2020's Perspective: Jerry Schlichter on the Future of 401(k) Litigation
Founding & Managing Partner
Schlichter Bogard & Denton
Jerry is founding and managing partner of the firm. He has been repeatedly elected by his peers for inclusion in "Best Lawyers in America” and “Lawyer of the Year” and is listed in the 2019 edition.
Jerry has been featured in numerous national publications, including the New York Times, Reuters, Bloomberg, USA Today, and the Wall Street Journal, for his and the firm’s success in pioneering claims of excessive fees in 401(K) plans and obtaining precedent-setting results involving claims of excessive fees against large employers, and for the reduction in fees his cases have caused throughout the 401(k) industry.
He and the firm have obtained settlements in these 401(k) excessive fee cases of more than $300 million for employees and retirees, in addition to significant improvements in their 401(k) plans; in total, this relief has been valued at more than $1.5 billion. He also was lead attorney for the firm in the first and only full trial of an excessive fee case in the country, resulting in a verdict of $36 million. In recent rankings of the most influential people in the 401(k) industry by 401kWire.com, Jerry has repeatedly ranked in the top 5.
According to a recent article published in Reuters, the CEO of Brightscope, an independent company which evaluates 401(k) plans, stated, speaking of Mr. Schlichter’s national impact on 401(k) plan fees, that “[h]is impact has been humongous." The New York Times has referred to Jerry as “a Lone Ranger of the 401(k)’s,” and he has been referred to by Investment News as “public enemy no. 1 for 401(k) profiteers” and by Chief Investment Officer as “the industry’s most feared attorney.” In describing the effect of his work on behalf of employees in 401(k) plans, the Wall Street Journal referred to it as being “Schlicterized”.
In 2014 and 2015, Mr. Schlichter’s firm obtained the two largest 401(k) excessive fee settlements in history. The first was a settlement for $62 million against Lockheed Martin on behalf of Lockheed Martin employees, which included significant changes to the Lockheed Martin 401(k) plan. The second was a settlement for $57 million from Boeing, which likewise included significant non-monetary relief.
Also in 2015, Mr. Schlichter won a unanimous 9-0 decision in the U.S. Supreme Court in Tibble v. Edison, the first U.S. Supreme Court case to consider fees in 401(k) plans.
In an order in the case of Nolte v. Cigna Corporation in 2013, the U.S. District Court judge stated: “As the preeminent firm in 401(k) fee litigation, Schlichter, Bogard & Denton has achieved unparalleled results on behalf of its clients. Jerome Schlichter and Schlichter, Bogard & Denton’s work throughout this litigation stands as yet another example of the firm’s acting as a private attorney general, risking breathtaking amounts of time and money while overcoming many obstacles for the benefit of employees and retirees. . . . Mr. Schlichter and the Schlichter, Bogard & Denton firm’s actions have led to dramatic changes in the 401(k) industry, which have benefited employees and retirees throughout the country by bringing sweeping changes to fiduciary practices.”
The U.S. District Court in Tussey v. ABB similarly found of “special importance . . . the significant, national contribution” made by the team led by Mr. Schlichter, which has “educated plan administrators, the Department of Labor, the courts and retirement plan participants” about the fiduciary obligations of 401(k) plan administrators.
Jerry has received numerous awards, such as the Levee Stone Award and "What's Right with the Region Award" for his contributions to revitalization of the city of St. Louis and the state of Missouri.
In December 2013, Jerry was honored with the prestigious St. Louis Award, given to the person who has accomplished the most in the prior years for the development of St. Louis.
Jerry spearheaded the founding and development of another St. Louis not for profit, Arch Grants, which is a global competition for startup businesses in which winning entrepreneurs come to St. Louis, receive $50,000.00 and a broad package of support services including business mentoring, discounts on office space, and free legal, accounting, and marketing services. Arch Grants has provided grants of $50,000.00 to 114 startups since its founding in 2012, and has been the subject of numerous national articles describing its building of entrepreneurial businesses in St. Louis.
Education: University of Illinois, B.S., Business Administration, 1969, (in 3 years) with honors; James Scholar. University of California at Los Angeles, J.D. 1972; Associate
Editor, UCLA Law Review.
Admitted: California (1972); Illinois (1973); Missouri (1982).
Recap, Highlights, and Thoughts
My now annual conversation with Jerry Schlichter, plaintiffs attorney with Schlichter Bogard & Denton has been one of the more popular episodes on the 401(k) Fridays podcast. This year was one of our best and most forward looking. In case you are not familiar with Jerry and his work in successfully brining 401(k) or ERISA litigation against employers, he has a pretty impressive track record. He burst onto the scene with a flurry of litigation in 2006 and to date he has secured settlements of over $300 million and what he would call significant improvements in their plans. In total, this relief is valued at more the $1.5 billion. In Jerry’s prior appearances on the podcast we have talked about how the modern era of 401(k) litigation started, his unanimous victory in the Supreme Court and several other of his thoughts and observations. This time, we briefly touch on the current state of litigation and spend most of our time talking about how he thinks litigation will evolve in the coming decade. This is a great listen, be sure to stick around for the end when I ask him about his third act in retirement plan litigation.
If you want to check out my prior conversations with Jerry you can either search or scroll through your podcast app and look for titles with "Boogey Man" in it. Those are not required listening to follow along in this episode, but are good none the less. Also, please share your thoughts on this episode on social media. Be sure to tag me, Rick Unser or the 401(k) Fridays Podcast. Or, if you would prefer send me a private message or an email to email@example.com.
Thanks for listening!
Sincerely Your Host,
NEW: Episode Transcript
Rick Unser: 00:00:00 Well Jerry, welcome back to the podcast. You've graced us with your presence a couple of times already and those have been super informative and some of our more popular episodes. So can't wait to hear what you have to say today about the current state of 401k litigation and uh, all sorts of other fun stuff.
Jerry Shlichter: 00:00:18 Happy to be here, Rick.
Rick Unser: 00:00:19 Well, let's just start with maybe a couple of quick observations about what you're seeing out in the 401k litigation marketplace. Most of what litigation seems to be focused on today is fee litigation in some way, shape, or form. So what are you seeing out there? It has the low hanging fruit been picked? Does this have a lot more to go or, or what do you think?
