The overturning of summary judgments doesn’t happen very often, but with a recent surge in 401(k) lawsuits, so too is there a recent increase in these motions.
Take, for example, the recent case of Principal Life Insurance Co., facing allegations that it had breached its fiduciary duty by engaging in prohibited transactions. A lower district court found that Principal was not a fiduciary to a 401(k) plan using its Principal Fixed Income Option. But an appeals court disagreed and said that that ruling was an error.
More than 530 lawsuits have been tracked by Boston College since 2006; 60 percent of them are still pending. Many of the lawsuits have the same basis, a lack of transparency that results in unpredictable performance, undisclosed fees, conflicts, self-dealing, unknowns around continued monitoring of a plan and — one of the more prominent factors — the dicey definition of what a fiduciary is.
According to the Department of Labor, an employer has a fiduciary duty “to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan’s investments in order to minimize the risk of large losses.
In addition, they must follow the terms of plan documents to the extent that the plan terms are consistent with ERISA. They also must avoid conflicts of interest. In other words, they may not engage in transactions on behalf of the plan that benefit parties related to the plan (such as other fiduciaries, services providers, or the plan sponsor).”
Yet Fidelity, John Hancock, Mass Mutual, BlackRock, Morgan Stanley and even Goldman Sachs — the very firms in charge of many of the world’s largest retirement funds — have all been sued by their own employees because of issues surrounding their 401(k) plans. If a firm can’t take care of its own people, how can it take care of yours?
It doesn’t stop there.
Over the last few years, some of the world’s largest corporations like Boeing, Walmart and International Paper have written big settlement checks to their employees, while under scrutiny for pushing retirement plans with excessive fees, among other seemingly opaque actions.
When these companies went to court, the Wall Street firms behind the products placed the blame on them, pointing to their role of fiduciary versus that of the seller of the product. So the providers were off the hook — that is, until their own employees came down on them for similar issues.
The investment firms ran their employee plans just as they would their client plans, facing a major conflict of interest: their own products being built into the plans, together with high fees and oftentimes questionable performance.
Combine that with acting as fiduciaries on their own plans — as the sponsor — and things got complicated. Arguing that it was not a fiduciary to its own employees, Principal not only received subpar legal advice, it came across as uncaring and more concerned about products than its employees or clients, in an obvious conflict of interest situation.
The courts have been forced to take the lead in policing retirement plans. It is something the industry didn’t do, nor did the Securities and Exchange Commission and — to some extent — neither did the Department of Labor. Trillions of dollars in retirement money has been improperly managed, hurting consumers and the shelf life of 401(k) savings. In fact, the average 401(k) lasts only 5.5 years in retirement.
Clearly, this is unacceptable, especially as we face questions around Social Security’s survival and an underfunded pension fund system.
Kudos to the higher courts and the Supreme Court for taking charge. This is one area where aggressive class action litigation has been very good for the consumer.
Most plans are in violation of the landmark 401(k)-fee case of Tibble v. Edison, a ruling that led to requiring that providers offer lower fee share classes (at least when available in an existing fund or a similar fund). Edison also led to other requirements, like ongoing monitoring for performance issues by an independent third party.
Yet there is still a lot of work to do to truly protect consumers. As recently as this month, a federal judge found that Fidelity was not a fiduciary and it was legal for it to accept fees as “shelf space” payments.
This bucks the trend of independence, open architecture and conflict-free payments in the industry, and reinforces the need for an independent fiduciary for the plan.
When assessing your own 401(k), it’s important to address concerns about these lawsuits with your provider. If they aren’t familiar with the slew of controversy and criticism around these suits, it’s likely they’re part of the problem.
These cases, at their core, are about best practices for the consumer. The good news is that 401(k) plans are getting better as we continue to demand more transparency, though we still have a long road ahead.
A good independent fiduciary to help the plan sponsor is becoming more and more common in an industry that is continually lowering costs, fees and improving plan structure and performance.
