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Friday, September 24, 2021

3 Updates on Current Fiduciary Lawsuits

We often talk about living in a “fiduciary era”, and new lawsuits are still a big part of it. Plan sponsors are facing lawsuits for excessive fees, poor performing funds, and a lack of looking out for participants’ best interest. Here are a few examples we’ve noticed of the continuing trend:

Setting Precedent

The fiduciary lawsuits will be an ongoing process between collective participants and fiduciaries. There will be winners and losers on both sides of the argument. However, one thing is certain, it will not stop. With so much of awareness about the fiduciary responsibilities, the participants in the 401(k) plans will be scrutinizing their plans for possible flaws and their lawyers will be not too far to bring up a lawsuit if anything will look suspicious. For example, this week Franklin Resources has agreed to pay $13.85 million to settle fiduciary charges brought by 401(k) plan participants against its Franklin Templeton (BEN) managers for allegedly violating their fiduciary duties claiming that 401(k) managers violated their fiduciary obligations by stacking plans with Franklin’s proprietary mutual funds and failing to negotiate lower fees.

However, a few weeks ago similar lawsuit was decided in the favor of the defendant where American Century Investments won a class-action lawsuit alleging the asset manager profited from its company 401(k) plan at the expense of employees by loading the retirement plan with in-house funds. So, it is obvious that the battle will rage on with each side taking turns winning. Also, it is obvious that if you are a fiduciary, you should take a hard look at your plan and make an honest conclusion if any changes are necessary or next time you may find your name among news articles.

School’s Out for the Summer

Big universities also have to face fiduciary lawsuits and prove that they act in the best interest of their retirees. For example, New York University (NYU) was accused of inability to reduce high fees from record-keeping vendors, and investing in underperforming accounts.

Last summer thousands of employees filed a lawsuit against the school because of mismanaging their retirement plans, which allegedly resulted in $358 million of losses at two 403(b) plans. But the U.S. District Judge Katherine Forrest found that plaintiffs failed to prove the retirement plan trustees acted imprudently. Hence, NYU won this lawsuit, but such cases will most likely take place over and over again in the future, and thorough analysis and proper management of the retirement plans is the best way to avoid such litigation.

Big Fund Companies

It looks like big fund companies aren’t safe from lawsuits either. At the end of last year, major companies like Fidelity and T. Rowe faced litigation for their own 401(k) plans. Plaintiffs claim that these fund companies are offering overpriced and underperforming funds to their own participants. Many of them are using retail share classes instead of the much cheaper institutional options. While these fund companies are definitely protesting these claims, they definitely aren’t strangers to excessive fee and 401(k) lawsuits. Only 4 years ago Fidelity had to settle a different excessive fee suit.

And just last week, Fidelity was the focus another lawsuit. This time it is a class action suit for allegedly accepting kickbacks from service providers at the expense of plan participants. It is alleged that the kickbacks were required to make up for the lower revenue sharing as a result of many plans adopting low cost passive share classes.

Whether these new suits will be settled or not is yet to be seen, but it does look like some changes will have to be made.


Lawsuits from all angles are definitely still a theme this year for 401(k) plans. Whether it’s a negligence of fiduciary duty or conflicts of interest, plan sponsors need to stay on their toes. Participants (and their lawyers) will still be on the lookout for fiduciary breaches of all kinds.

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