Jerry Shlichter: 00:00:45 Well, most of the fruit was low-hanging at the outset of this litigation. And I would say now the fruit level has been raised across the board from what it had been. Fees are down, fiduciaries are taking their jobs much more seriously than they were when we began this litigation. However, there still are companies that are not doing it right and there are fiduciaries who need to do their jobs in a better way. So I expect that the litigation will continue and there probably will be some additional litigation involving smaller plans than the large plans that have, we've seen that we brought going forward. But without a doubt the fees have been compressed. And that's a good thing for American workers and retirees.
Rick Unser: 00:01:32 And when you say smaller plans, I mean I think everybody defines large plan, small plan, mid sized plan a little differently. What do you mean by fee litigation? Coming to smaller plans?
Jerry Shlichter: 00:01:42 Most of the litigation has been plans of above $500 million. And going forward I would anticipate this is separate from anything that my office does. I would anticipate there will be cases involving plans as low as a couple of hundred million dollars in assets. And there have been a couple of examples of that already.
Rick Unser: 00:02:06 Yeah. And I think some of those have been viewed as more one-offs versus the wave is now going down to a 25 or $50 million plan. I mean, I guess one thing that comes to mind and I think you shared this on some prior podcasts, is each litigation or each case that you bring or others bring is almost a business venture on its own. And I guess that when you look at a smaller plan or you know, a couple hundred million dollars versus $1 billion or more, do the economics make sense or, or is there a different way that litigators might be looking at the future of fee litigation or other litigation that might be coming to smaller plans and we've seen them in today?
Jerry Shlichter: 00:02:48 Well, your listeners may not be aware, Rick, of the fact that the attorneys, including my self and my firm, who bring these cases don't just willy nilly file cases because we're not paid by the hour as defense attorneys are in these cases. Our clients who are just average participants in a plan can't afford to pay an hourly rate, much less take on a large a defense firm and the cost of litigation and pay for experts, document discovery and so on. So there's a screening process that attorneys do to look at the merits and look at the resources that have to be committed. Our commitment in the cases has been whatever it takes. If we make the decision to invest in a case that is to bring a case, we do it because we have conviction that the fees are excessive or the investments are imprudent or some combination of breaches and then we take it to whatever level it requires. An example being the first trial of a 401k case was the ABB case, which went on for literally 12 and a half years with two appeals and ended only several months ago.
Jerry Shlichter: 00:04:04 After all that time. In that case, as in any case, the attorneys, the law firm is out, whatever the time is because lawyers have to be paid a salary and the expenses and they're all at risk, so there is a limit to the amount of risk that lawyers will take and looking at cases that may even involve a clear fiduciary breach, but when you look at the resources necessary to bring that case, all of which are at risk like an entrepreneur. Then some cases that may have merit or be right the same way as if a doctor commits malpractice, but there's no real harm. The condition doesn't turn out to be a problem. It may be malpractice, but that doesn't mean there'll be a case.
Rick Unser: 00:04:53 Right, and and when you say kind of screening for cases or screening the merits of cases, one thing that I've heard, and it talked to a few others that are kind of in a similar business to you, is there's a lot of import in a lot of, let's just say consideration given to what attorneys are seeing in 55 hundreds and audit reports. If you're thinking about talking to, you know, plan sponsors or some of their service partners that are in the business of preparing those reports and filing those reports, do you think people have enough understanding of how important those are for someone like yourself or others that are looking at a plan from the outside and deciding whether or not it makes sense to bring a case or, or a my, you know, maybe overestimating the importance there?
Jerry Shlichter: 00:05:39 No, I don't think you are. Rick. 5,500 forms are filled out in a wide variety of ways. Many employers take the time to take it seriously and service providers and to do so in a way that is informative and in compliance the DOL requirements,
Jerry Shlichter: 00:05:58 but a lot of them are almost going through the motions and some of them are quite inaccurate, but this publicly available information is a part of what any attorney would look at in deciding whether there's merit to the case. So if the numbers are misstated, for example, let's say the a recordkeeping rebates, if there are any out of revenue sharing have been rebated to the plan, that's something pretty important for a sponsor or a fiduciary to make sure is listed or their record keeper shows because that shows the true net cost of recordkeeping. Whereas without showing those rebates, it may give a false impression. No.
Rick Unser: 00:06:41 Well said and I think that's something that from a learning standpoint or an awareness standpoint, I think certainly you'd always want to hope that statements 5,500 etc are going to be accurate and factually correct, but sometimes I think in the way that people are presenting the data or the story is being told through the 5,500 in the audit report, looking back over a few years, you know, does that continuum of information tell the story that you'd want it to, that you're being a good fiduciary, you're making decisions that are in the best interest of the plan participants or if you're looking at it in that fashion, does it maybe not tell that story that you'd want it to?
Jerry Shlichter: 00:07:21 Yeah, the 5,500 is the window to the world. It's just same thing as a website or any other publicly available information. So the importance of doing it carefully and accurately is great.
Rick Unser: 00:07:33 One more thing on I guess maybe some current litigation. Coming back to some of your comments earlier about, Hey, the the, the low hanging fruit has been picked. One thing that I'm seeing in some others are speculating on with regards to sort of this evolution of, of fee litigation is it's just going to get more complex and it's going to get more granular, more nitpicky. For example, one case that I saw recently was somebody had brought a case against a plan sponsor who was using an index fund for the S and P 500 or that kind of large cap representation, but the tracking error on that index fund was outside the norm. Do you see that? Is the future, do you see that having much, much success or is that maybe just kind of an isolated instance where somebody may be testing the waters or that's a trial balloon to see what might happen with that type of argument?
Jerry Shlichter: 00:08:28 Well, I don't know that case who brought that case, but I would say that that's unusual and is the kind of claim that is more of an outlier claim. Uh, at this point, and I don't know the numbers, but it may well be on the margin, a small incremental difference in terms of the handling of the plan. There was no question. I believe that it's fair to say that litigation is going to get more complex and perhaps more technical. I'm not saying that it's going to be nitpicky to use the term used rec that might be seen as nitpicky, that particular poor tracking area in an index fund, but the complexity is caused in part by the sophistication of service providers including recordkeepers who in terms of the big picture, what's happened is fees had been compressed and everybody knows that federal judges have commented on it.
