Attorney finds niche practice litigating excessive 401(K) fee charges
By Catherine Martin
The Daily Record Newswire
ST. LOUIS — When St. Louis law firm Schlichter Bogard & Denton first started looking into pursuing litigation against companies in relation to excessive 401(K) fees, no other law firm had brought forward such litigation before.
That was likely because of the risk “and the staggering amount of resources that it would take to bring these claims,” managing partner Jerome Schlichter said.
The risk paid off for Schlichter, however, who has made a niche practice out of 401(k) cases.
Last week, the firm announced that it had settled a case with Boeing over allegedly excessive 401(k) fees, securing $57 million for the plaintiffs, who were Boeing employees.
The amount, according to a press release from the firm, is the second largest ever in 401(k) excessive fee history. The largest was also a Schlichter case — attorneys earlier this year negotiated a $62 million settlement on behalf of Lockheed Martin employees and retirees.
Staggering risk
Ian Ayres, a lawyer and an economist who is a professor at Yale Law School, said he would definitely agree with the premise that Schlichter and his law firm “really have taken the lead on excessive fee litigation concerning 401(k) plans.”
“There have been other people that have been asking other questions about 401(k) [plans], but he’s the first one to see how excessive fees are the problem, and to really craft the litigation strategy to take it on,” Ayres said.
He agreed that the risk and the cost were likely reasons no one else had pursued litigation before, and said it also relates back to the fact that the Department of Labor and Washington regulators “were not sending clear signals” in support of such litigation.
“There wasn’t much leadership in Washington,” Ayres said. “Schlichter’s litigation has been leading the Department of Labor to use its substantial power more aggressively in these cases.”
But when Schlichter first started looking into 401(K) fees, he had no idea that would happen, that the cases would result in such large settlements or even if litigation would be profitable at all.
About 10 years ago, Schlichter said the firm, a personal injury firm, started getting more and more questions from its clients about their 401(K) plans, which he descried as “America’s retirement plan.”
“People were asking about how they can figure out what is going on in their plan, whether they have enough to retire on, and were expressing concerns about not being able to have the amount of savings for retirement they thought they would have or having to work more years than they thought they had to,” he explained. “There were also concerns about figuring out what the fees were.”
Schlichter said the firm spent a year and nine months looking into industry practices and getting familiar with the details of 401(k) industry practices.
“It’s very, very opaque. It’s difficult to determine what’s going on in 401(k) plans,” Schlichter said.
Schlichter said he was “frankly amazed” that even though there are over 500,000 401(k) plans in the U.S., and the laws say that fees must be reasonable and investments must be prudent, there had never been a claim brought for excessive fees “by anyone in history.”
“What happened in this area was in a closet with no scrutiny and no limits, in a situation where there’s no employer incentive to avoid excessive fees, to avoid imprudent investments because it doesn’t affect the employer’s bottom line,” he said.
Some employers “do it right,” he said, but others weren’t. When Schlichter attorneys decided to file the case, they knew it would be “very, very expensive” and a risky proposition that “would be vigorously defended.”
“There had been no cases brought and the reason was, in my view, because of that staggering risk and the challenges of resources that would have to be brought to that table,” Schlichter said.
When asked why his firm decided to take the risk, he said the firm “felt that this was something that was a need.”
“Because the American retirement system has shifted its risk of fees and market performance to employees, and no one was protecting their interest by bringing enforcement actions or litigation,” he said. “It certainly was not for the faint of heart and without a strong belief that there was a wrong here that needed to be corrected to improve the retirement assets of American workers, no one would bring such a case.”
Reaching settlements
Schlichter’s first settlement in 401(k) fees was in 2013, when the firm reached an agreement with Cigna and Prudential Insurance Company for a $35 million settlement. The next was a $30 million settlement over the International Paper Company’s 401(k) plan.
Other settlements followed, including the $62 million settlement reached with Lockheed Martin in July.
In the Boeing case, attorneys filed a joint motion on Nov. 5 before Judge Nancy Rosenstengel in U.S. District Court for the Southern District of Illinois seeking preliminary approval of settlement.
In an email sent out to Boeing employees last week, Tony Parasida, senior vice president of human resources and administration said that settlement “is a reasonable approach to avoid the additional expense of continued litigation.”
“It’s not an admission of wrongdoing, and Boeing maintains that it has prudently managed and overseen the [voluntary investment plan] at all times,” he continued.
The settlement calls for distributing the fund among those who participated in the plan between 2000 and 2006, after deducting attorneys’ fees and court costs.
The court will hold a hearing early next year to determine whether to give the settlement final approval.
A fading niche?
The case is among several Schlichter has in the balance right now, including another case Tibble v. Edison, which was argued before the U.S. Supreme Court in February — the first time the high court heard such a case. Schlichter said both sides agreed the case “would affect every 401(k) plan in America.”
In May, the Supreme Court, with a 9-0 vote, remanded the case to the 9th Circuit “to consider petitioners’ claims that respondents breached their duties within the relevant 6-year period… recognizing the importance of analogous trust law.”
The case remains pending.
Schlichter said there are two other 401(k) cases he is working on now, as well.
The biggest role of Schlichter’s litigation, Ayres said, has been “helping to increase the salience of the excessive fee problem.”
“I think plan fiduciaries, in part because of Schlichter’s litigation, it’s now more on their radar screen that they should worry and have some concern about the competiveness of their plans’ fees,” he said.
The niche, however, is one that will eventually fade away. Fees have already started to come down and “some of the most egregious practices” have stopped, Schlichter said, which likely means the end of cases to bring forward. But frankly, Schlichter, said, if there are no more cases, it’s “a good thing.”
“We’ll be very pleased if there are no more cases, because that will mean fees have come down to the point where they should and American workers and retirees will benefit,” he said.
