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

Due to recent legal victories won by 401(k) plan participants, fiduciaries of 401(k) plans who have not yet benchmarked 401(k) plan fees and expenses against market rates ought to do so in 2025. In a number of significant cases, plan members won legal battles against employers and plan fiduciaries who they claimed permitted their 401(k) plans to impose exorbitant fees and charges for investment management and/or administration. There are numerous examples, some of which are included here.

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

In 2024, the number of class action lawsuits alleging excessive fees under the Employee Retirement Income Security Act increased by 35%. Additionally, more ERISA class action lawsuits were filed using innovative arguments against defined contribution and defined benefit plans. The second half of the year saw a near-record rate of filings, accounting for the majority of the increased volume.

This rush of case filings comes after 18 months of filings at a slower pace beginning in January 2023 when plaintiff firms sorted through a backlog of cases. Nonetheless, three years in a row of record settlements have been reached in a large number of legacy cases. The gap has been filled by plaintiff firms with innovative new legal theories, such as a surge of forfeiture claims against new wellness initiatives and defined contribution plans, excessive

Frequency Up

Beginning in January 2023, the frequency of excessive fee case files decreased for 18 months; however, in the second half of 2024, the number of cases filed increased by 35%. The innovative forfeiture fiduciary-breach argument is asserted in a large number of recent cases. By allocating lost plan assets to future contribution obligations rather than deducting participant contributions, these 28 new forfeiture cases—out of the 34 total filed to date—claim that plan fiduciaries violated their duty of loyalty to plan participants.

2024 Lawsuit Trends

The increased number of law firms filing forfeiture claims, notably high-fee legacy firms like Capozzi Adler P.C. and Walcheske Luzi LLC, is the primary cause of the rise in case submissions. 28 further forfeiture cases were brought in 2024 after the first six, which were filed in late 2023 and five of which were in California, were not dismissed with prejudice. 21 cases, or the great majority, were filed in the second part of the year.

A sizable portion of the backlog in earlier instances has been resolved for the first time. Out of the 526 lawsuits filed between 2016 and 2024, there are currently 153 pending cases, which is the fewest in three years. As an illustration, 90% of the record number of cases that were filed in 2020 have now been resolved.

This seems to play a part in allowing established law firms to take on new cases.

The number of cases that plaintiff firms have filed over the past three years is displayed in the following chart. It demonstrates how many new legal firms are joining the market and how the successful Capozzi Adler (12 cases) and Walcheske (11 cases) firms continue to drive the greater amount of case files.

With 12 challenges to pension risk transfers (against nine companies), fiduciary-breach cases against health plans (21 tobacco or vaccine wellness cases), and the first two alleged excessive fee lawsuits against health plans (Johnson & Johnson and Wells Fargo), 2024 saw a significant increase in fiduciary-breach class action lawsuits against defined benefit plans. The final week of December

Two class action lawsuits alleging fraud schemes under the Affordable Care Act were brought directly against medical care providers. This is a result of class action filings paying more attention to health plans for novel fiduciary-breach claims.

From a broader perspective, class action fiduciary-breach litigation are increasingly progressing from normal challenges to plan fees and investments, culminating in challenges or objections to plan design. The lawsuits aim to alter the plan documents’ design rather than alleging that fiduciaries did not adhere to its conditions in a sensible manner. These assertions cast doubt on how plan sponsors provide advantages and choices that were previously thought to exempt settlor functions from fiduciary duties.

Settlements Hit Another Record

The number of settlements increased from 42 in 2023 and 31 in 2022 to 53 in 2024. In 2024, $203.3 million was paid out in settlements for cases that were reported. This is less than the record settlement amount of $352.8 million in 2023. Nevertheless, the entire settlement amount was nearly equal to the 2023 total, excluding the outlier $124.6 million payout in the Ruane, Cuniff & Goldfarb Inc. case [which had a sizable portion of plan assets invested in one erratic biotech stock]. However, for the third consecutive year, the average settlement decreased. In 2024, the average payment was $4.6 million ($3.2 million excluding the $69 million settlement from UnitedHealth, a case involving special conflicts of interest evidence). Eliminating the aforementioned anomalies from every year.

Learn More

This is a content preview space you can use to get your audience interested in what you have to say so they can’t wait to learn and read more. Pull out the most interesting detail that appears on the page and write it here.