Do Class Action Lawsuits Against Plan Sponsors Accomplish Anything?
Historically, there has been little litigation involving retirement plans. But in recent years such litigation has exploded. This began with what are known as “stock drop cases” filed following the market crash of 2008 and 2009. These cases were class actions bought against large corporate plans where publicly traded company stock was included as an investment option. The plaintiffs alleged that company stock was an imprudent investment due to a steep drop in value. Many of these cases settled for large amounts as plan sponsors were anxious to resolve these lawsuits because of the negative publicity they generated.
Other class action lawsuits have been filed against plan sponsors typically alleging excessive fees and/or imprudent investment selection. The amounts involved in these lawsuits are large, but small on a per participant basis. Most settlements and judgments have amounted to, at most, a few hundred dollars per participant.
The number of these cases continues to increase. In 2020, over 100 class actions were filed against plan sponsors. Until recently, these lawsuits involved only very large plans but now are being filed against smaller plans as well.
The US Chamber of Commerce filed an Amicus Curie brief (i.e., friend of the court) in an excessive fee suit brought against the American Red Cross. The gist of this brief is that these class action lawsuits are of no benefit to anyone other than plaintiffs’ attorneys. In its brief, the Chamber states the rapid increase in excessive fee litigation is not “a warning that retirees’ savings are in jeopardy, but proof that converting subpar allegations into settlements has proven to be a lucrative endeavor for attorneys bringing these lawsuits.”
The Chamber's brief makes a number of good points about these class action lawsuits:
There is little or no communication between the attorneys and the plan participants they purport to represent;
These lawsuits are similar from case to case and are not based on the details of any particular plan;
Most complaints are cookie cutter and simply lift allegations from complaints filed in other lawsuits - case in point, the complaint filed in a case against the University of Miami was cut and pasted from complaints in other cases right down to the typos;
The allegations in these lawsuits simply second guess, with the benefit of hindsight, the decisions of plan fiduciaries rather than alleging the use of a flawed process in making decisions; and
Plaintiffs’ attorneys have effectively been able to hide behind ERISA's perceived complexity and avoid the dismissal of these suits regardless of the merits, leaving sponsors with the choice of either expensive and protracted litigation or entering into a settlement.
The negative consequences of these lawsuits are many. Most obvious, sponsors must devote time and resources to defending against these lawsuits or pay significant settlements. The cost of fiduciary insurance has increased and there is now, arguably, too much of a focus on fees because the least expensive choice available is not always the best option.
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