Jerry Shlichter: 00:09:29 They've said it's a result of this litigation, and as that has happened, what I call whack-a-mole is occurring as we speak, the fees go down and for recordkeeping and something else pops up as another way of getting alternative revenue. We're seeing that with regard to in particular what I think, maybe we'll talk about this later, but things such as selling non-planned products and services to plan participants using the information obtained by the record keeping role. That's a problem in our view because when you look at the facts, the record keeper is entitled to this very highly confidential information, asset balances, investment choices, years till retirement, social security number and other types of information that no one would say should be publicly available or usable by somebody except for the role in which they acquired it. They acquire at the record keeper, acquires it because that information is necessary to carry out the function of a plan and to keep balances and so on.
Jerry Shlichter: 00:10:42 However, keeping in mind that the duty of the fiduciary committee members is to work for this sole benefit, the exclusive benefit of the participants, allowing that information to be used for selling IRAs, wealth management, other products and services, insurance, credit cards, all of which is being done is for the benefit, frankly, of the service provider. And we can talk about the fact that many people might say, well, but isn't that advantageous for the employee or retire? That's the obvious question. You don't, they need to know this information. Sure. Advice about other investment choices is something that can be helpful. Keep in mind, this is not fidelity advertising the a Superbowl for IRAs or wealth management or something. This is the handpicked service provider that the employer has selected who's now going to the employee and saying you should use our services for other things and throw it from the employee standpoint. There's the imprimatur of approval by the employer and the employee doesn't know whether or not that's proper
Jerry Shlichter: 00:12:01 and isn't being given choices. It's the employee in many of these cases is being given only options that are proprietary for the record keeper. And so that has been something in our litigation that we have in recent settlements in the university space for all three be space restricted as part of the conditions for the settlement.
Rick Unser: 00:12:21 And to be clear on that, cause that was one thing I saw is what you're saying is part of your settlement is record-keeper you cannot use any of this data to solicit business or record-keeper. You cannot solicit business regardless of whether you have data or any other access that that you should or shouldn't have.
Jerry Shlichter: 00:12:45 Both. The record-keeper role is a plan role. The role of selling stuff outside the plan is not a record keeper role. Using that access, whether the information is used or not, it's impossible for the record keeper not to use the information. I mean they have it. They couldn't contact the person if they didn't have that information. So we say that it's improper to do that and to allow it is a fiduciary breach. So this is dangerous territory. Now this gets into the issue of well, okay, how do we then make sure our employees, if we want to help them learn about other investments, about IRAs for example, how do we make sure they get that information? Well, you can ask yourself the question as a fiduciary, is that our role? Are we responsible for outside investments and having providing a mechanism for that. That's one question. If you want to do that. I would say do it very carefully and I'll give you an example. In the first and only four Oh three B case ever tried in this country is the NYU case. We brought a, as you know, us
Jerry Shlichter: 00:14:00 series of four Oh three B cases after the 401k cases and those cases are pending as we speak. Some of them had been settled in the NYU case, a woman, a professor at the medical school who had a large balance in her plan was solicited using her information about her balance and her investments and the record keepers representative, and this is a public record, so this is not any kind of confidential information, said you need to take $300,000 out of your tax deferred four Oh three B plan and have us manage that. She said, well, I know a lot about my medical field, but I'm a financial illiterate. So I relied on their advice. My employer picked them and so they said I should do that. I did it, gave him $300,000 they manage that 82 basis, not tax deferred. And then they put it into mutual funds, which each had their own expense ratio and some of which were the record keepers.
Jerry Shlichter: 00:15:02 And this is Tia, so that you know the record-keepers, proprietary mutual funds. So the woman was being charged high fees for management and then fees on fees for the funds, including paying TIAA to recommend itself for these funds. And the kicker, this is kind of amusing if it wouldn't be unfortunate, she was asked, do you have children, you and your husband? Well, no, we have a dog. Oh, have you ever thought about what happens if your dog dies before you and your husband die? Who's going to take care of your dog? You need insurance for that. And she said that point, I'm a financial illiterate, but I knew I didn't need that. That's an example a, what is an abuse of the record keeper role in our judgment.
Rick Unser: 00:15:56 And I want to come back to to one of the things you said because I think that the sentiment that a lot of employers have is, you know, the way you've described this individual where I'm pretty good at my day job, but maybe I'm not the most financially savvy or the most financially sophisticated individual. So you know, I want some help, I need some help in making some of these decisions. And I think a lot of employers have said, okay, um, we recognize our employees probably need some help or, or it would be good for them to have, have access to help when they need it. Hey, I've got a life event and I need to talk to somebody. Or Hey, I'm thinking about retirement and you know, I'd like to try to have somebody else smarter than me financially. Help me figure this out. And I think one common thing has been, all right, well we have this record keeper that we've aligned with. They have some great resources in, you know, to us that seems a little better than them just opening up the phone book or doing a Google search and being at the mercy of whoever pops up at the end of that phone or at the end of that Google search. I mean, is that an okay motivation as to why employers might be allowing or offering these types of services to their employees?
Jerry Shlichter: 00:17:15 Sure. A benevolent employer you're talking about wants to help its employees maximize their ability to have a successful retirement. That's a laudable purpose and motivation. But the devil's in the details and what the employer should recognize is that by steering people to the record keeper, employers making choices about it's the record keepers, IRAs or it's insurance or it's credit cards, and if it's going to be making that kind of a recommendation, use our record keeper. That's a role that's outside of the role of running a 401k plan or four Oh three B plan and then the employer is getting into a role such that it should be looking at the alternatives rather than saying, Oh great, our record keeper has great IRAs. Well, have you examined those IRAs? If you looked at the fees, have you looked at the performance? Have you looked at what's being done on the, on the insurance, what kind of insurance premiums there are and what kind of insurance this is.
