At the latest NAPA Summit, a session led by Tom Kmak, the well-respected Founder and CEO of Fiduciary Benchmarks, and Tom Clark from the Wagner Law Group and formerly Schlichter Bogard seemed to strongly indicate that there has been little to no value as a result of the many and growing number of ERISA lawsuits against defined contribution plans. Another industry luminary suggested that private equity was funding some of these lawsuits.
With the appointment of Dan Aronowitz, former President of Encore Fiduciary, an insurer against lawsuits the new, as EBSA Director, vocal critic of these lawsuits suggesting a special ERISA court and opining that the DOL, not litigators should be protecting plan and participants, it seemed like a good time to ask some critical questions to both plaintiffs’ and defendants’ attorneys (Tom Clark declined to comment) including:
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Whether there has been any value to ERISA litigation and, if so, please enumerate.
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Whether you have evidence it is being funded by PE/VC firms.
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What effect will the new EBSA director, Aronowitz, who has not been shy about his views, have?
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Do you agree with him that we should have a special ERISA court, like with patents, because it is so technical?
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What effect will recent SCOTUS decisions like Chevron et al. have?
Here are some of their responses.
Jerry Schlichter of Schlichter Bogard, who heralded the run on ERISA lawsuits, cited multiple judges who have written that litigation has benefited participants $2.8 billion annually while educating the DOL and has dramatically changed industry practices.
Another plaintiff’s attorney, Carl Engstrom of Engstrom Lee, noted that total 401(k) plan costs have declined 30% from 2009, when 5500 forms became publicly available, until 2022, with the steepest declines among mega plans, which are the most frequent litigation targets. Noting that increasing plan sponsor and advisor sophistication, technology advances to lower costs, DOL disclosure rules, and professional advice have helped lower costs, litigation has also played a part.
According to Engstrom, even the threat of litigation has helped, resulting in more plans searching for lower-cost share classes and conducting periodic RFIs and RFPs. Citing the recently United Healthcare $69 million lawsuit, in which the CEO pushed to retain Wells Fargo target dates to maintain their benefits business with the bank, litigation will make plans more cautious.
Litigation has resulted in more transparency, lower fees, and stronger competition, noted Matthew Eickman, Chief Legal Officer at the Fiduciary Law Center and former RPA. Fred Reish, the father of fiduciary and partner at Faegre Drinker Biddle & Reath, noted that investment costs and total plan fees have dropped, though this cannot be traced to a single cause.
Nevin Adams, former Chief Content Officer at ARA, admitted that litigation has made “…all of us more sensitive to the duties and obligations under ERISA, it has also spawned some frivolous attempts to wrest a quick settlement.” Along with financial damage, lawsuits result in “wasted time and energy” by plan fiduciaries making them “reluctant to stick their neck out in adopting new plan designs.”
Reish agrees that plans are less willing to consider new services and investments like guaranteed income, while Eickman conceded that litigation may have fueled the race to zero and created a “nation of timid fiduciaries.” That fear, Eickman noted, may be keeping them from choosing value over costs, particularly target date funds and QDIAs.
Engstrom did not know of a single instance where a company has cancelled their 401(k) plan because of litigation, nor have any switched to safer DB plans, nor has it resulted in layoffs or bankruptcy. “…litigation is just regulation and enforcement through private means,” stated Engstrom.
No one thought that the Aronowitz EBSA appointment would be bad, with Engstrom thinking it would be good to have someone who understands the business, though he did note that his “white papers have become more vitriolic and less objective in recent years.” Eickman thought it would result in fewer DOL amicus briefs, at least against plans, with Reish stating that “Aronowitz will focus on limiting baseless lawsuits.” Adams admitted that, “he won’t be able to throttle the plaintiffs bar, but I expect to see less ‘collusion’ with that group.
Though Aronowitz thinks that the DOL should supplant litigation to protect participants, Schlichter noted that, “Before we pioneered excessive fee litigation, there had NEVER been a case brought…by any law firm in America or by the DOL.” With less resources and a clear bias, it’s hard to see how the DOL could replace the good effects of litigation.
Adams and Reish were not opposed to an ERISA court but Adams is not optimistic with Engstrom stating, “This is a profoundly dumb idea,” noting that, “Any benefit from improved sophistication is massively outweighed by the risk of judicial capture by idealogues.”
And most were unsure what effect recent SCOTUS decisions would have on ERISA lawsuits.
Finally, none of these experts have heard of any PE or VC firm funding ERISA litigation, though it is common in some other areas. Defending the amazing DC system is laudable, but not at the expense of objectively considering important issues, which some litigation has addressed, making improvements when needed and not fear-mongering without facts to promote the arguments of those with vested interests appearing to be neutral.
#ERISA #Litigation #Helpful #Harmful