With the proliferation of litigation against 401(k) plans, it should be noted that it focuses on only one thing: cost. Litigation surrounding share classes, proprietary funds, and overall plan expenses is all about plan participants shelling out too much in fees or at least that’s what these plaintiff ERISA litigators are arguing about.
Eventually ERISA litigators will be done with litigation concerning fees. There will be those ERISA litigators that will still focus on fee litigation until they waste their time arguing cases where a plan participant is paying 5 basis points more than maybe they should because the sad fact is that many ERISA litigators don’t understand that such litigation is effectively trying to get blood from a stone. We will eventually reach a point of 401(k) fee litigation overkill if we aren’t there already.
The next frontier in 401(k) litigation isn’t going to be about fees and it’s going to be the issue that most plan sponsors and providers neglect. It’s also going to need the right climate and that climate is going to be a bad market for investing. In my opinion, a fertile ground for litigation is going to be surrounding losses incurred by plan participants where they direct their own investments under ERISA §404(c) and the plan sponsor doesn’t provide enough information for participants to make informed investment decisions. Too many plan sponsors think that they are bullet proof under ERISA §404(c) as it offers them absolute liability protection from losses incurred by plan participants when they exercise control over their investments. The problem is that it’s not the case, protection is a sliding scale and is dependent on how much a plan sponsor informs participants about investments and the investment options offered under the plan. Too often, plan sponsors offer little information and no investment education to plan participants. I’m sure that’s the case with many large plans, which makes them easy pickings for hungry ERISA litigators.
People laughed at me when I suggested that small to medium sized 401(k) plans were at risk for litigation. I’m sure there will be those that laugh at my suggestion that the next big thing of 401(k) litigation will be ERISA §404(c), time will tell again if I’m right again.