A spate of legal settlements involving financial firms' DC plans this year illustrates the potential risk of sponsors offering their own proprietary products due to alleged ERISA violations.
Placing proprietary products, such as mutual funds and collective investment trusts, in defined contribution lineups is perfectly legal, and financial firms often include them in their own plans. However, plaintiffs' lawyers have found enough alleged flaws in some plans' procedures and practices to convince sponsors that settling is cheaper than fighting in court even though sponsors admit no wrongdoing.
"A lot of companies can do everything right and still get sued," said Emily Costin, a Washington-based partner for Alston & Bird LLP who represents sponsors.
She declined to comment on specific cases but said factors influencing a settlement decision could include a sponsor's risk tolerance, the facts of the case, the amount of coverage by the sponsor's insurer, the court where a complaint is filed and even the judge hearing the complaint.
"ERISA cases are expensive to litigate," said Kai Richter, a plaintiffs attorney and partner at Nichols Kaster PLLP, Minneapolis, offering a rare agreement with defense attorneys.
His firm has secured several settlements in proprietary-product ERISA lawsuits, and it is representing plaintiffs in several pending cases.
"The fundamental allegation is: If a non-conflicted fiduciary follows a prudent process, would they choose these funds or retain these funds?" said Mr. Richter, who declined to comment on specific cases. "A settlement reflects the recognition of significant litigation risk."
Based on dates that settlement terms were announced, recent proprietary-product agreements include McKinsey & Co. ($39.5 million) and Huntington Bancshares Inc. ($10.5 million) in August; Fidelity Investments ($28.5 million) and Neuberger Berman Group ($17 million) in June; and J.P. Morgan Chase & Co. ($9 million) in May.
Management consultant McKinsey & Co. isn't a financial services firm. It was sued along with MIO Partners Inc., an affiliate that provided proprietary investments for two McKinsey DC plans.
Other settlements this year include Putnam Investments ($12.5 million) in April; SunTrust Banks Inc. ($29 million) and Invesco Holding Co. (U.S.) Inc. ($3.5 million) in March; and M&T Bank Corp. ($20.9 million) in January.
These settlements include those pending formal court approval as well as those that have received approval. Defendants in each case denied wrongdoing.
Last year, ERISA proprietary-product settlements included Franklin Resources Inc. ($13.9 million); Massachusetts Financial Services Co. ($6.9 million); SEI Investments Co. ($6.8 million); and Eaton Vance Corp. ($3.5 million).