1. Just out of Reish
Crystal Ball
What litigation might be coming to 401(k) plan sponsors?
I
am frequently asked about the biggest risks for 401(k) plan operating costs. However, other investments may make none of
sponsors. In effect, the question is: What will plan sponsors those payments. As a result, participants who invest in mutual
be sued for in the future? If the answer were obvious, every- funds that pay revenue sharing may bear the costs of operating
one would be taking steps to improve their practices and the risk a plan, while participants in other investments pay nothing. A
would disappear. Also, I am mindful of Casey Stengel’s warning: graphic example is where half the participants invest in mutual
“Never make predictions, especially about the future.” That said, funds that pay revenue sharing and the other half are in a com-
these are my “best guesses” regarding future 401(k) litigation: pany stock fund that pays no plan-operating fees—participants
First, let’s look at past 401(k) litigation. There have been two invested in the mutual funds end up paying the entire cost of
major waves of high-profile litigation—company stock cases and operating the plan. In this case, ask yourself, “Are the expenses
revenue-sharing cases. In many ways, the company stock law- being allocated fairly?” While law does not require “fairness,”
suits were predictable, because company stock is a nondiversi- plaintiffs’ attorneys like to point out when the behavior of 401(k)
fied investment, meaning that the losses can be large—perhaps fiduciaries is fundamentally unfair.
even total. As a general principle, lawsuits are generated by large From a legal perspective, the issue is whether the alloca-
losses—and where large losses occur, so does litigation. tion of the revenue sharing is prudent. There is little guidance
The second wave dealt with revenue sharing. The claims about the proper allocation of revenue sharing in 401(k) plans.
were that excessive amounts were being paid by mutual funds Therefore, a plan sponsor may believe that its allocations are
to recordkeepers, advisers and consultants, who “shared” them. appropriate because nothing prohibits them. On the other hand,
The plaintiffs’ attorneys also argued that the cost of those “indi- from a plaintiffs’ perspective, nothing in the law supports a con-
rect” payments was embedded in the investments, making them clusion that revenue sharing can be allocated without analysis
unreasonably expensive. In some cases, those payments were and decisionmaking by the fiduciaries.
explained poorly or nondisclosed. That brings us to a second One more thought on the subject: There is analogous guid-
principle of litigation—if money is moving from one person to ance from the DOL about the allocation of expenses, saying that
another without being clearly disclosed to, and evaluated by, the plan committees must make prudent decisions about it, mean-
fiduciaries, the likelihood of litigation grows. ing the committees must engage in a process to make informed
and reasoned decisions. Based on that guidance, the failure to
Another feature of the company stock and revenue-sharing
evaluate the allocation of the revenue sharing may be a fiduciary
cases is that the rules about fiduciary responsibility were unclear.
breach. The key is to be attentive to this issue because, as Yogi
For example, how responsible is a plan committee in evaluating
Berra said, “The future ain’t what it used to be.”
the company stock investment? When does company stock need
In my next column, I will discuss other issues ripe for litigation.
to be removed from a plan? After years of litigation, we have
more but incomplete clarity. In regard to revenue sharing, the
courts are split on the responsibilities of plan committees to use Fred Reish is chair of financial services ERISA practice at
the “purchasing power” of their plans to select lower-cost invest- the law firm of Drinker, Biddle & Reath. A nation recog-
ments. And there is not much guidance about how to evaluate nized expert in employee benefits law, he has written four
money paid from investments to providers. On that last point, books and many articles on ERISA, IRS and DOL audits
the Department of Labor (DOL) 408(b)(2) disclosure regulation and pension plan disputes. Fred has been presented the
will significantly impact the information given to plan commit- Institutional Investor Lifetime Achievement Award and the
tees and their responsibility to evaluate it. PLANSPONSOR Lifetime Achievement Award. He is one of
So, what will future 401(k) litigation be about? One poten- the 15 individualsnamed by PLANSPONSOR magazine as
tial issue is the allocation of plan expenses among participants’ “Legends of the Retirement Industry,” and also one of five
accounts. For instance, some investments pay revenue shar- individuals acknowledgedas Retirement Plan Adviser
ing to service providers and thereby pay part or all of the plan’s Legends by PLANADVISER magazine.
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