Jerry Schlichter, once dubbed ‘the Lone Ranger of 401(k) plans’ by the New York Times, has had his share of favorable media coverage.
But his highest praise may be from a handful of federal judges that presided over the claims his firm brought against fiduciaries of some of the country’s largest retirement plans.
More than one judge described Schlichter’s efforts as tireless. Another claimed him to be an advocate of the “highest caliber.” One said he assumed “breathtaking” risk litigating complex ERISA cases against some of the country’s most powerful corporations.
In a 2013 ruling against Cigna’s 401(k) plan, the presiding judge noted that no other law firm “was willing to accept such a daunting challenge,” and estimated the ERISA suits brought by Schlichter have resulted in $2.8 billion in annual savings for American workers and retirees.
All told, Schlichter, Bogard & Denton, the boutique St. Louis-based law firm Schlichter founded nearly 30 years ago, has won more than $330 million in settlements for 401(k) participants, and upwards of $100 million in attorneys’ fees since the first lawsuits were filed in 2006.
But now, the 401(k) Lone Ranger finds himself reloading after two federal courts dismissed excessive fee suits brought by Schlichter, potentially marking a sea change in ERISA claims going forward.
A judge in the Northern District of California dismissed a claim against Chevron’s $19 billion 401(k) plan. Participants in the plan alleged Chevron breached its fiduciary obligations by offering expensive retail shares of mutual funds, an underperforming money market fund, and by using an asset-based revenue-sharing agreement with the plan’s recordkeeper.
Some ERISA attorneys have characterized the Chevron case as the first in a new generation of suits brought against large plan sponsors, an assessment Schlichter takes issue with.
“I don’t see the Chevron case as being qualitatively different from the earlier cases,” Schlichter told BenefitsPRO. “This is one of the largest plans in the country that offered 10 mutual funds in a higher share class than were readily available. We’re making the same argument that we successfully made in the Tibble case.”
In dismissing the Chevron case, Schlichter contends the lower court violated the 9th Circuit Court of Appeals’ en banc unanimous decision in Tibble v. Edison, the case famous for being the only excessive fee retirement plan lawsuit heard by the Supreme Court.
Earlier this year, the 9th Circuit ruled that Edison fiduciaries had an ongoing duty to monitor and remove more expensive retail class shares in its retirement plan.
In the Chevron case, the court granted a motion to dismiss the claim on the grounds that the plaintiffs failed to provide sufficient evidence to support the allegations—or in legal speak, failed to make a claim.
Schlichter “respectfully” disagrees with decision, and is mounting an appeal.
“There are lower cost share classes that are absolutely identical to the funds offered in the plan, except for the fees. It’s our contention that that fact does state a claim,” he said.
“It’s a theme and theory we’ve advanced throughout these cases—that wasting participants’ money is a fiduciary breach,” added Schlichter. “In the Tibble case, 11 appellate judges unanimously said plan sponsors need to be cost conscious, and that wasting money amounts to a breach.”
An appellate hearing has not been scheduled. When the case is heard, Schlichter will ask the 9th Circuit to reverse the lower court decision and send the claim back for a trial.
“If the law is followed, we’re confident the case will be reinstated,” he said.
403(b) claim against U Penn tossed
In 2016, Schlichter, Bogard & Denton filed a raft of excessive fee claims against prominent universities that sponsor massive 403(b) retirement plans.
This fall a court dismissed a claim against the University of Pennsylvania’s $3.8 billion retirement plan. The plan offered 78 investment options through two recordkeepers. Fees on the investments ranged from 4 to 87 basis points.
The plaintiffs alleged the asset-based charges for recordkeeping in the plan, which were paid for through revenue sharing from some of the mutual funds, resulted in excessively high fees for plan administration, a claim common in the defined contribution cases Schlichter has litigated.
Under an asset-based model, fees go up as account values increase. Schlichter and his team argued that structure created unjustified revenue for record keepers, and eroded participants’ retirement savings.
The judge in the Penn case ruled the asset-based model was more favorable than a flat per-participant record-keeping fee, noting that under the latter structure, participants with lower account values pay a higher percent of their assets for plan administration.
Schlichter feels the court erred on the recordkeeping claim, and failed to consider other ways to levelize plan fees.
“Uncapped asset-based revenue-sharing agreements are a fiduciary breach,” said Schlichter. “Just look at the S&P this year. It’s up 22 percent. You can’t justify charging 22 percent more in recordkeeping fees just because the market has gone up. That’s a windfall for the recordkeeper for doing absolutely nothing.”
So far, the suit against Penn is the only 403(b) case to be dismissed. Schlichter is confident the decision will be reversed on appeal.
“We’re not arguing all revenue-sharing agreements are illegal,” added Schlichter. “But it’s a fiduciary breach to allow them to be uncapped.”
He cites an increasingly common form of charging recordkeeping costs that caps the total plan expense and then applies charges to individuals based on their account balances, thereby assuring participants with lower account values are not charged a disproportionately high fee.
Schlichter says that form of fee levelization has been insisted in several of the excessive fee cases he has settled.
Within the retirement industry, some stakeholders claim the scrutiny plan sponsors are placing on fees could stifle productive innovations in plan design. Schlichter thinks the argument is a red herring.
“To say the attention to costs comes at the risk of prudent innovations sounds like a desire to return to the past, which was the Wild West,” said Schlichter.
“It’s not a zero-sum game with plan design,” he added. “Fiduciaries have to look at cost and prudence. The guiding beacon always remains—are you operating a plan to the sole benefit of participants. If that leads you to innovation, then great.”
As for his own retirement, Schlichter, 68, doesn’t see it in the horizon.
“I remain deeply engaged and intend to continue to be indefinitely,” he said. “My grandmother lived to be 111. I’m planning to outlive her.”