Heads-up: attorneys on the prowl for 401(k) plaintiffs

August 2, 2016—An attorney in St. Louis, Mo, Mr. Jerome Schlichter, is advertising to participants in certain employer 401(k) plans to hire him in a class action against their employers. This particular attorney is well known in the 401(k) industry for suing and winning awards against a number of household name firms.

In addition most suits settle. His recent settlements include a $62 million case involving Lockheed Martin, and a $57 million case against Boeing. The list continues with Bechtel Corp., International Paper Co., Caterpillar Inc. General Dynamics Corp., Kraft Foods Global Inc., Novant Health Inc., Cigna Corp., Prudential Retirement Insurance and Annuity, and Ameriprise Financial. This last two are ironic in that these are financial service companies who sell 401(k) plans. The fact that their own employees sued them for the company plan may not bode well for their clients’ plan’s either.

The accusation in the suits are simple: employees at the company who were responsible for management of the plan (legally referred to as Plan Fiduciaries) violated their responsibility under the Employee Retirement Income Security Act (ERISA) by not making sure the fees that the plans were paying were reasonable – that’s the key word. Plan Fiduciaries must identify all plans fees, understand who is being paid what, and then adopt and consistently document a process to determine that the fees are, in fact, reasonable.

Note to Alexandria Capital clients who are reading this: you are fulfilling this obligation annually.

Mr. Schlichter’s firm has won awards or obtained settlements of over $300 million for 401(k) participants. His advertisements for new clients are to employees in Merck, Delta and, interestingly, The Evangelical Lutheran Church in America. This last organization is a 403(b), not a 401(k), indicating that non-profits are next.

If you are thinking to yourself that you have nothing to fear because the lawsuits are against very large plans and your plan is very small by comparison, you may have somewhat of a point. Fiduciaries at large plans have deep pocket and attract attorneys. But smaller plans are sued as well, and awards are won against the C-Suite officers and HR Directors. The number of lawsuits are accelerating, hitting a record in the fourth quarter of 2015.

In reality, the lawsuits are a drop in the bucket compared to what ERISA’s regulator, the Department of Labor (DOL), is winning against plan sponsors of all sizes. The $300 million that Mr. Schlichter has won over years can be assessed by the DOL’s Employee Benefits Security Administration (EBSA) over a period of 2 – 6 months (depending on how focused they are on 401k plans versus other tasks such as enforcing the Affordable Care Act). Every year the EBSA obtains awards from 2,000 to 3,000 plans and their Fiduciaries with an average award of $250,000 – $450,000 depending on the year.

If you are thinking to yourself that you don’t have to worry because you are with “Big Household Name Financial Institution (BHNF)” and they have my back (I hear a version of this every week of my life), good luck with that. BHNF firms were with all of Schlichter’s targets as well.

You have hired BHNF to record keep your plan assets (tracks whose money is whose), prepare plan documents, prepare your tax return, do plan testing, etc. In these areas they do have your back (except that if they make a mistake the regulators will blame you, not them). But in all the many other areas of ERISA compliance they absolutely do not have your back. They have their back.

Their goal in life is to sell you insurance or mutual funds. That is how they make money, so they cannot be blamed for this. Their goal is not to protect you from Schlichter or the EBSA. Think about it. Is it in their interest to tell you what your fees are and how to determine they are reasonable?

It’s in the best interest of BHNF for you not to know your fees and not to have a process that determines reasonableness. In fact, the vast majority of small 401(k) plans (and many of the large plans that have been successfully sued) pay their fees through a process called “revenue sharing,” which is a sophisticated process of hiding fees. The plan investments make X%, but the participants are told they earned X% less the fee %.

For these reasons most plan participants and (believe it or not) some plan sponsors believe their plan is “free.” That’s the objective of BHNF. In fact I’ve even seen fancy “Fiduciary Governance” training booklets published by one particular BHNF which just happens to leave out this whole “reasonable fee” obligation from the list.

In summary, when you started your 401(k) you promised, knowingly or not, to adhere to the rules found in ERISA. ERISA places great responsibilities on Plan Sponsor Fiduciaries. It should. The Plan Sponsor Fiduciaries are solely responsible for the management of the 401(k) and, therefore, will have a great impact on the future retirements of their employees. If you believe that BHNF has ANY responsibilities under ERISA think again. In fact, odds are your service agreement with them is crystal clear (to an attorney) that they have zero obligation under ERISA and that you have all of it.

At Alexandria Capital we do not have our own proprietary family of mutual funds or insurance to sell. This allows us the freedom to train Plan Sponsors properly in all aspects of compliance with ERISA. It also, unlike BHNF, allows us to legally accept delegation for some of your ERISA responsibilities so you no longer have liability for them.

If you are interested in learning more, let us know.