated that workers do not feel financially prepared for this.

Employers are aware, and some have been adding student loan payment benefits as way to help attract and retain workers, particularly at a time when jobs are difficult to fill.

Nonetheless, it’s likely that some workers will be financially struggling — and rising inflation certainly won’t help. As they look for places to cut costs, their 401(k) contributions will almost certainly be on the table.

More articles in this series:

• 2022 outlook for Social Security
• Prospect of rate hikes puts 2022 economy, markets in clearer focus
• Advisers to focus on staying home in 2022
• Political tension could permeate the SEC's 2022 agenda
• Free planning apps drive down cost for advice in 2022