Jerry Shlichter: 00:18:26 I don't think employers, we want to go down that road if they realize that they have exposure for making such a recommendation. Now it's something altogether different. If the employee asks for help from the record keeper, any, no different from calling up a broker or calling up an insurance person. That's different, but steering the people is where there's exposure on the part of the employer and also then looking at what is going to be said to that employee. We've got record-keepers now who are pushing their credit cards, has the employer look into what those credit cards are charging and what the alternatives are in wealth management. Okay. Are recordkeepers a great wealth manager? Well, does the employer really know that? Is that what they've looked into and decided to make them the record keeper? I doubt it in most cases and if they are the wealth manager, is it a robo, formulaic kind of management for which there should be a low charge? Is it a hands on with some people where there's going to be a higher charge? What's the relative charge to compare to other wealth managers? What's the performance over time? Again, it would create a whole new set of fiduciary obligations if an employer's going to walk down that road. And that's why employers and fiduciaries need to be very careful if they're going to go out on that limb.
Rick Unser: 00:19:59 And let me come back to something you said a minute ago, and I think what I heard you say was there's a line between an employer steering someone towards the record keeper versus a participant saying, I'm actively soliciting help from the record keeper.
Jerry Shlichter: 00:20:18 Right. That's a bright line.
Rick Unser: 00:20:20 Okay. And can you help me explain the difference or maybe help me understand, well, what would it look like if an employer is steering someone towards record-keeper resources versus, you know, a participant that is maybe, I don't know, aware of those resources or reaches out to solicit some help. Maybe give me an example of how those two are you, where one crosses a line and where one doesn't,
Jerry Shlichter: 00:20:49 right. Well, I'll give you an example. Again, that's part of a public record in the NYU situation. So TIAA marketed itself as having on-campus representatives to help people in the plan sounds like a great deal. Wonderful opportunity to have questions answered, but these people, it turns out are salespeople whose compensation is paid in part by what they sell and so that's the kind of person who recommended this woman to have dog insurance and and take her money and have it managed by them with fees on fees. So enabling that and the fiduciary is in that case said they thought they were providing a service to these folks but they didn't investigate at all. By allowing on site representation and allowing salespeople to be there with no inquiry as to who are these people, what's their role, what kind of information that they're providing. Are they compensated based on selling stuff?
Jerry Shlichter: 00:21:58 That would be an example of steering that I'm talking about. An example of simply making information available would be to say to your participants, this record keeper does have products and services. We are not endorsing those services and products outside the plan. We have told our record-keeper not to solicit you for these things. If you wanted to contact them about a particular kind of product, you're free to do so just as you're free to contact some outside representative of any company. But we are specifically not endorsing those cause we haven't looked into those other services and products. That would be an example of a voluntary choice by the participant without steering.
Rick Unser: 00:22:44 Got it. And you said another word there that I had that I wanted to kind of ask you about, and correct me if I'm wrong, but I think again this comes back to some of the language that you're putting into some of your settlements. It can, is this concept of non-solicitation, you know that's been something that I've seen pop up in some instances. Do you see that as maybe a wave of the future where employers or planned fiduciaries are going to be inserting some of that language or, or maybe might it be a good idea for employers to consider inserting some language like that into the service agreements that they have with various providers? Or is that, is that kind of overkill?
Jerry Shlichter: 00:23:26 No, it's being done already by some plan fiduciaries and plans and sponsors and I do see that as something that will be done more and more in the future as employers become more knowledgeable about these practices. The whack a mole practices as I described them do I think overkill? No,
Jerry Shlichter: 00:23:46 I don't think it's overkill. The Moe has to be whacked to put it in those terms because this is a serious duty to work for the sole benefit of the employees and retirees and it's easy to see how allowing us to go on is working for the benefit of the service providers and therefore may well be a fiduciary breach. You know, another analogy might be, Rick, if you think about a doctor, it gets a lot of confidential information and is required to keep that information confined to the patient doctor relationship. No one would say it would be proper for the doctor to take that medical information and sell it for the doctor's benefit. No one would say that and no one to put it closer to this would say it would be appropriate for a, a an employer to take the social security numbers of its employees and put them out on the market to sell and get the money for that or to give it to somebody for them to sell.
Jerry Shlichter: 00:24:52 Yet that's what's going on. When you think about it with this very highly confidential information, employees don't believe that when they sign up for a 401k or four Oh three B plan, their investment choices and their selection and their asset levels and maybe their retirement goals and plans will be made available to people who want to sell them things. That's not part of the bargain and that's a fiduciary breach and in our opinion, and it has value. That's the other thing. It would be very valuable for somebody to be able to market to people when, if they are the only ones allowed to have access to them. If they're given great amounts of information about their financial status and their investment choices and the kinds of investments they want and all this personal information and their social security number. This is the kind of information that people pay a lot of money for because it has value. The value belongs in the plan and belongs to the participants. It does not belong to the record keeper
Rick Unser: 00:26:05 and I think what you're hitting on I think is one of the big questions that's floating around in the community right now, which is is participant data a plant asset?
Jerry Shlichter: 00:26:16 Yes. It's a thing of value generated by the plan. That's what a plan asset is. It unquestionably has value, substantial value, and it is unquestionably derived from the plan. It exists only because of the plan as part of the plan. So our view is that this is a plan asset without a doubt.
Rick Unser: 00:26:43 So I guess with that position then, all right, I'm an employer. How do I determine that value or how do I monitor that value or how do I ensure that the value of that data is being used in the best interest of plan participants?
Jerry Shlichter: 00:27:02 You don't allow it to be used outside the plan, which means it's unnecessary to determine the value because it's not being appropriated for some other use. The the record keeper has the information, it uses it to create a spreadsheet or whatever it is of balances and contributions and withdrawals and so on, and that's the limit of its use. If you say, well, and there are people who have said this, well, I've had two proposals from the record keeper or the proposed record-keeper one, if I'm not allowed to use this information and sell products and services and a lower recordkeeping number, if I am allowed to market to sell these products and services, so isn't it my obligation to get the lower recordkeeping price, which I get by allowing these things to happen. My response to that question is, no, it's a fiduciary breach. Even if it were not a plan asset, it's a fiduciary breach to allow this information to be used without plan participant consent to benefit that record-keeper selling other things.
