As MEPs grow, ERISA lawsuits rise with them

As companies seek efficiency, lower cost and reduced fiduciary headaches by joining a multiple-employer plan, the MEP providers are encountering the same ERISA challenges to their 401(k) or 403(b) plans as those faced by single-employer sponsors.

Allegations range from excessive investment fees to poorly performing investments to inadequate monitoring of administrative costs.

Attorneys representing the retirement industry and consultants who advise it predict that as MEPs become more popular and gather more assets, their providers face greater litigation risk. Pooled employer plans, authorized by the SECURE Act, only entered the market as of Jan. 1, 2021, and haven't been subject to ERISA lawsuits.

"The provider is more vulnerable," said Kent Mason, a Washington-based partner at Davis & Harman LLP, noting that small companies joining an MEP lack sufficient assets to attract the plaintiffs' bar. "The small hardware store is not much of a defendant."

Mr. Mason represents retirement industry clients in ERISA lawsuits. Like others interviewed for this article, he declined to comment on specific cases.

"Some members of the plaintiffs' bar are comparing multiple-employer plans to a com- parable-sized single-employer plan," said Mr. Mason. "It's just wrong."

Plaintiffs' attorneys are "misunderstanding" the nature of MEPs when they try to make cost comparisons to single-employer plans, he said.

For example, MEP providers must deal with many different payroll systems among their sponsor clients, he said. The cost of communication to many sponsors is more complex and the cost of marketing to many clients is different than challenges faced by even the largest single-employer plans, he added.

Plaintiffs' lawyer Jerome Schlichter disagrees that MEPs present significant differences in 401(k) plan management vs. single-employer plans.

"From our perspective, these are not difficult, complicated plans to record keep," said Mr. Schlichter, founding and managing partner of Schlicter Bogard & Denton LLP, St. Louis, who represents clients suing MEPs for alleged ERISA violations. "We don't see a big difference in multiple employer plans compared to single-employer plans."

Among his clients were participants in a $4.9 billion asset MEP 401(k) plan run by Insperity Holdings Inc. The participants sued Insperity, some Insperity subsidiaries and Reliance Trust Co., the plan's trustee, in 2015.

In October 2020, the defendants, while admitting no wrongdoing, settled the case. Reliance paid the full $39.8 million settlement. Plaintiffs had accused Reliance of making "imprudent" investment decisions, including selecting and retaining "its own high cost and poorly performing" investments, the original complaint said.

Another MEP settlement — Mr. Schlichter's firm wasn't involved — was a $10 million payment, announced in July 2020, by the National Rural Electric Cooperative Association. The association was sued in July 2019 by participants in a $12.07 billion asset MEP 401(k) plan, alleging excessive fees in violation of ERISA. The association admitted no wrongdoing in the case of Intravaia et al. vs. The National Rural Electric Cooperative Association, et al.

An earlier MEP settlement of $6 million was announced August 2018 in the case of Clark et al. vs. Oasis Outsourcing Holdings Inc. et al. in which participants in an MEP 401(k) alleged an assortment of high fees. The defendants admitted no wrongdoing related to the $1.84 billion asset plan.

A picture of MEP ERISA lawsuit trends is still evolving as because most cases are still working their way the through the courts, including MEPs that have recently become defendants. Among the recent MEP provider lawsuits:

