DC Plan Sponsors Should Pay Attention to Increased Litigation, Low Retirement Confidence

Increased litigation; regulatory and legislative changes; and a lack of retirement confidence among participants were common themes observed by defined contribution plan sponsor panelists on a recent Mercer webinar reflecting on key trends in the first quarter of 2023.  

Roughly 43 lawsuits, noted with activity, have been filed this quarter against retirement plans, including 14 settlements that totaled about $55.3 million, said Rhonda Berg, a senior principal and defined contribution consultant at Mercer and one of the speakers at the firm’s Defined Contribution Plan Sponsor Quarterly Update.  

Berg said those settlements ranged from $200,000 at the low end (Schneider Electric) up to $15 million at the high end (Eversource Energy). There were also 18 cases that were dismissed during the quarter. When identifying key themes among the 42 cases, Mercer found that 29 were filed on the basis of excessive fees and investments, eight were filed against 403(b) plans/not-for-profits and five targeted issues related to target-date funds.  

In one example, the U.S. Supreme Court considered a case brought against Northwestern University’s retirement plan committee for not offering the lowest-cost retirement plan or the best available investment funds. The Supreme Court disagreed with the U.S. 7th Circuit Court of Appeals’ decision to dismiss the case and sent it back to the appellate court to re-evaluate.  

A three-judge panel on the 7th Circuit then decided in a March 23 ruling that two of the three claims against the plan sponsor should go back to the district court level for further consideration. While some legal analysis suggests this ruling will open the door to more litigation attempts in the future, Berg disagreed. 

“We don’t think this decision in particular signals a huge shift in terms of excessive-fee litigation,” Berg said. “We’re not surprised that they revived the institutional share class claim, based on the Supreme Court [decision that Northwestern failed to use institutional, rather than retail, share class investments].” 

To avoid litigation, Berg emphasized the importance of reasonable fees, properly managed plan operations, appropriate fund offerings (including target-date funds), proprietary investments offerings and appropriate managed account program fees and services.  

Legislative and Regulatory Updates 

Geoff Manville, a partner and senior director of government relations at Mercer, said the partisan political fight about raising the U.S. debt limit is something that plan sponsors need to pay attention to, as it may impact retirement savings tax incentives.  

“A lot of us think it’s likely that Congress is going to buy themselves a little more time to deal with this issue, maybe until October, which would line up with when the fiscal year 2024 appropriation bills are due,” Manville said. “In the longer term, the growing focus on the deficit will likely bring a return of proposals for things like more Rothification of retirement savings [and] limits on preferential tax treatment of [retirement] savings, especially for high earners.” 

Manville said Congress’s main priority right now, as it pertains to retirement, is working on a corrections bill to amend the SECURE 2.0 Act of 2022 and on bipartisan legislation that would permit 403(b) plans to invest in collective trusts. 

“On technical corrections for SECURE 2.0, the Hill knows that fixes are needed,” Manville said. “The problem is it’s not clear when a bill might pass. … The good news is that Congress is talking with regulators, the [Department of the] Treasury and [the Department of Labor].” 

Manville predicted that in the near future, the Treasury will announce that they will enforce SECURE 2.0 rules as intended.  

In environmental, societal and governance news, Manville said the DOL’s final ESG investment rule remains safe for now, as Republicans’ efforts to override President Joe Biden’s veto failed in March. GOP bills continue to target plan investments, and Democrats are seeking to codify Biden administration rules, but Manville said such bills are “not going anywhere in a divided Congress.” 

“With all these efforts to block the ESG rule, plan sponsors may be wondering what they should be doing,” said Brian Kearney, a principal in Mercer’s law and policy group. “I think the big picture here is that even though the final rule is in effect, things are far from settled. Even with the president’s support for the rule, we still have these two lawsuits that need to play out, and they’re in the very early stages of litigation. I think plan sponsors need to stay engaged with their investment consultants and ERISA counsel on how to proceed.” 

Retirement Confidence 

Another key trend noticed by Mercer experts in the past quarter was that overall retirement confidence is down. 

According to EBRI’s 2023 Retirement Confidence Survey, only 64% of workers feel confident they will have enough money in retirement. While this number is down from 73% in 2022, Kelly Henson, Mercer’s investment strategy leader for U.S. defined contribution, said the statistic is still concerning. 

In addition, almost half of workers surveyed said debt is negatively impacting their ability to save, and 84% of workers reported the increased cost of living will make it harder to save. 

To respond to participants’ inflation concerns, Henson said plan sponsors should consider adding an inflation-sensitive investment option, such as a diversified real asset offering, in their retirement plan if they do not already have it. Additionally, she said it is important to provide education about inflation-protection options for employees. 

For participants worried about debt, Henson said plan sponsors should evaluate what budgeting tools or debt consolidation opportunities are available. SECURE 2.0 provisions like emergency savings or matching structures that provide flexibility, such as student loan debt matching, are additional measures that plan sponsors can consider.