Surge in ERISA Litigation Challenges Plan Sponsors and Brokers, Says Expert

A notable increase in Employee Retirement Income Security Act (ERISA) litigation since 2020 is causing substantial compliance challenges for plan sponsors, resulting in heightened vigilance among brokers and advisors. Bonnie Treichel, founder of Endeavor Retirement and Endeavor Law, emphasized in a recent discussion that this evolving legal landscape necessitates urgent dialogues about risk management within benefit programs.

The expansion of the plaintiff bar has compounded these challenges. Treichel pointed out that more legal firms have entered the ERISA litigation space, aided by technologies that reduce the cost of filing lawsuits. This influx has led to a dramatic uptick in litigation volume, indicating that plan sponsors must adopt a defensive posture while brokers need a keen understanding of the implications for compliance and plan structure.

Forfeiture Litigation Wave

One of the most striking trends is the surge in forfeiture litigation. Over 60 cases have challenged the long-standing IRS guidance regarding the use of forfeited funds in defined contribution plans. Traditionally, plan sponsors used these forfeitures to offset employer contributions or cover administrative expenses. The recent litigation posits that these funds should be redirected to minimize participant costs instead. Even if these legal actions don't succeed, they disrupt what had been a stable area of benefits law, prompting a reconsideration of established practices.

Treichel noted that this heightened litigation risk has made plan sponsors wary of implementing innovative features in their plans. The fear of becoming the target of litigation as an early adopter stifles creativity in plan design, leading to a reluctance to explore options like emergency savings features or enhanced auto-enrollment.

Legislative Complexity

In addition to the litigation pressures, plan sponsors are grappling with the rapid pace of legislative changes stemming from SECURE 1.0 and SECURE 2.0 enacted in 2019 and 2022. Many sponsors struggle to navigate the implementation requirements, and the prospect of a SECURE 3.0 introduction adds further complexity. Treichel explained that while sponsors don't necessarily oppose upcoming legislation, they worry about their capacity to handle new changes so soon.

For instance, the recent Roth catch-up provision—though seemingly minor—entails considerable operational demands for proper implementation, including system updates, participant communications, and payroll coordination. The cumulative impact of these legislative changes is expected to prompt a wave of plan corrections as sponsors resolve implementation issues.

Alternative Investments in 401(k) Plans

An additional trend that warrants attention is the gradual movement towards permitting alternative investments—such as private equity, private credit, and real estate—within 401(k) plans. While there hasn’t been a formal prohibition on these investments under ERISA, practical barriers remain significant due to the daily liquidity requirements of defined contribution plans. The proposed registrations for investment selection create an avenue for these alternatives but do not mandate their inclusion, leading many fiduciaries to adopt a wait-and-see stance.

Cryptocurrencies epitomize the risks involved with these emerging asset classes. Fidelity has considered including digital assets in its recordkeeping services with certain limits to manage concentration risk effectively. However, fiduciaries remain concerned about the behavioral risks of participants gravitating towards volatile investments.

Rising Demand for Expert Guidance

For brokers tasked with advising on retirement plan design and fiduciary obligations, the implications across these various issues are clear: plan sponsors are seeking guidance, exhibiting reluctance to take the first step, and looking for trustworthy advisors who can navigate this complex regulatory framework. Treichel’s practice, Endeavor Law, has broadened to include both retirement and health and welfare plan legal services, highlighting how interconnected these sectors have become for employer benefit options. This suggests that brokers should also consider a holistic approach in servicing clients.

As the environment continues to evolve, those who skillfully navigate these challenges will be well-positioned to provide substantial value to their clients.