Almost all of the high profile ERISA cases involve large . . . very large . . . retirement plans. Typically, those plans have over $1 billion in assets. Think of Deere, Walmart, Caterpillar, and so on.
Flying largely below the media radar, though, are an increasing number of small plan ERISA lawsuits. Of course, most people have heard of the Supreme Court decision in LaRue, but many may not realize that it involved a small plan.
At my law firm, we have seen the following small plan cases in the past few years:
- An $8 million plan, where the participants asserted that the plan sponsor imprudently selected the investments and overpaid the adviser. The plaintiffs also argued that the adviser became a fiduciary because he took over the decisions about the investments. In other words, rather than asserting that the adviser gave non-discretionary fiduciary investment advice, they argued that he became a discretionary fiduciary investment manager.
- A $10 million plan where the plaintiffs asserted that the recordkeeper/TPA was overpaid by “secret” revenue sharing. Essentially, the plaintiffs argued that the direct charges by the recordkeeper, when combined with the non-disclosed revenue sharing, amounted to unreasonable compensation, which is a prohibited transaction.
- A $400,000 plan where the adviser gave the plan sponsor the name of a potential new recordkeeper. The recordkeeper, after taking over the case, embezzled the $400,000 in plan assets. The plan sponsor sued the adviser, saying it was a fiduciary and improperly recommended the recordkeeper, resulting in large losses. This case reflects the efforts by plaintiffs’ attorneys (and FINRA claimants’ attorneys) to argue that advisers with limited fiduciary responsibilities (e.g., investment advice) are fiduciaries for every thing they do. While that is not the law, those attorneys are often helped by poorly drafted adviser agreements.
- A $20 million plan where the adviser earned approximately $1 million in commissions over a seven-year period. The adviser and his broker-dealer were sued by the plan fiduciaries for prohibited transactions and fiduciary breaches. Obviously, the primary claim was for excessive compensation. However, there was also a claim that the adviser set his own compensation (e.g., “dial-a-commission”) and that the insurance company provider aided and abetted that conduct.
The moral of this story is that advisers, TPAs and plan sponsors are not immune from litigation just because they work with or sponsor small plans.
In each of these cases, the attorneys’ fees and court costs (just for the defendants) were in excess of $100,000 and, in several of the cases, in excess of $400,000. Obviously, that is a risk that should be insured. If you could be considered a fiduciary—even if it would be “stretching” the definition, you should buy fiduciary liability coverage. Even if you think you have coverage, you should double-check or have your attorney review the policy. I am constantly surprised by the number of people who think they have coverage, but who, upon close examination, do not.
These lawsuits tend to be expensive and last for years. Do what you can to minimize the emotional and financial drain. Have well-drafted service agreements. Develop good risk management practices. Be properly insured.