Rick Unser: 00:28:17 So I'm glad you went there and, and I don't, I don't know if I'm going to pick away at this in the right order, but as you were talking through things, I guess one thing that went through my mind is, okay, I see your point and if we look at where maybe litigation is going in the future, how were you or other litigators going to assign value to say, you know what plan fiduciary employer, you've done this poorly, you have allowed access, you've, you've allowed the record keeper to sell product, you've, you've used participant data in appropriately and we're now going to construct a lawsuit with X dollars attached to it. Have you gotten that far or is this still maybe one or two steps removed from that?
Jerry Shlichter: 00:29:05 We have gotten that far in current cases where that issue is being discussed and litigated as we speak in several for all three B university cases where experts are now in the case on both sides who are discussing the value of those kinds of services and products. For example, we're seeing record keepers who are getting to the point of offering close to zero record keeping costs if they're allowed to do all of this. That's one measure.
Jerry Shlichter: 00:29:42 One could say of value, but is that the limit of the value? If there's a fiduciary breach, it's our position in allowing the data to be used as confidential, highly confidential data to be used to benefit the recordkeepers proprietary products and services. Then under the law, our view is that the benefit must be disgorged and that the fiduciary has enabled this benefit to be obtained by the record keeper and even if the record keeper is not a part of this suit,
Jerry Shlichter: 00:30:19 the employer is subject to exposure for that benefit, the value of that benefit because in a Rissa, the court sits in equity. There's this old distinction going back hundreds of years to the English common law between law and equity. They put it in very simple terms. Equity means the court does
Jerry Shlichter: 00:30:40 not allow something that's unfair to happen and if there is a fiduciary breach and somebody makes a profit off that breach, courts will look at how can the court rectify that breach and if the participant's data has been used for the benefit of someone, that data belongs to the participant or in the aggregate that data belongs to the plan and the plan should benefit if that has been allowed to occur. That's a position that is a very recent issue that's come up now in
Jerry Shlichter: 00:31:20 multiple cases of hours. I don't believe it's come up in anyone else's cases to this point, but I do see that as an ongoing issue going forward.
Rick Unser: 00:31:28 And another thing you mentioned is if an employer is conducting an RFP, and I think over the last several years, one message that's come out loud and clear from a lot of the the litigation has been, you know, you need to monitor service providers, you need to conduct more frequent RFPs. And check to make sure that your current plan details are being priced and serviced in a competitive fashion. As plans go through that process, do you think it is incumbent upon people to start getting a little bit more granular in either eliminating or excluding or prohibiting certain activities by the record keeper to sort of suss out that that true cost of recordkeeping?
Jerry Shlichter: 00:32:16 Yes, absolutely. Again, because of what's happening as opportunities to drive revenue to the record-keeper are cropping up. And that means that fiduciary has have to inform themselves about what our current practices, the Rissa says the fiduciary is, are held to the standard of a prudent expert in the space. And so if
Jerry Shlichter: 00:32:40 new practices are arising as they are, it is not a defense for fiduciary to say, well, I, gee, I didn't know that they're doing as marketing or I didn't know that some of these new approaches are being used. I wasn't aware that the mole has to be whacked. Uh, that's not a defense. So there's a need for them to continue to inform themselves and to investigate what's going on along these lines.
Rick Unser: 00:33:07 And I think based on that, I think you said this earlier, that Hey, that that could result in higher recordkeeping fees and I understand that. However, I think at the employer level, one thing that I think people have really been embracing is low fees, low cost. I mean we've seen that in record keeping fees, we've seen that in investment fees, we've seen that in the move to passive management in a lot of cases that that people really are getting the message around low fees. So I guess maybe help the employers or help the plan fiduciaries maybe reconcile a little bit that says, all right, I've got a proposal from a very strong record keeper and I've got two flavors of that proposal. You know, I've got flavor number one, which includes some extra stuff, but man, it certainly drives down my costs, which on the surface I understand that's something I should be doing.
Rick Unser: 00:33:58 But then flavor number two says, okay, this is cleaner. It is limiting and excluding a lot of things or all things that the record keeper could do to earn extra revenue, but it's higher, maybe materially higher. Because of that. I mean, I think what I'm hearing you say is flavor number two is the is the better path, but how, I guess how would a a plan fiduciary sort of reconcile some messages out in the market right now, which is low cost, you know, et cetera with, all right, we're going with this higher cost option because even though it is more expensive, it puts us in better fiduciary standing and get on. I don't know if I'm processing that right, but I'd love to hear your take on that.
Jerry Shlichter: 00:34:42 Right. It's a very good question, Rick, and a question that responsible employers increasingly probably will have to ask themselves how to handle. There's a simple answer and a simple approach. Don't let the use of plan information outside of the plan. Turn your head as a fiduciary. Establish the bright line that that cannot be done because you're risking fiduciary breach if you allow it and not just risking it, you're committing line. In my opinion, the bright line is you can't do this stuff. You can't sell this. You cannot solicit our employees for these other products and services. If they have a question and come to you with it, fine, but you can't solicit them, then get an RFP, you'll be the employer will be and fiduciary as will be fine shape
Jerry Shlichter: 00:35:38 if they take that position and then get an RFP with RFP specifically containing the restriction on no marketing. That's what we have set as the approach in multiple cases involving university such as Vanderbilt, Johns Hopkins, both recently he has settled and approved by federal courts going forward, uh, for the plan. There is no need to worry then about the fact that yes, they would have had lower fees if we allowed all this other stuff. Because when you think about it, here's the other thing. Okay. The limit of recordkeeping fees isn't necessarily zero. We are aware,
Jerry Shlichter: 00:36:21 uh, situations where this outside marketing produces so much profit that the recordkeeping number ought to be negative. The recordkeepers should pay for the privilege of recordkeeping because of the lucrative nature of selling IRAs and wealth management and so on. So again, the risk of a fiduciary breach is not in doing what I've suggested. Your approach. Number two, the risk is if you take approach number one, because then you're going to have to get into what is the profit they're making on their IRAs, how much money is being made on all these other services. If we're allowing that to happen as an offset to recordkeeping costs, and maybe that is so much that the record keeping costs should now go in the other direction and be negative. I don't think employers want to do that. It's a can of worms they shouldn't want to get into and that's why the answer is a simple one.
