Parties to Settle 401k Fiduciary Breach Lawsuit in Reichert v. Juniper Networks, Inc.

San Jose, CAOn November 11, the District Court for the Northern District of California is expected to approve a settlement in Reichert v. Juniper Networks Inc. The class action ERISA lawsuit, like many before it, alleges that the fiduciaries of the Juniper Networks, Inc. 401(k) Plan breached their legal duty to plan participants because of the way that they managed the participants’ retirement savings.

The allegations are familiar. The resolution is now becoming familiar. But it seems fair to ask why this keeps happening. Should employees who are trying to save for retirement be better protected by the law? The question answers itself.

The allegations 

The lawsuit, brought on behalf of roughly 7,000 plan participants in the $1.4 billion Juniper Networks 401k plan, claimed that the fiduciaries failed in their legal obligations by:

• authorizing the plan to pay unreasonably high fees for retirement plan services;
• failing to objectively, reasonably, and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost;
• maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories;
• authorizing the plan to pay unreasonably high fees for managed account services; and
• failing to disclose to participants the information that they needed to make informed investment decisions.

Let’s be honest. Most people who participate in employer-sponsored retirement plans do not spend their time monitoring retirement plan investments. They rely on generic/good advice that saving for retirement and that participating in a 401k plan is a good thing. They might check their periodic statements, but otherwise they leave the task of managing investments to the professionals.

ERISA fiduciary duties – what the law says and what it doesn’t

Retirement savings are generally long-term investments. You start saving at 30 and you keep saving until you’re 70. With what’s left of Social Security, you’re likely to be okay, we think... One part of the plan, for many people, is an employer retirement plan. The biggest part of this is likely to be a 401k plan. Your employer has to manage it fairly and for your benefit.

ERISA Section 404 requires that your employer plan managers act solely in your interest and in the interest of other beneficiaries. They must also pay the reasonable expenses of the plan. “Reasonable plan expenses” may include recordkeeping and participant communications, legally required plan updates and the cost of outsourced administrative expenses. Whether an expense is reasonable is largely evaluated not in terms of result (investing is a gamble, after all), but in terms of process.

The law does not provide granular guidelines for plan managers/fiduciaries about important questions, such as:

• what is an unreasonable fee;
• what is adequate review of an investment portfolio;
• are some kinds of investment funds completely off limits; and
• how much information is necessary for participants who are expected to make informed decisions about their own money.

Recent lawsuits seem to suggest that it may be a bright line breach of fiduciary duty to include pricier, riskier, actively-managed funds in the menu of options available to a 401K plan participant. But for the most part, in the absence of bright lines, the emphasis in fiduciary breach ERISA lawsuits tends to be about process -- whether fiduciaries actually had a systemic process for reviewing investment results and expenses.

Settlement expectations  

           
Given the lack  of guidance, it is not surprising that many fiduciaries, like those of the Juniper Networks, Inc. 401(k) Plan chose settlement. Analysts write that:

“[p]lans under $1b settle for approximately 30-40% of the damages model, whereas plans over $1b settle closer to 10% of the alleged damages model, or 1-5 basis points of plan assets.  Proprietary cases involving investments from the plan sponsors, like the Wells Fargo case, generate the highest settlements.” 

In more general terms, it appears that recent breach of fiduciary duty lawsuits are more likely to settle, but the overall settlement amounts appear to have declined during the last few years. Of course, the final payout to individual plan participants depends on a number of other factors including the size of the class, the structure of the deal and attorneys’ fees.

What’s wrong with this story?

The narratives on both sides of 401k plan fiduciary breach ERISA lawsuits seem to have become set in stone. Plan participants decry careless management practices and investment managers’ relentless quest for profit at the expense of retirement savers. The retirement plan industry and defense attorneys denounce aggressive practices on the part of plaintiffs’ lawyers. Sometimes they name names. It has become a bit of Kabuki theatre.

As workers anticipate that Social Security may make up less of their income when they retire, saving through employer-provided retirement plans seems like a sensible idea. But the safety of those nest-eggs seems to have declined since the adoption of ERISA in 1974. Perhaps the solution lies in legislation that reduces the legal and financial risks on both sides of the equation.