Since 2020, there have been nearly 20 new class action settlements on this topic. In response, the US Chamber of Commerce has begun filing amici briefs in the cases that have not yet been settled. If you can’t recall the last time you heard of an amicus brief in a case at a lower level it’s because it is extremely unusual.
In March of 2022, the Department of Labor urged 401(k) firms to exercise extreme caution in investing in cryptocurrency. In the DOL’s words, investing in crypto would implicate the firm’s fiduciary duties. “Under ERISA, fiduciaries must act solely in the financial interests of plan participants and adhere to an exacting standard of professional care. Courts have commonly referred to these prudence and loyalty obligations as the "highest known to the law." Fiduciaries who breach those duties are personally liable for any losses to the plan resulting from that breach. A fiduciary's consideration of whether to include an option for participants to invest in cryptocurrencies is subject to these exacting responsibilities.”[1] The DOL focused on the possibility of risk, urging that those risks made allowing cryptocurrency options in plans would be problematic. “These investments present significant risks and challenges to participants' retirement accounts, including significant risks of fraud, theft, and loss.” In urging this caution, the DOL referenced the Supreme Court’s decision in Hughes.
Back in September of 2021, we summarized this case and noted the potential problems it could raise for plan sponsors and advisors.[2] At issue in Hughes is whether a defined-contribution plan charged its participants fees higher than would have been charged in alternative investment products. The Hughes case had some unusual facts, which included not only “investment options with fees much higher than the investors should have or could have tolerated, but also, importantly, the sheer number of investment options that the plan” offered. “Respondents also offered a dizzying array of hundreds of investment options, many of them duplicative options in the same investment style. This led to higher fees …and imposed an onerous burden on participants to select between so many options and an equally onerous burden on fiduciaries to monitor them.” Nevertheless, this case may have raised hopes among plaintiffs’ counsel. The Court’s ruling in Hughes eschewing a categorical rule may be what plaintiffs are focusing on, rather than on the odd facts of the Hughes case.
Since 2020, there have been nearly 20 new class action settlements on this topic for a total of $68 million.[3] In response, the US Chamber of Commerce has begun filing amici briefs in the cases that have not yet been settled. If you can’t recall the last time you heard of an amicus brief in a case at a lower level (like the district court or court of appeals) it’s because it is extremely unusual for those briefs to be filed in such cases. But the strategy makes sense since it’s the mere filing of the lawsuits that the Chamber of Commerce is seeking to prevent. The Chamber alleges that plaintiffs are cherry picking data at the cost of the costs of plan management.[4]
Experts suggest that one key to avoiding lawsuits like those filed in the cases against Xerox Corp., the Kroger Co., Humana Inc., Exelon Corp., and many others is to look to benchmarking. This may be the time to consult with your financial advisors, recordkeepers and ERISA counsel about benchmarking opportunities. In doing so, you may want to consider benchmarking what options you have included in your plan fund line up, and the total number of them, in addition to the fees charged to participants. You may want to ensure that your last benchmarking report has occurred within a recent time period. It may also be time to undertake either a request for information or a request for proposals with help from your advisors.
[2] https://www.bcgbenefits.com/blog/supreme-court-watch-hughes-v-northwestern-university and https://www.bcgbenefits.com/blog/for-you-or-against-you
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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