Rick Unser: 00:37:16 And let me come back to that benevolent employer who says, you know what? I hear you. We still want to provide some type of service, you know, whether it be rollover support, whether it be investment management support, maybe just to make sure we're not mincing words here. That would be in the form of investment advice or managed accounts or whatever it might be. Does that then say, okay, well if I want to go down that path, do I then solicit those services independently or is there some way that from a fiduciary prudence, fiduciary best practice standpoint, that those services may be could reside within the record keeper if an employer take certain steps?
Jerry Shlichter: 00:38:03 Yeah, again, a great question. The answer starts with the fact that every service to the plan must be the subject of an investigation for prudence and fees. So if you're going to say for example, and we're seeing this pop up, I think what's going to happen in the future in the industry is that there will be more and more managed accounts, again being pushed by record-keepers because a fee compression. Now there are eight 401k managed account service providers who provide 95% of the assets under management for managed accounts. It's a developing area and there are record keepers who have managed account platforms where they work with a managed account provider or they themselves are fidelity being an example. So as soon as you go down the road that we're providing this service as a benevolent employer, great. But then you've got to investigate that service.
Jerry Shlichter: 00:39:04 You can't just say, well gee, we're going to give you the, our record keeper service. You've got to say the same way you do for recordkeeping, look at alternatives because what's happening is that now revenue sharing is being applied in managed accounts. So the record keeper has it's favored managed account provider goes to the employer and says, Hey, you know, uh, ABC is a great managed account provider, doesn't disclose an ABC managed account is kicking back 15 basis points of revenue sharing to the record keeper. All of a sudden the record keepers compensation went up for really no more service. In addition, the range of managed account fees is orders of magnitude
Jerry Shlichter: 00:39:51 as low as eight basis points and one of these eight providers, a flat fee not based on assets to over a hundred basis points. Well if your service provider, if your record keeper is itself charging a hundred basis points for this or recommending somebody who's charging a hundred basis points or 90 basis points and then getting 15 basis points kickback, that's a problem and you are going to have to investigate that if you're going to get walked down that road. Same thing with wealth management. Wealth management isn't just a commodity service. It's a tremendous range of fees and approaches and if again you're recommending the record keeper as a wealth manager for your employees, then you've got to investigate that wealth manager and its fees and make comparisons to others in the market.
Rick Unser: 00:40:44 I think that's sound counsel on your end there. One thing that is you were talking that just kind of strikes me is, and I, and I think this is just an interesting swing in the pendulum here is, and maybe it's just your, your whack-a-mole examples is one of the best examples is you know, as fee compression has happened, you've got people that are trying to do more for the participants. And I think the business models have a lot of people are really all coming together now where you know, whether it's record-keepers in the investment management, in the wealth management, in the rollover space that maybe they weren't before, but through acquisitions or business partnerships, they now were there. I think the same thing is more to come. No, I agree. And I think that's a big trend. I think the same thing's happening even in the space where you know, advisors who were counseling plans and plan fiduciaries now are in the investment management business or in the wealth management business or in the, in the rollover business, in whatever it is.
Rick Unser: 00:41:45 And I, I would agree with you 100%. We've had several people on the podcast that have talked about how this, I don't know if conflations right word, but I really liked the word of, of business models is going to become more and more apparent and more evident and prevalent over the, over the next few years or in the foreseeable future. I mean, how do you see that, I mean, does this sort of conflation, have you licking your chops as a, you know, as a plaintiff's attorney sand, are I bring it on, this is, you know, this is what I've been waiting for or is there a thoughtful way that as some people are bringing more services under one roof that they could do that and not necessarily be your next target, for lack of a better word?
Jerry Shlichter: 00:42:28 Yeah. Well, just in terms of a, I don't ever wish for employees to get ripped off. It would be a great thing if we put ourselves out of business, we'll find something to do. But we represent people and I always have in my career and that's what we do. So now I'm not looking for this to happen. I hope it doesn't happen. But yeah, with conflation as you put it comes the same thing you see in other other realms. Investment banks for example, cross selling, cross marketing, things like that. As soon as you have a service provider in one space who is able to bundle services charges, it means that you've got to look carefully. When we started this litigation in 2006 and one of the first cases was the ABB case that was filed, and in that case, fidelity had its business model involved.
Jerry Shlichter: 00:43:21 It did this very same thing. It was the record keeper for the 401k plan. It provided health and welfare plan administration, payroll processing and administration for a defined benefit plan for executives. Yet all those things bundled together and it's nice for the employer because they dealt with one entity. But what happened, what we alleged and what the court ultimately found was that fidelity was losing money on the three corporate services and had over a 51% profit for the 401k plan. Meaning the employees were subsidizing corporate expenses with their retirement assets, which was held to be a fiduciary, an egregious fiduciary breach. Same potential risk is here when you start saying, I'm going to have a one stop shop approach because now some of these service providers have combined services. You can't let that keep you from looking at each service specifically on its own. That's what the department of labor requires. That's why record keeping has to be an RFP and the website of DOL says every three to five years and that's why if you're going to provide other services you have to look at those services provided by the market through independent
sources of service.
Rick Unser: 00:44:40 So we've spent a lot of time talking about data participant services. I guess before we move on, is there anything that we've missed in that conversation that you think is important for employers to know or that is relevant or related to those two? I think very intertwined topics.
Jerry Shlichter: 00:44:57 Well all of the items, products and services that can be sold. Again, if that is going on in the plan, employers need to inform themselves at first about whether that's being done. If they haven't, I would advise employers to think this way if they haven't inquired about it. And my guess is that most of them haven't because this is relatively topical, relatively current. If they haven't inquired is probably going on. That's the likelihood because why not? If there's no resistance, why I do it, it's in the financial interest of the service provider, so that's the first question. Figure out if it's going on and then look at what the employer wants to do. My advice is don't allow it at all unless the employee asks if they are going to allow it. They are going down a dangerous road and at a minimum if
Jerry Shlichter: 00:45:53 they want to provide other services, they have to look at the alternatives, have to look at the marketplace and provide a reasonably priced service with reasonably prudent options. Nope,
Rick Unser: 00:46:04 I think that makes sense. And again, I'll just reiterate what I think is the the confusing point for some, which is with lower costs by including some of these things. I think what you're saying and I think what maybe current or future litigation could be leading us towards is that lower cost at the expense of some of these other items might not actually put you in the best fiduciary position.
