The concept of “context as king” in these ERISA-based lawsuits stems from the duty of prudence…. Since these cases turn on whether a plaintiff can sue for fees they feel are unreasonable, ensuring proper recording of the context involved in fee decisions may be key. Yet, plan sponsors may be asking themselves if a single decision will suffice?
According to the experts, 2023 ranks among the highest for number of lawsuits against plan administrators in the last decade or so, and 2022 had nearly 100 such suits.[1] In fact, between 2021 and 2022, there have been close to 20 new class action settlements on this topic for a total of $68 million.
One reason for the spike in these kinds of cases is the 2021 Supreme Court ruling in Hughes v. Northwestern. This summer, the lower court ruled on the Hughes case, and its findings further muddied the waters on recordkeeping fees. Legal experts predict future guidance from the USSC.[2] In the interim, plan sponsors and plan administrators may want to consider the issue of recordkeeping fees, which seems to be the most contentious and conflicted area of this case. Even more granularly, plan sponsors may want to consider how they keep records of the context and circumstances around their recordkeeping fees. By doing so, they may be in a proactive position should they need to prove their fees align with those of competitors if they are sued. Here’s a brief review of the history and recent rulings.
When it comes to Hughes, the emphasis on the context of the plaintiff’s claims seems to be the spark that has lit the litigation bonfire concerning plan sponsors. As we said in the past: “The Court’s ruling in Hughes eschewing a categorical rule may be what plaintiffs are focusing on, rather than on the odd facts of the Hughes case.” In August of 2022, we noted that one specific takeaway from the increase in cases was clear. “Hughes may indicate that offering investment options that may be niche or suited for a limited number of employees could be troublesome.”
As a point of history, the Supreme Court ruled on Hughes ultimately returning it to the lower court, the Court of Appeals for the Seventh Circuit. In that case had some unusual facts, which included not only “investment options with fees much higher than the investors should have or could have tolerated, but also, importantly, the sheer number of investment options that the plan” offered. “Respondents also offered a dizzying array of hundreds of investment options, many of them duplicative options in the same investment style. This led to higher fees …and imposed an onerous burden on participants to select between so many options and an equally onerous burden on fiduciaries to monitor them.”[3]
It is this opinion, from the Seventh Circuit, which may cause confusion and conflict. That’s so because of how much emphasis the court placed on the facts of the plaintiff’s complaint and an about face in terms of the trend of these cases. “[T]he decision appears to reverse what previously appeared to have been a trend favoring tighter controls on excessive fee litigations at the pleading stage.”[4]
The concept of “context as king” in these ERISA-based lawsuits stems from the duty of prudence. That duty, owed by a fiduciary to its beneficiaries is context specific.[5] “At times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”[6] Since these cases turn on whether a plaintiff can sue for fees they feel are unreasonable, ensuring proper recording of the context involved in fee decisions may be key. Yet, plan sponsors may be asking themselves if a single decision will suffice? Some experts now say, after the Seventh Circuit decision that failing to monitor fees for reasonableness may be grounds for an ERISA suit.[7]
This presents a tough balancing act for plan sponsors between not imposing too much compliance homework when it comes to recording their decisions concerning fees, yet also ensuring their fees continue to align with the circumstances should those circumstances change. “A fiduciary need not constantly solicit quotes for recordkeeping services to comply with its duty of prudence. But fiduciaries who fail to monitor the reasonableness of plan fees and fail to take action to mitigate excessive fees — such as by adjusting fee arrangements, soliciting bids, consolidating recordkeepers, negotiating for rebates with existing recordkeepers, or other means — may violate their duty of prudence.”[8] Many of our recent newsletters and blog posts have addressed some of this guidance and discussed practicing “good fiduciary hygiene,” including maintaining documents, hiring outside advisors to assist them, and documenting all decisions in minutes, pay attention to fees and sales loads.[9]
Now may be the right time to discuss whether your current compliance procedures align with the need to record context and circumstances around recordkeeping fees. Plan sponsors may also want to meet with their legal and regulatory counsel concerning whether an evaluation of their current recordkeeping fees is appropriate.
[1] https://www.planadviser.com/401k-litigation-continues-fever-pitch
[3] https://www.bcgbenefits.com/blog/increase-in-lawsuits
[5] https://www.millerchevalier.com/publication/erisa-edit-hughes-take-two-its-all-about-context
[7] https://www.millerchevalier.com/publication/erisa-edit-hughes-take-two-its-all-about-context
[8] https://www.millerchevalier.com/publication/erisa-edit-hughes-take-two-its-all-about-context
[9] https://www.bcgbenefits.com/blog/compliance-concerns-hughes-vs-northwestern
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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