Last month, Pentegra Retirement Services was hit with a lawsuit involving its multiple employer plan, or MEP.
It was at least the third such excessive-fee case brought this year against an MEP provider, after ADP TotalSource was named in two separate lawsuits over its 401(k) plan in May. There have also been two recent settlements, including a $10 million agreement in a 2019 case filed against the National Rural Electric Cooperative Association, or NRECA.
This year also has seen a wild rise in the number of 401(k) lawsuits, though relatively few of them have involved MEPs.
It’s not clear whether MEPs represent the next frontier in 401(k) litigation, but the recent case filings and settlements show potential interest among plaintiffs’ law firms in pursuing more class-action claims against big MEP providers.
“As any area grows in visibility and size, inevitably it could be a potential for litigation,” said David Levine, principal at Groom Law Group. “It’s why we’ve seen lawsuits, whether it’s the MEP lawsuits you see today, or whether it is the different types of claims against service providers or the old-fashioned fee lawsuits.”
One indicator is that the law firm that pioneered 401(k) litigation, Schlichter Bogard & Denton, is behind several of the recent MEP cases. The firm, which began a barrage of 401(k) litigation in 2006, has brought dozens of cases on behalf of plaintiffs against 401(k) and nonprofit 403(b) plan sponsors, the latter of which includes colleges and universities.
In March, the law firm finished a 10-day bench trial in a 2015 case against MEP provider Insperity Retirement Services and Reliance Trust Co., which managed and controlled the plan’s investment options. The court has not yet delivered a verdict on the case, and on Sept. 21 the parties reached an undisclosed settlement, court records show. Insperity’s MEP represented nearly $3.7 billion in assets among more than 124,000 participants as of the end of 2018, data from the Department of Labor show.
Schlichter Bogard & Denton also brought the September case against Pentegra, as well as one of the lawsuits in May against ADP TotalSource. The Pentegra plan represented about $2.1 billion at the end of 2018, while the ADP plan had about $4.4 billion.
But managing partner Jerry Schlichter said those cases do not necessarily represent an area of interest for his firm.
“I would not say there is a trend or that this is necessarily going to be an area of litigation in the future,” Schlichter said. “It’s really a case-by-case situation.”
The lawsuits the firm has brought against MEP providers don’t have commonalities, he said.
“Each MEP case, like any other 401(k) case, has to be looked at on its own facts,” he said. “The fiduciary duty is the same — to have prudent investments and reasonable fees.”
One thing that separates MEP cases from some other 401(k) fee cases is that MEP providers receive compensation from the plans, while 401(k) sponsors generally do not, unless they are a financial services firm, such as a record keeper or investment provider.
Some firms, like Pentegra, are compensated at least in part for the fiduciary liability they assume by having discretion over plan administration, said Jason Roberts, CEO of the Pension Resource Institute. That can make it hard to show that the plan provider charged excessive fees, Roberts said.
“That type of case I don’t think will ever succeed in either extracting a settlement of any meaningful amount or being adjudicated in favor of the plaintiffs,” he said. “When you are asking a professional fiduciary to step in and assume those duties, there is additional work, and there is additional risk. And both of those premiums will be priced in and reflected in the value of the services.”
Plans can opt for higher levels of service, for higher costs, “because courts have routinely reminded plaintiffs that we don’t look at fees in a vacuum,” he said.
There is also a misconception that MEPs are less costly that other 401(k) plans, he noted.
A recent report by an assistant professor at Boston College Law School found that MEPs overseen by human-resources outsourcing firms, called pooled-employer organizations, on average have fees several times higher than individual 401(k)s.
In 2018, Oasis Outsourcing settled a case involving its MEP for nearly $6 million, about $2 million of which went to legal fees.
MORE TO COME
There will likely be more attention paid to MEPs and similar plans, with the first pooled employer plans, or PEPs, set to launch next year. PEPs, the Department of Labor’s answer to “open” MEPs, do not require participating employers in the same plan to have any commonalities, as MEPs do.
Both MEPs and PEPs “will be under intense scrutiny and potential targets of litigation,” a trend that’s hinted at by the recent cases filed against ADP, Greg Ash, partner at law firm Spencer Fane, said in an email.
“Litigation tends to follow the money, and the primary purpose of these arrangements is to aggregate more plan assets so as to leverage bargaining power,” Ash said. “As the plans get bigger, so will the scrutiny, and the targets on their backs.”
If litigation does persist, it could cause Congress to act, Levine said.
“Congress is trying to promote innovation to help people save for retirement,” and litigation could stifle that, he said. However, plaintiffs’ firms likely feel differently, he noted.
“Most plan sponsors just want to do right by their employees,” he said.
One consequence of the overall rise in litigation is that fiduciary insurance has become more costly, he said.
“These cases take a lot of resources to defend,” he said. Rather than settling cases, “more people are interested in defending these out, to try to see if they can get some resolution.”
CONSEQUENCE OF LITIGATION
MEPs can be an obvious target for litigation, given the amount of assets in those plans, said Nevin Adams, chief content officer at the American Retirement Association. It’s hard to know whether those plans will attract even more lawsuits, but the discovery processes in such cases could lead to different types of claims in the future, he noted. For example, the ownership of participant data has become central to some cases, he said.
“Schlichter spent a lot of time in the ERISA space and developed some judicial cred,” Adams said. “In the process of discovery, [he’s going] to stumble across other things that are potential fodder.”
Regardless, the rise in 401(k) litigation over about 15 years has made plan fiduciaries much more sensitive to fee considerations, he said.
“It’s important for people to remember that they’re dealing with other people’s money,” Adams said “If it’s not a wake-up call, it should be. To every committee out there that is just trundling along and assuming somebody else is minding the store — you’re a fiduciary and you’re supposed to be minding the store.”
Fiduciary standards have become clearer as a result of litigation, and employers have taken their duties much more seriously, Schlichter said. But there will still be potential cases in the future.
“Many plans have been improved substantially, without litigation,” he said. But “there still are employers who are [plan] sponsors who are not carrying their duties fully.”
The easiest way to avoid getting sued is to “align their conduct with adherence to a beacon,” Schlichter said. “And that beacon is operating in the best interest of the participants, by making sure that the fees are reasonable and the investments are prudent. If they do that, then they shouldn’t have anything to worry about.”
As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.