Jerry Shlichter: 00:46:31 Well, and I would say to that if somebody called me about their plan, a participant called and said, I became aware that my employer had two recordkeeping bids, one for wealth management, insurance, IRA's, credit cards, all the other products and services that might be offered. Again, a lower recordkeeping costs and one that had a higher record keeping costs, but it didn't allow those services and my employer pick the higher one. Do I have a case? My answer would be you do not have a case and we are not going to handle that because your employer did the right thing. I don't know if that answers the question directly, but that's, that's the way I would look at that and I believe any responsible attorney would look at the situation and if the employer is allowing all those other things then I would say, well I'd like to know and you should find out if you can and we might look into that whether all those other services are
Rick Unser: 00:47:30 producing such a lucrative number that your record keeping not only be free but plan out or receive some benefit beyond that. So the exposure is, in my opinion, not with the employer that has the higher record keeping fee but doesn't allow this. It's with the employee who allows it for the lower recordkeeping fee. And I think a lot of employers would love to hear you say now you don't have a case to a participant complaint. I know that employers don't realize we say that all the time. We've said that more cases than we filed and that was going to be my followup question there is, you know, I think that's the one thing that I think of some employers sort of run in fear over is well I don't want my participants or a group of participants reaching out to a plaintiff's attorney and you know, saying, Hey, this doesn't seem right, or Hey, we got screwed somehow. I mean, I'm just curious, I mean you're obviously, you know, the, the big guy on the block in terms of the cases filed and settlements gained numerically or just from order of magnitude, I mean, how many participants do you have calling in a given year or over the last couple of years and maybe as a percentage, how many of those actually turn into cases versus ones that are either dismissed or looked into with no action taken?
Jerry Shlichter: 00:48:49 Yeah, we don't track how many calls we get [inaudible] and they come in from so many directions with social media, emails, calls, referrals from other attorneys, et cetera. We get many, many of these, many, many of these. But I can tell you that the percent of cases that we bring out of the various ways we get contacted by people who think they may have something is a well under 5%. Okay. Any 5% are rejected, many of them outright. And it's understandable. People don't understand what's going on so often and they feel that something's been done wrong. But when you dig into things, a lot of employers have really changed. And that's a great thing. As I said, so many, many employers are doing the right thing. Others want to and maybe aren't not doing so. But the
Rick Unser: 00:49:41 cases we bring are really more outliers. They're not anything like a high percentage of those that were asked about. All right. And let me, let me ask you one or two kind of closing questions here. So as I look out maybe at your next chapter, you obviously made a big splash and your firm made a big splash in 2006, which is now hard to believe, you know, 14 years ago, uh, with some of that initial fee litigation that you filed, which I think was very disruptive. And I know we've talked about in prior podcasts and then I feel like your, your second chapter was the four Oh three B and the, and the litigation against the universities. I guess, correct me if I'm wrong here, but I don't think over the last three years you've brought a new case against a new defendant. I may be wrong on that. Maybe clarify that first and then what's your third act? I mean what, what do you see as the, as, as what's coming next or I can't imagine you're, you're just going to sail away into the night and, and what's out there is the, the last things you're going to do.
Jerry Shlichter: 00:50:47 Well, you're right about that. I'm not going to be sitting on a beach somewhere and that's because this is whether people realize it or not, a part of a, of a commitment of passionate commitment to trying to help people. It's obviously a way of making a living, but it's beyond that. And, and if it weren't, there would not have been the original cases that we pioneered because this is a journey that's a journey with a lot of risks. And a lot of resources. We have filed one case in the last three years in this space, but we're very active. We have a, as a matter of fact, right at this moment in time, we have two cases going on in federal court. Ironically, both in Denver federal court as we speak on behalf of two national class actions. One is a 401k plan and bobbing banner healthcare.
Jerry Shlichter: 00:51:36 And the other one is actually under what's called the investment company act, which is on behalf of shareholders and the great West mutual funds alleging excessive fees. We will continue to do this and there still are plans that are problem plans, surprisingly somewhat to me because it's hard to imagine how with all of this advice and your podcast and all the other materials, people haven't figured this out. But there are some. So I expect that we will continue that. I do believe there will be more complex issues that come up in cases going forward involving some of these activities such as selling products and services outside the plan, such as managed accounts, which are going to be more and more prevalent, I believe. And, uh, some other areas that we're looking at in this space. So I don't think this is ending. And I do think there will be spinoff if you will,
Jerry Shlichter: 00:52:45 claims and related claims based on more current and recent practices. But the bottom line is that I've seen if I've learned anything over these years, Rick, when there is a lack of transparency, that is decisions being made in an isolated way that people don't see. People follow their financial interests, people follow financial incentives. And when that happens in a fiduciary context, there are problems created. So as things get more complex practices get more sophisticated beer service providers join products and services in a, in a more fulsome way, these abuses have a way of percolating out to the surface. And that's what we're looking at and I expect there'll be more cases brought along these lines.
Rick Unser: 00:53:41 All right. On that note, I think over the years you've been very successful in a lot of settlements. I think I've kind of a two part question here. What do you think the impact of those settlements are on maybe future cases or future litigation? And then the second part of that is do you wish you had your day in court more often or do you think you get done what you need to get done through the settlement process? What a trial.