• In March, participants sued MEP provider Nextep Inc., alleging that its $283.1 million 401(k) plan charged high fees for poor-performing investment options. A company representative didn't respond at the time, or again last week.
• In February, participants in a 401(k) plan, with $2.4 billion in assets, run by MEP provider Wood Group U.S. Holdings sued the provider and investment adviser NFP Retirement Inc. They contended that fiduciaries failed to offer lower-cost share classes and claimed a conflict of interest between the two defendants in offering certain investments. "The lawsuit contains numerous inaccuracies pertaining to our fees, services and processes," and NFP spokeswoman wrote in an email at the time. A representative for Wood Group didn't respond at the time, or again last week.
• In September 2020, MEP provider Pentegra Retirement Services was served with a lawsuit alleging the charging of high administrative fees, failing to monitor costs and failing to conduct competitive bidding for several years for administrative services relating to its $2.1 billion asset 401(k) plan. "We reject the claims and intend to mount a vigorous defense against them," the company's general counsel wrote in an email at the time. In October, another law firm representing other plaintiffs, filed an ERISA complaint with similar allegations. The lawsuits have been consolidated.
• Also in September 2020, participants in two 401(k) plans, with total assets of $4.1 billion, managed by MEP provider TriNet Group Inc., filed suit with an assortment of "mismanagement" claims, such as maintaining some higher-cost mutual funds when similar or identical funds were available in the marketplace that were cheaper and better-performing. "TriNet is committed to transparency with all fees charged on its 401(k) plans and works with an independent investment adviser to conduct ongoing benchmarking of plan fees and investment fees," a spokeswoman responded at the time.
• In June 2020 and again in July 2020, a Quest Diagnostics Inc. MEP-sponsored 401(k) plan, with $4.6 billion in assets, was sued by two different law firms representing different participants, alleging ERISA violations. The cases were consolidated. In May 2021, a U.S. District Court judge in Newark, N.J. rejected the company's request to dismiss the case.
• In May 2020, ADP Inc. was served with two lawsuits alleging ERISA violations in its MEP administration — one by employees in company participating in the multiple employer plan and one by a sponsor. In the latter, a rare case among MEP lawsuits, the sponsor claimed ADP failed to monitor the plan's record keeper's offering of products, which it alleged represented a conflict of interest. At the time, a company spokeswoman, declining to comment on both lawsuits against the $5.72 billion asset plan, wrote in an email that the MEP "works diligently to fully and properly discharge all of its fiduciary and other duties."

All asset figures above are based on the latest available data from Form 5500s, 11-K statements or lawsuits.

Because MEP provider lawsuits are relatively new, "it will be a while before the chips fall where they may," said attorney Nancy Ross, a Chicago-based partner at Mayer Brown LLP who defends retirement industry members in ERISA cases.

To reduce litigation risk, she said MEP providers must demonstrate they followed and documented ERISA procedures to avoid raising "red flags" to the plaintiffs' bar.

For example, if an MEP takes a payment out of plan assets, it must substantiate that the costs are the same as the market rate for the same services, Ms. Ross said. MEPs could get paid directly by charging participants an individual fee each quarter or annually rather than taking their fee based on a percentage of assets, she added.

The same care must be taken if the MEP offers proprietary products. "As long as it's done properly," such actions should pass muster with ERISA, she said. "You have to show you did your homework."

DC consultant Robyn Credico predicts ERISA lawsuits will continue against MEP retirement plans as MEPs gain more retirement assets and as plaintiffs' lawyers look for weaknesses in administration. MEPs "are taking on a lot more than record keeping," said Ms. Credico, the Las Vegas-based defined contribution consulting leader for Willis Towers Watson PLC.

"Some provide payroll. Some provide legal services. Some provide advice on plan design," she said. "In effect, it's a one-stop shop."

That means MEPs must justify and document their various fees. "You have to prove what you are doing is more efficient than if the employers were doing it themselves," she said.

Noting that MEP ERISA lawsuits often focus on issues such as record-keeping fees, poor performance and failure to offer lower share classes in DC plans, consultant Michael Barry asked — and answered – the question: "At whose doorstep do you lay responsibility? The entity that has the most money."

Because courts haven't offered a clear picture on MEP fiduciary liability, sponsors should pay close attention to how MEPs deal with fees and fund performance, especially to the adequacy of the process for managing these issues, said Mr. Barry, president of O3 Plan Advisory Services LLC, a part of October Three Consulting in Chicago.

Mr. Barry and other interviewees said the trend in MEP lawsuits likely will encourage plaintiffs to file similar lawsuits against providers of pooled employer plans. "If these plans are successful and a lot of money flows into them, they can expect lawsuits," he said.

"The jury is out on the extent if PEPs will be highly utilized," said Andrew Oringer, a New York-based partner at Dechert LLP, who represents the retirement industry in ERISA lawsuits."You've got a financial institution ramping up and creating an entire infrastructure. You have a new target for a plaintiff's lawyer."

Ms. Credico said, "there's not a whole lot of difference" between the MEP and PEP structures. "There's no big PEP out there now," she added. "As they grow, there will be a risk."