ARA Calls Out Litigation ‘Sheriff’ in Fiduciary Regulation

Among other changes, the American Retirement Association has requested that the Labor Department change the Best Interest Contract (BIC) Exemption to eliminate reliance on the plaintiffs’ bar as an enforcement mechanism.

Perhaps the most controversial aspect of the current fiduciary regulation is its emphasis on enforcement of the regulation by litigation. In fact, and as the ARA’s comment letter points out, “It is a certainty that if the prohibition on mandatory arbitration of class claims goes into effect on January 1, 2018, there will be an increase in litigation.”

The comment letter goes on to explain that the plaintiffs’ bar has already taken note, and “one need look no further than the dozens of class action lawsuits filed against fiduciaries in recent years to appreciate the catastrophic impact this could have.” And, in the “a picture is worth a thousand words” category, the comment letter includes information on some of the settlements in that litigation to date and an analysis of the fees collected by plaintiffs’ attorneys (as class actions, a contingency fee is frequently applied).

Defendant: Ameriprise Financial
Settlement: $36.5 million
Attorney Fee: $9.0 million

Defendant: Bechtel
Settlement: $26.2 million
Attorney Fee: $7.7 million

Defendant: Boeing
Settlement: $57.0 million
Attorney Fee: $20.8 million

Defendant: Caterpillar
Settlement: $22.3 million
Attorney Fee: $5.83 million

Defendant: Cigna
Settlement: $47.8 million
Attorney Fee: $12.8 million

Defendant: General Dynamics
Settlement: $20.9 million
Attorney Fee: $5.7 million

Defendant: International Paper
Settlement: $41.5 million
Attorney Fee: $11.5 million

Defendant: Kraft
Settlement: $14.2 million
Attorney Fee: $4.7 million

Defendant: Lockheed Martin Corp
Settlement: $84.3 million
Attorney Fee: $22.3 million

Defendant: Nationwide
Settlement: $190.0 million
Attorney Fee: $50.0 million

Defendant: Novant Health
Settlement: $32.0 million
Attorney Fee: $10.8 million

Source: Multnomah Group

Few of these cases have been fully adjudicated in the courts, and most of those that have ultimately favored plan fiduciaries. But defendants in the vast majority of these cases, having spent years tied up in discovery, depositions, and pleadings, instead — and in some cases on the precipice of going to court, chose to settle.

As the comment letter notes, an enforcement mechanism that relies on this same plaintiff’s bar to act as the “sheriff” “…is likely to enrich the plaintiff’s bar at the expense of the very savers the regulation seeks to protect.”

Other Comments

Also highlighted in the ARA comment letter was the need for clarification in the definition of Level Fee in the BIC Exemption to permit a Level Fee Fiduciary to receive transaction-based compensation under an offset arrangement that falls within the parameters of Advisory Opinion 97-15A (the so-called “Frost” opinion). The current BIC includes a presumption that receipt of third party payments will always result in biased advice that cannot be mitigated through an “offset” arrangement — even though that is, as the comment letter notes, in conflict with the Department’s position in Advisory Opinion 97-15A and Question 7 of Part II of the Department’s Conflict of Interest FAQs. There, the Department very specifically stated that nothing in the Regulation “…alters the analysis of Advisory Opinion 97-15A.”


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Finally, between the timing required to comply with President Trump’s admonition to reconsider the impact of the fiduciary regulation, and the very real possibility that it might result in “significant system modifications to accommodate a new wave of revisions,” the ARA notes that “the potential extra cost and time can be easily avoided by extending the applicability date while the Department completes its review.” The ARA has recommended that the applicability date be pushed back beyond June 9, 2017, until at least Jan. 1, 2018, and that transitional relief with regard to the Best Interest Contract Exemption should be extended until at least July 1, 2018. Moreover, if the Department chooses to amend or rescind the Regulation as part of its review, the applicability date should be extended to provide adequate time for financial services firms to modify compliance systems — noting that “a period of 24 months from the date final changes are promulgated should be the earliest applicability date to ensure an orderly transition period.”

Add Your Comments

One Comment

  1. Michael Wolff
    Posted April 18, 2017 at 10:37 am | Permalink

    How did these settlements (and don’t forget the judgments in Tussey v. ABB Inc. and Tibble v. Edison Int’l) come “at the expense of the very savers the regulation seeks to protect”? These settlements increased plan assets and reformed atrocious practices that had cost participants retirement savings and enriched sponsors and service providers. The settlements did not take a penny out of any plan participant’s account.

    Even the early cases some plaintiffs lost resulted in reformation of 401(k) plans to lower-cost investments that benefited thousands of participants (look at the UTC plan).

    The DOL never pursued these actions. Only because these plaintiffs’ lawyers (and I am one of them) persevered through years of effort and expense did we get the vast reformation of 401(k) plans that we have today, which has benefited millions of American workers.

    Private litigation is not perfect, but it works far better for individual victims than relying on a Government agency that is not adequately staffed or funded to conduct such litigation on its own.

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