The nuisance value

When I write about the need for plan sponsors to understand their responsibilities as plan fiduciaries and their potential liability if they ignore their duties, I hear the same complaints about my ideas. The complaint which was even leveled by other ERISA attorneys is that small 401(k) plans never get sued over plan costs or a failed ERISA Section 404(c) process for participant-directed plans.

While I don’t suspect that best ERISA class action litigators will bother with a $2 million 401(k) plan, one of the major reasons that small plans haven’t been sued is that ERISA litigators haven’t gotten there yet. They are too busy with larger plans and I assume that once the larger plans are taken care of, some ERISA litigators will pursue smaller ones. I have already seen one litigator placing ads trying to solicit potential clients who are participants in 401(k) plans using insurance company platforms. So while smaller plans haven’t been targeted yet, who is to say that trend will continue?

In addition when it comes to litigation against smaller plans, perhaps people think too big. Perhaps the litigation is more of the nuisance kind, perhaps as a threat of litigation by a former, aggrieved employee with no hopes of taking it to court and just trying to settle it for $25,000 or less.

For example, I worked for a third-party administration firm that had a penchant for getting sued by former employees (no, not me). I remember one administrator who was an Orthodox Jew who was a bit incompetent and a lot insubordinate. For one reason, he took some time off and agreed to make up hours by working on Sundays. The problem was that he wasn’t there when he said was there (the front door records don’t lie), so he was terminated. So instead of going away quietly, he hired an attorney and threatened litigation. He claims that he was fired because he was an Orthodox Jew. Well, the owners of the company were Jewish and while I was never their fan, they went out of the way for him because he was Jewish. The case was frivolous, but my bosses paid him $4,000 to go away. They wrote it off as a nuisance value because hiring an attorney to defend a lawsuit would cost more than $4,000. So suppose when times are tough and employees are either laid off or terminated or cost, what would stop a former employee from threatening litigation against the employer because the employer never bothered to implement an investment policy statement for their participant-directed 401(k) plan or bothered to review the investment options or offer any participant education. Am I that far off? Aggrieved former employees have sued or threatened to sue for less. So perhaps the potential liability for small plans that plan sponsors need to be concerned with are not class action lawsuits, but nuisance threats. Plan sponsors don’t have to give a weapon to aggrieved former employees if they don’t load the gun with a poorly managed retirement plan.

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