401(k) Lawsuits: What Are the Causes and Consequences?

401(k)s are now the main type of employer-sponsored retirement plan. However, these plans are still relatively new, having started as a supplement to defined benefit plans in the early 1980s. As a result, many questions remain unanswered about the legal obligations of the plan fiduciaries, who are responsible for administering the plans and their assets. While the law is clear that plans must be administered for the “sole benefit” of participants, it is less specific on many details: for example, how plan fiduciaries should select the type and number of investment options or determine a reasonable level of fees. Indeed, instead of laying out specific regulations or guidance, the Department of Labor’s (DOL) general approach to overseeing 401(k)s has been through its own enforcement actions or through litigation (mostly privately initiated). This brief looks at the broad complaints that motivate the litigation and how the threat of litigation may affect the retirement industry. This brief is organized as follows. The first section introduces the three main reasons why litigation is brought in the first place: 1) inappropriate investment options; 2) excessive fees; and 3) self-dealing. It then explains that, from the courts’ perspective, fiduciaries’ main responsibility is to follow a prudent process in making plan-related decisions. The section also shows how common each type of litigation is and highlights that recent lawsuits have been more focused on excessive fees than past lawsuits, when investments were more of a focus. The second section turns to the potential effects of this litigation on 401(k) plans. In particular, it points out two major trends that have coincided with the lawsuits: 1) a rise in the use of low-cost index funds, which are perceived as less vulnerable to litigation; and 2) a downward trend in investment and administrative fees. The section also describes one potential negative consequence of litigation – the fear of plan fiduciaries to offer innovative plan options, such as lifetime income products.