Jerry Shlichter: 00:54:08 And coming from outside the space, it's always been our approach to if we believe in our case, to take the cases to trial. And that is what we are really Aimee at in these cases. There's no case we take that we don't intend to take all the way through the advent trial as I've said earlier. Uh, and it sometimes frankly is frustrating when you have a settlement, especially perhaps on the Eve of trial because you'd like to have a court decision. But there are many factors involved in these settlements and obviously the
Jerry Shlichter: 00:54:42 uncertainty of the outcome is a very big part of it for both sides, but also the cost. And frankly, in all of our cases, we insist on non-monetary relief, which can be very important going forward and have greater value frankly than the money when you look over for a period of years. And so getting those benefits and the compensation in the hands of the employees is a factor you have to as a responsible attorney take into account too. But I think as I just said, I think we probably will have more trials going forward and uh, we're into right now as we speak, which two multi-week trials. So in terms of the settlements having any effect, yes they do. They have any effect because while they're not binding court precedents, both sides look at what happens in those cases. And the other thing that they look at and should look at is who is the lawyer?
Jerry Shlichter: 00:55:45 What's the law firm involved? Because there's a difference, a big difference in the level of commitment that law firms have and the level of sophistication, frankly, they have on both sides in terms of these cases. And when you're on the plaintiff's side as as I am, and you have to invest in the cases, there are people who don't want to make that investment because it's painful, especially when you're risking the money you put in for expert witnesses and all the other costs. I think the settlements have had an impact in educating sponsors that there is exposure and making maybe
Jerry Shlichter: 00:56:24 open their eyes a little bit more to what they need to do to avoid such exposure.
Rick Unser: 00:56:29 And you, you brought up a great point that I wanted to ask you. Obviously you were one of the pioneers in fee litigation 401k litigation, especially successful litigation. We bought the first cases. Yeah. You've had a lot of copycats over the years. Does that, I don't know how, how do you see that? How do you, how do you feel about the fact that a lot of people are sort of taking what you've done and tried to create their, either their own version of it or copy what you've done? Does that, I don't know. Does that make you feel happy that, that there's others kind of taking up your cause or do you, as you said, there's a very big difference between the lawyers bringing the litigation. What do you think about that?
Jerry Shlichter: 00:57:11 I sometimes have almost a cringing reaction when I see complaints that are filed in court against a company that literally verbatim copy our language. Totally. But it's, it's fine. All of these cases are a public record. Uh, we are very aware when we brought any of these cases that they could be copied and there are people who do that. At the end of the day, it's good if plans that are subject to cases that that should be sued are sued as I see it because that helps everybody who's not only in that plan but in other plans to have a improvement in their plans. But the caveat is I don't like to see people who simply copy what we're doing and then are unwilling to invest in the case in the way it should be invested in by bringing in and often expensive expert witnesses carrying the ball all the way to the goal line and, uh, fighting zealously for the clients. And lawyers do that. But if they don't do that, it hurts everybody. It hurts even plan sponsors because it can give them a false sense of security that shouldn't be there.
Jerry Shlichter: 00:58:27 So I guess the old saying, imitation is the sincerest form of flattery applies, but it doesn't bother me at the end of the day that others have filed similar lawsuits and there are some very good lawyers around the country who done so, but it's good to know that it's happening and wouldn't have happened without our starting it.
Rick Unser: 00:58:52 All right, last question and then I'll let you go. I feel like I saw this the other day in somebody's case where they said, you know what? We recognize the employer has taken some actions recently to improve their plan, but there are still issues or, or things that have transpired over the years where there was breaches or harm done to the plan or the participants. If whether it's result of our conversation or just events in the marketplace and employer goes through an endeavor to say, you know what, we might not have been doing everything perfectly from the, you know, in this aspect or from a fiduciary perspective, but you know, all right, we've got our house in order. Is it enough to sort of clean up and move on or is there some responsibility to say, I mean let's just use some of the stuff we've talked about today. Hey, we were allowing our record keeper to solicit or approach our plan participants about IRA rollovers in managed account services that they have. We realized that maybe we should've done that differently and we've now structured everything to be much more aligned with current fiduciary best practices. Is that enough to sort of satisfy their duty or is there any requirement for them to sort of look backwards and and clean up quote unquote some things or decisions they might've made in the past?
Jerry Shlichter: 01:00:18 Well, yeah, they, the ladder, the need is for them. If, let's say they had, I don't know, a large plan with retail mutual funds when readily available institutional funds or they're for a lower price share class and, and they realize it and they make the corrections and they put the right funds in the plan. Well, the reality is that the actions, until they did that cost their employees money and under the law they have a claim that could go back six years from the time of filing of a case for that past those past losses and that money would have been invested. And when you think about the return of the market recently, if somebody lost $1,000, that thousand dollars for that participant might today be worth 1800 or 1500 so they do have that responsibility under the law. Now of course we're an employer. They don't want to draw attention to what happened by doing that.
Jerry Shlichter: 01:01:22 Their choice is to do that and do the right thing, what the law requires or to take a chance that they might or might not get sued and the statute of limitations runs. My advice would be bite the bullet, do the right thing. That's what most employers will want to do. If you have owned up to a mistake you made, that's great and rectify it entirely rather than only halfway for the future and avoiding the past because it costs your employees money and you can do that by a contribution to the plan easily. But that's, that's my advice. And if they do that, by the way, then if an attorney or the employee goes to their attorney, the attorney's going to say, we're going to say they took care of it. Yeah, they did some things that shouldn't have been done, but they took care of it. You have no case.
Rick Unser: 01:02:16 There you go again. I liked, I liked those words. No case.
Jerry Shlichter: 01:02:20 I say you do have a case by far.
Rick Unser: 01:02:23 Well thank you so much for your time. Any closing thoughts or, or anything that we didn't discuss during our, during our time today that you'd like to send us off with?
Jerry Shlichter: 01:02:32 Well, I, I've, I want to say, Rick, that you really know this space well and uh, your questions are very timely and very pertinent. And so you, you, you really are providing a service to people. And the only other thing I'd add is, again, the guiding beacon for a fiduciary or employer should always be asking the question, what is in the interest of my employees and retirees or the participants in this plan? And I need to work for that interest only. So if you follow that beacon, you'll make the right decisions.
Rick Unser: 01:03:08 I love it. Thanks again for your time. I appreciate it. And certainly next year, probably come track you down again and pick your brain and see what you've been up to.
Jerry Shlichter: 01:03:15 Okay. Take care, Rick.