American employees seem set to file a nearly record number of class-action lawsuits this year regarding excessive fees in retirement plans, with an increase in settlements encouraging more law firms to engage with these cases.
Encore Fiduciary, which focuses on fiduciary litigation linked to 401(k) plans, anticipates that 99 lawsuits will be brought against employers this year for allegedly overcharging in defined contribution plans, just a few short of the record 102 lawsuits from 2020. So far, as of September, 74 cases have already been filed.
Workers in these lawsuits are claiming their companies haven’t adequately shielded them from investment options that carry unusually high fees. Typically, settlements mandate employers to pay millions, most of which eventually goes back into employees’ retirement accounts after legal fees are deducted.
The surge in 401(k) litigation appears to stem from more favorable court decisions, an expanding network of plaintiffs’ attorneys, and heightened awareness among workers about investment fees.
Notable companies, like IBM and Southwest Airlines, are facing legal challenges this year relating to unsatisfactory investment choices in their 401(k) plans. IBM is being sued for offering a target-date fund that hasn’t performed well, while Southwest Airlines is facing action for continuing with a poorly performing stock fund focusing on large companies.
While IBM declined to comment, Southwest Airlines did not respond to inquiries.
Attorneys argue that the wave of lawsuits is contributing to lower fees and better protections for plan members. However, many employers contend that these lawsuits go too far, accusing attorneys of exploiting the system for their own gain.
“We’re trying to keep everyone honest,” said Charles Field, co-vice chairman of Sanford Heisler Sharp McKnight, the law firm pursuing these 401(k) excessive fee cases.
Although lawsuits concerning high fees began around 20 years ago, it took a considerable time before courts leaned in favor of plaintiffs.
“This isn’t a casual endeavor for us,” remarked Jerry Schlichter, co-managing partner at Schlichter, Bogard & Denton, which initiated the first 401(k) excessive fee lawsuit against ABB in 2006. That case lasted 13 years, culminating in a $55 million settlement for workers who had incurred significant losses.
Field noted that the U.S. Supreme Court has generally been supportive of 401(k) participants, having issued several rulings in recent years that underscore the ongoing responsibility of plan sponsors to monitor investment choices and eliminate those that aren’t wise, additionally requiring them to show that their fees are justified.
“Litigating has become easier,” mentioned Stephen Day, a partner at Jackson Walker who has defended employers in 401(k) lawsuits.
Simultaneously, more law firms are pursuing legal action against plan sponsors, encouraged by favorable settlements from lawsuits concerning 401(k) overcharging that can yield attorney fees of up to a third of the settlement amount.
Justin Bove, the chief revenue officer at Encore Fiduciary, commented that many attorneys have discovered a “viable business model” by seeking overage claims, sometimes resulting in settlements worth millions.
“The companies filing these suits genuinely seek to gain from these settlements,” Bove added.
Encore recorded 53 401(k) excessive fee settlements totaling $204 million last year, an increase from just 12 settlements worth $139 million in 2020.
Attorneys maintain that their motives extend beyond profit. “We’re not trying to put businesses out of work,” noted Field. In June, he achieved a notable $69 million settlement for 350,000 UnitedHealth Group workers. “Our focus is on litigating cases that can make a real difference.”
Experts working for the plaintiffs in the UnitedHealth case estimated damages between $276 million and $340 million. According to court documents, Sanford Heisler Sharp McKnight received a third of the settlement, equating to $23 million, along with over $735,000 in fees.
“Our plan fiduciaries always act in the best interests of plan participants and deny any allegations to the contrary. However, this settlement allows everyone involved to move forward,” the company stated.
Lawyers assert that litigation has played a critical role in lowering the costs associated with administering 401(k) plans. A study from McKinsey noted that between 2013 and 2023, recordkeeping and administrative costs dropped by 25-35%, in part due to “an increase in litigation.”
As employee awareness on these issues grows, workers are becoming more inclined to challenge their employers regarding costly retirement plans.
Schlichter remarked that inquiries about excessive 401(k) fee cases have risen as employees become more informed about their employers’ responsibilities.
“There is also an increasing awareness among employees,” Schlichter added. When people hear about lawsuits related to fees, they come to realize there could be issues with their own plans.
