Callan reviewed 165 lawsuits filed against mid- to mega-sized defined contribution (DC) plans ($175 million to $10 billion-plus) between January 2019 and August 2022, to provide an analysis of trends in litigation centered on the fiduciary duties outlined in the Employee Retirement Income Security Act (ERISA). For ERISA litigation, 2020 was a bumper year, with 73 new cases filed. After the U.S. Supreme Court agreed to hear Hughes v. Northwestern in September 2021, the rate of new lawsuits slowed. As a result, 2021 saw only 39 lawsuits. After the decision was issued in January 2022, the rate of litigation resumed. As of August 15, this year has seen 32 new lawsuits.
DC Plan Lawsuits: The Highlights
The complaints span industries, plan sizes, plaintiffs’ counsel, and allegations.
- Plan sponsors in the financial services industry were most likely to be subject to these complaints (20%), closely followed by health care (17%; excludes biotech and pharmaceuticals, which were tracked separately).
- While a high volume of law firms filed new lawsuits (38) during the time period under review, 21 of those filed only one lawsuit.
- The law firms with the highest number of cases settled less often than law firms with fewer cases. Law firms that settled more often (over 55% of the time) filed 10 or fewer lawsuits during this period.
- Nearly 50 lawsuits in this review were settled (28%). Across all cases to have reached a settlement, it took approximately two years to get to a settlement from the date the suit was filed.
- One-third of settlements were with plans containing funds that were proprietary to the plan sponsor, referring to those funds in which the plan sponsor allegedly receives a benefit from the inclusion of the funds. The settlements for plans with proprietary funds were 2.5x those without proprietary funds ($15.8 million compared to $6.3 million).
- The most common allegation was a breach of prudence, cited in 77% of cases compared to 61% that included a claim of breach of loyalty. These breaches are tied to varying elements of ongoing plan management: 83% of lawsuits challenged some facet of fund selection, and 63% focused on the target date fund suite. Also, 75% challenged administrative fees and other elements of plan services.
- The median plan assets in lawsuits filed during this time period was $1.7 billion, and the median participant count was 17,500. The average amount of plan assets was $5.7 billion with 67,500 participants on average.
What DC Plan Sponsors Need to Know: The ongoing pace of new litigation reinforces the need to continue managing and reviewing fees, funds, and services. Plan sponsors should continue to carefully monitor investment options, review plan fees, and follow any written governance documentation, including the investment policy statement. Additionally, plan fiduciaries should document the process and decisions made around vendor selection and fees to demonstrate their due diligence.
This is the first of two posts on litigation topics. In our second we explore four key themes that emerged from our analysis.
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