In an increasingly litigious environment, defined contribution plan sponsors say they are being forced to choose the cheapest options for their participants — which are not necessarily the best investment options.
Over the past couple of years, the defined contribution industry has been hit with a wave of lawsuits that blame corporate pension sponsors for selecting target-date fund options that underperform. The lawsuits claim that these pension plans are in violation of the Employee Retirement Income Security Act of 1974.
“There is a history of litigation where plan sponsors in some respects felt like the best space to be is in the lowest cost thing,” said Dennis Simmons, executive director for the Committee on Investment of Employee Benefit Assets. “That’s not necessarily the best thing for plan participants.”
In 2022, there were 11 lawsuits filed against defined contribution plans that included the same target-date funds. These suits claimed that the corporate plan sponsors violated ERISA’s prudence standard by choosing funds that underperformed for their defined contribution plan participants. Companies from Booz Allen Hamilton to Microsoft were named in these suits, many of which were dismissed.
This isn’t the first time law firms have targeted plan sponsors. Around 2016, another wave of lawsuits hit corporate plans, going after them for high fees, transparency concerns, and fund strategies.
The ERISA Industry Committee has described this latest wave of litigation as “cookie-cutter lawsuits.” One corporate pension chief investment officer, who asked to remain anonymous given litigation concerns, noted that they have seen instances where it was clear that the attorneys had duplicated a prior complaint, because they failed change the name of the company named as the defendant in the lawsuit.
Regardless of their merits, such suits can be costly for corporations. While some companies have pushed back in court, others have chosen to settle out of court, according to Simmons.
“Once you’re into discovery and expenses involved there, most plans settle in that case because they’re not in the business of managing retirement plans,” Simmons said. “They’re trying to offer this as an employee benefit.”
What makes this situation more challenging, the CIO said, is that state and district courts have ruled differently on the matter, leaving companies based in multiple jurisdictions with a lack of clarity about how to proceed.
“The standards for them even bringing a case to court need to be consistent and maintained,” the CIO said. “These frivolous copycat suits can cause a distraction and a real legal cost.”
Institutional Investor previously reported that while some plan sponsors may want to add lucrative investment options like alternatives strategies to their defined contribution plans, these lawsuits, among other issues, have made any deviation from the status quo challenging.
CIEBA is advising that its members to focus on “process, process, process” when they select and monitor defined contribution plan options. This means holding and ensuring attendance of regular investment committee meetings, ensuring that those meetings align with the corporation’s policy standards, and assiduously keeping records of their work.
“If there is litigation, that’s the first thing that the plaintiffs look for,” Simmons said.
Said the CIO, “The whole basis of ERISA is your process. It doesn’t have to say you have to be perfect in your selection in hindsight. The lawsuit should be around a broken process, not about picking the wrong investments.”
Simmons sees this as a silver lining for plan sponsors facing litigation, as it’s pushing them to be proactive by reviewing investment lineups, making changes to the portfolio options, and memorializing it in meeting minutes.
“Where things stand right now, at least the CIEBA members, it’s not like they’re spooked by any of it — they’re not afraid of it,” Simmons said. “What it does is just focus fiduciaries again on the process.”
