401(k) Lawsuits Flourishing – Is TOLI (Trust Owned Life Insurance) Next?

In the past few years, we have seen a rash of lawsuits against 401(k) plan sponsors. Most of these suits allege that plan sponsors shirked their fiduciary duties, usually for allowing excessive fees or self-dealing.

Well-known firms like Lockheed Martin and Boeing have signed multimillion-dollar settlements with their employees. Even financial firms that provide 401(k) plans to the public have recently been sued by their employees. (1)  Some have already settled suits in favor of their employees. Banks are not exempt either. In May of this year, suits were filed against two large banks, accusing them of “self-dealing” (2) and providing “proprietary investments options and recordkeeping services at the expense of performance.” (3)

The suits include some of the largest and most respected plan providers. Vanguard, long known as a low-cost provider of mutual funds, was cited in a lawsuit brought in December of last year by participants and beneficiaries of the Anthem Inc. 401(k) plan. An attorney familiar with the case was quoted as saying, “Even so-called low cost might be too high cost.” (4)

All of these cases were brought under the Employee Retirement Income Security Act of 1974 (ERISA), established to provide minimum standards for retirement and health plans in private industry. ERISA also gives plan participants the right to sue for breach of fiduciary duty by the plan sponsor. And although there have been lawsuits in the past under ERISA, the past few years have seen the beginning of the deluge — and it does not seem like it will let up.

According to research by the Investment Company Institute, the average fees paid by 401(k) plans declined by about 30 percent between 2000 and 2014. An attorney who represents employees believes these fee decreases are directly related to the series of lawsuits over the past decade. (5) You can easily argue that the lawsuits are creating a positive outcome for the average investor.

TOLI trustees are generally subject to the Uniform Prudent Investor Act (UPIA) as adopted in their state, which outlines the responsibilities and fiduciary requirements of being a trustee of a life insurance trust, including, but not limited to, “investing as a prudent investor would” as well as “investigating” and “monitoring” trust assets (Section 2), reviewing the trust assets and disposing of “unsuitable assets within a reasonable time” (Section 4), investing and managing trust assets “solely in the interest of the beneficiaries” (Section 5), acting impartially “in investing and managing the trust assets” (Section 6), and only incurring costs that “are appropriate and reasonable” (Section 7). The UPIA actually references the ERISA, noting that the UPIA is a “comparable prudence standard” in relation to the ERISA laws imposed by Congress.

Although it has been used as a reason for TOLI lawsuits, the UPIA has not created the volume of lawsuits that has been created by ERISA — yet.

A recent article in Estate Planning magazine notes there is a “growing concern” among estate planning professionals that “over the next ten to 15 years there will be an onslaught of litigation by trust beneficiaries against the trustees of life insurance trusts.” (6) The article cites the low interest rate environment and cost of insurance increases that have occurred, which have wreaked havoc on policy performance. But it also points out other areas that could spur litigation. For example, hidden issues surrounding the trust document that may cause an adverse outcome, and inadequate or incompetent trust administration that might generate a negative result. The article goes on to highlight the responsibilities of a TOLI trustee to review and manage the asset to maximize the value to the beneficiary, another possible area of litigation.

We at ITM TwentyFirst could not agree more. In fact, we could provide many more examples of situations we have seen that could create litigious situations for a TOLI trustee. As part of our fall ITM TwentyFirst University schedule, we will be providing a special webinar on this very subject. Titled How TOLI Trustees Can Avoid Getting Sued, it will include real-life scenarios where trustees could have been liable for hundreds of thousands of dollars of damages and also provide trustees with solutions to mitigate their liability. If you are a TOLI trustee, you will want to take part. Just click here to register.

https://www.itm21st.com/Education

  1. New York Life Accused of Profiting Off Workers’ 401(k)s, Bloomberg BNA, July 20, 2016
  2. Participants File Self-Dealing ERISA Suit Targeting M&T Bank, Planadvisor.com, May 16, 2016
  3. BB&T Finds Itself Targeted in Self-Dealing ERISA Suit, Plansponsor.com, May 23, 2016
  4. New 401(k) Suit Targets Vanguard Fund Fees, InvestmentNews, January 5, 2016
  5. Uptick in Fee Litigation Reshaping 401(k) Industry, Bloomberg BNA, June 9, 2016
  6. Troubling Trend for Trust-Owned Life Insurance Trustees, Estate Planning (a Thomson Reuters/Tax & Accounting journal), August 2016

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