If fee and fiduciary regulations aren’t enough to push retirement plan sponsors and their financial advisors toward best practices, the mounting litigation should. Dozens of lawsuits seeking class action status have been filed against plan sponsors for allegedly mismanaging their plans in a variety of ways, and there’s no cease-fire in sight.
“We’re in it for the long haul,” says Jerry Schlichter, the founding and managing partner at St. Louis-based law firm Schlichter Bogard & Denton LLP. “We didn’t go down this road to bail out.” Over the past decade, he has filed 18 lawsuits pertaining to 401(k) plans, including four this year.
“We initiated the area of litigation,” says Schlichter, who handled the class action suits that settled in 2015 against Lockheed Martin Corp. (for $62 million) and Boeing Co. (for $57 million). “We were virtually alone for years at the beginning.” That’s changing.
Last year, the Supreme Court unanimously ruled on Tibble v. Edison International, also filed by Schlichter, that a fiduciary “has a continuing duty to monitor investments and remove imprudent ones.” Although it remanded the case to an appeals court, which dismissed it in April, the Supreme Court’s favorable ruling has helped the genie out of the bottle.
Other law firms have since fired off lawsuits to a string of financial services firms—including New York Life Insurance Co., Neuberger Berman Group, Morgan Stanley and Edward Jones—for allegedly breaching their fiduciary duties as 401(k) plan sponsors. The plaintiffs in these suits, which seek class-action status, are former employees.
“It’s good to see the light of day shining on 401(k) plans after being in a dark closet for decades,” says Schlichter. “It’s a good thing for American workers and retirees.” Further, he says, “It’s gratifying to see fees have come down in the industry.”
He hopes to drive similar results in academia. In August, he filed separate lawsuits against 12 prominent universities—including Yale, Duke, New York University and the Massachusetts Institute of Technology—for alleged breach of fiduciary duties for their multi-billion-dollar retirement plans. The cases largely cite excessive fees. Most are 403(b) plans; MIT offers a 401(k).
Not surprisingly, plan sponsors are tapping financial advisors for help in the tricky retirement plan arena. According to Boston-based Cerulli Associates, total corporate DC plan assets experienced a five-year (2010-15) compound annual growth rate of 7.6%, compared with 8.3% for advisor-sold corporate DC plan assets.
“Cerulli is most positive on the potential for growth in the RIA-sold segment of advisor- sold DC assets,” says Jessica Sclafani, who leads Cerulli’s U.S. retirement research. “Select RIAs are now going head-to-head with national brand name consulting firms and winning DC plan business in the mid-market ($25 million to $250 million in assets).”
Cerulli believes the Department of Labor’s conflict-of-interest rule “will spur another round of continued specialization,” says Sclafani, by forcing some advisors to choose to focus on either retirement plans or traditional wealth management. Cerulli also expects the regulation “will push a portion of the ‘dabblers’ out of the employer-sponsored retirement plan market,” she adds.
Legal Perspectives
Schlichter says it’s very important for advisors to make sure plan sponsors understand their duty is to run a plan for the exclusive benefit of their plan participants. Second, sponsors need to know that fiduciaries are held to the standard of a prudent financial expert and must be aware of industry practices. “If those two beacons are followed, the sponsor should be OK,” he says.
Plan sponsors should know if institutional mutual fund rates are readily available and realize that using retail rates can be a red flag, he says. “Size matters,” he adds, noting that a bigger pool of assets can command lower fees. Awareness of a fund’s performance history and a manager’s longevity in running a fund are also important. A brand new manager with no experience in the investment style can be a red flag, he says.