Fee Benchmarking Should Be a Priority in the Wake of 401(k)

401(k) plan fiduciaries that have not benchmarked 401(k) plan fees and expenses against market rates recently should do so in 2025, in light of legal victories secured by 401(k) plan participants. In several noteworthy cases, plan participants prevailed in lawsuits alleging that employers and plan fiduciaries allowed their 401(k) plans to charge excessive administrative and/or investment management fees and expenses. A few examples are noted below, but there are several others.

Huizinga v. Genzink Steel Supply & Welding Co. In August 2013, the U.S. District Court for the Western District of Michigan ordered 401(k) plan fiduciaries to restore $321,000 to participants after concluding that they breached their fiduciary duties and paid excessive service provider fees to the plan’s third-party administrator.
Nolte v. Cigna Corp. In July 2013, the U.S. District Court for the Central District of Illinois approved a $35 million settlement involving CIGNA and its 401(k) participants, alleging, among other things, breaches of fiduciary duty and payment of excessive service provider fees.
Tibble v. Edison Int’l. In March 2013, the U.S. Court of Appeals for the Ninth Circuit ruled that Edison International’s 401(k) plan fiduciaries breached their duties by including retail shares of three mutual funds without first investigating the possibility of institutional-share class alternatives.
United Health Care. In April 2021, After a long-fought legal battle, UnitedHealth Group agreed to pay $69 million to settle a class-action lawsuit alleging breaches of fiduciary duties under the Employee Retirement Income Security Act of 1974. The litigation, initiated in April 2021, centered on claims that UnitedHealth retained a poorly performing suite of target-date funds, the Wells Fargo Target Fund Suite, on its 401(k) investment menu. According to the plaintiffs, UnitedHealth’s financial relationship with Wells Fargo influenced the decision to keep these funds.

A service provider’s fee disclosure, standing alone, does not necessarily give the plan fiduciary adequate information to assess whether a fee is reasonable. Benchmarking a service provider’s fee against its peers allows plan fiduciaries to make “apples to apples” fee comparisons and, thus, more informed decisions. Fiduciaries should periodically solicit and review bids from at least three service providers to obtain fee and expense data and/or hire an independent consultant to conduct the search and make related recommendations. We will continue to monitor this trend in 2025.

401(k) Excessive Fee Litigation Spiked to ‘Near Record Pace’

Encore Fiduciary reported a 35% increase in ERISA excessive fee litigation, in part driven by a surg

The frequency of Employee Retirement Income Security Act excessive fee class action litigation surged by 35% in 2024, with even more ERISA class action cases filed with novel theories against defined contribution and defined benefit plans. Most of the increased volume took place in the year’s second half, as filings spiked to a near-record pace.

This deluge of case filings follows 18 months, starting in January 2023, with a more moderate pace of filings, as plaintiff firms worked on a backlog of cases. However, many of the legacy cases have been settled with three consecutive years of record settlements. Plaintiff firms have filled the void with creative new legal theories, including a wave of forfeiture claims against defined contribution plans and new wellness programs, excessive fees, and Affordable Care Act fraud theories against defined benefit plans and providers.

The following summarizes the key developments in 2024 ERISA, including excessive fees and class action litigation.

Frequency Up

After 18 months of a lower frequency of excessive fee case filings starting in January 2023, the number of cases filed surged in the second of 2024 by 35%. Many of the recent instances assert the novel forfeiture fiduciary-breach theory. These 28 new forfeiture cases [with 34 total filed to date] allege that plan fiduciaries breached their duty of loyalty to plan participants by applying forfeited plan assets to future contributions obligations instead of reducing participant contributions.

2024 Lawsuit Trends

The driving factor behind the increase in case filings is the expanded number of law firms, including excessive fee legacy law firms like Capozzi Adler P.C. and Walcheske Luzi LLC, filing forfeiture claims. After the six initial forfeiture cases filed in late 2023 were not dismissed with prejudice (five were filed in California), 28 additional forfeiture lawsuits were filed in 2024. The vast majority—21 cases—were filed in the year’s second half.

For the first time, a significant number of the backlog in prior cases has been settled. The 153 pending cases (out of 526 cases filed from 2016 through 2024) is the lowest number in three years. For example, 90 percent of the record number of cases filed in 2020 have now been settled. This appears to be a factor in freeing legacy law firms to pursue new cases.

The following chart shows the number of cases filed by plaintiff firms in the last three years. It shows the prolific Capozzi Adler (12 cases) and Walcheske (11 cases) firms continue to drive the higher volume of case filings and how many more new law firms are entering the space.

2024 saw a substantial increase in fiduciary breach class actions lawsuits against defined benefit plans, with 12 challenges to pension risk transfers (against nine companies); more fiduciary-breach cases against health plans, with 21 tobacco or vaccine wellness cases; and the first two purported excessive fee lawsuits against health plans (Johnson & Johnson and Wells Fargo). In the last week of December, two class action complaints were filed directly against medical service providers, alleging fraud schemes under the Affordable Care Act. This reflects the increased attention to health plans for new fiduciary-breach theories in class action filings.

Considered more holistically, class action fiduciary-breach lawsuits continue evolving to challenges or objections to plan design, escalating from routine challenges to plan fees and investments. Instead of claims that fiduciaries failed to follow the terms of plan documents prudently, the lawsuits seek to change the design of plan documents. These claims challenge how plan sponsors design plan benefits and decisions considered settlor functions immune from fiduciary responsibilities in the past.

For example, forfeiture claims are attempts to change plan design or limit fiduciary discretion under plan terms so that forfeited contributions are applied to reduce participant expenses and not future employer contributions. The pension risk transfer claims are attempts to stop plan sponsors from transferring retirement plans to annuities. The actuarial equivalence cases are attempts to change the mortality tables that sponsors use in their plans to calculate alternative annuities choices.

In sum, as plaintiff firms get more creative, we are seeing more challenges that benefit design.

Settlements Hit Another Record

There were 53 settlements in 2024, up from 42 in 2023 and 31 in 2022. The total amount of settlements in 2024 for reported cases was $203.3 million. This trails the record $352.8 million in settlements in 2023. Still, without the outlier $124.6 million settlement in the Ruane, Cuniff & Goldfarb Inc. case [involving a significant percentage of plan assets invested in one volatile biotech stock], the aggregate settlement amount was close to the 2023 total.

The average settlement, however, continued to decline for the third year in a row. The average settlement in 2024 was $4.6 million ($3.2 million without the outlier UnitedHealth settlement of $69 million, a case that involved unique conflicts of interest evidence). Removing the outliers above from each year, 2024’s average settlement of $3.2 million is far less than the 2023 average of $5.7 million.

We believe this reflects the continuing trend that certain plaintiff law firms are willing to accept early cost-of-defense settlements before the expense of full-blown discovery. The record number of 27 settlements at $2 million or less reflects this trend of earlier and lower settlements.

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