Three new trends are emerging in plan litigation. Here are some tips on how to help your clients—and your advisory firm—stay out of harm’s way.
As advisors, TPAs, recordkeepers and other service providers are dipping their toes into including cryptocurrency solutions for their clients, the regulators and legislators are wading in as well. It has been an active first half of 2022 in the world of crypto offerings, with general interest in regulating cryptocurrencies and digital assets coming from President Biden and specific interest about cryptocurrencies in retirement plans from Congress and the Department of Labor’s Employee Benefits Security Administration (EBSA).
When the U.S. Supreme Court issued its decision in the Northwestern fee litigation case in January 2022, the immediate question across the retirement industry was whether we would see a spike in litigation. If the rest of 2022 is any indication, the answer is yes.
Several trends have begun to emerge. First, the number of plaintiffs’ firms bringing lawsuits has continued to expand beyond the “usual” well-known players. Second, no investment, feature or service provider is immune from court challenge. Third, while there have been notable winds for the defense bar, a number of cases have moved beyond the early “motion to dismiss” stage of litigation into the more time- and cost-intensive litigation discovery process.
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There are a number of steps an advisor might consider in light of these new trends:
• Investment Options. Lawsuits have moved beyond the typical focus on active investment funds or fee comparisons against these funds. Instead, plaintiffs’ lawyers have now brought a wave of lawsuits against plans utilizing low-cost passive target date funds. While industry pushback on these lawsuits has been swift and strong, advisors may be able to proactively assist their clients with continuing monitoring and documentation of their investment recommendations and decisions.
• Investment Solutions. Lawsuits continue to focus on products and services—whether rollover advice, managed accounts or other services. With new requirements of Prohibited Transaction Exemption 2020-02 now in effect and the expanding universe of managed accounts and other solutions, advisors would serve their clients well by reviewing their diligence processes when selecting and monitoring vendors and service providers.
• Preparing for Litigation. While as a defense lawyer I disagree with blanket statements on “when” or “how often” certain fiduciary monitoring or diligence activities should be undertaken, evaluating whether or not to undertake activities such as benchmarking, RFIs and/or RFPs as well as fund reviews is a potential takeaway from the recent rise in litigation. Importantly, ERISA does not require any specific activity so there is no one-size-fits-all requirement, such as running an RFI or RFP every set period of time.
• Insurance. Insurance for both advisors who could be named and plan fiduciaries is more essential than ever. For advisors, errors and omissions and/or fiduciary insurance (especially depending on an advisor’s role) may be important to consider. For plan fiduciaries, fiduciary insurance and its relevant limits and deductibles continue to be important items to consider as well.
• Contracts. Advisory agreements—after discussion and negotiation with clients—in some cases may benefit for clarifications regarding duties, responsibilities and indemnities assumed (and not) by an advisor or a plan fiduciary.
However, regardless of these steps, there is no guarantee that a plan or advisor will be immune from litigation. As such, advisors and their clients may benefit from being “on the lookout” for plaintiffs’ lawyers asking questions about their plans or similar activities. Importantly, with the entry of more plaintiffs’ law firms into the ERISA litigation space, a lawsuit can appear with little warning, so an ongoing proactive process can serve as an essential backstop.
Taking these steps can help an advisor to be a proactive resource and better prepare for what is now an increasingly common experience.
David N. Levine is a principal with Groom Law Group, Chartered, in Washington, DC. This column originally appeared in the Fall issue of NAPA Net the Magazine.
