The rash of 401(k) lawsuits only promises to heat up, and not just because of recent settlements that have attracted plaintiffs' attorneys to the industry.
The just-finalized DOL rule could open up a whole new class of lawsuits as the rules get tougher and more parties are considered to be acting as a fiduciary to the plan and its participants. So it’s especially interesting to hear from Jerry Schlichter, who led (one might say “dragged”) DC providers and plan sponsors into court, expound on the biggest mistakes that plan advisors can make as well as life after Tibble.
In a recent interview, Schlichter notes that advisors make the mistake of not drilling down into the details of the plan. Held to the very high standard of a prudent expert, advisors need to makes sure that fees are reasonable by benchmarking fees and investments. Though the majority of cases have been brought against providers and large plan sponsors, advisors that represent smaller plans should not feel safe, Schlichter warns. Not only is the DOL more focused on costs (much more than a decade ago when Schlichter filed his first lawsuit), but advisors face reputational risks if lawsuits ensue.
Left unsaid is the fact that a majority of plans under $10 million rely on a so-called “emerging” plan advisor with limited experience who may not be able to adequately benchmark fees and investments, in addition to dealing with complex issues. Regardless of the tools and software developed to shore up these inexperienced advisors, not providing comparatively reasonable services based on the fees paid could be considered a fiduciary breach, which may also encompass ongoing referral fees.
Schlichter jokes that life after Tibble is not so bad. “It takes about a minute,” he notes, “for plans to determine if fees are reasonable.” He also cites the Tussey v. ABB decision, in which the sole-benefit rule was violated when the record keeper used DC fees to subsidize corporate services like payroll services and the DB and health care plans.
Acting as a co-fiduciary could put advisors in a difficult position when executives make decisions like hiring a mutual fund that a friend manages but that would not pass simple screens. If advisors can’t talk strong-willed executives out of making rash decisions, they might be better off resigning.
So lawsuits are here, and more are coming. That might actually be a good thing if it leads plan sponsors to hire more experienced advisors.
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.
