My guest today is Jerry Schlichter, founding and managing partner of Schlichter Bogard & Denton. If you work in the retirement industry or are a fiduciary to a mega plan, you know all about Jerry. He's been featured in numerous national publications, including The New York Times, Reuters, Bloomberg, USA Today, and the The Wall Street Journal, for his success in pioneering claims of excessive fees in defined contribution plans, obtaining precedent-setting results against large employers. There's a reason he's been called “public enemy no. 1 for 401(k) profiteers” and “the industry’s most feared attorney”.
In this episode, he discusses the economics of taking on 401(k) and 403(b) cases, as well as the past, present and future of retirement plan litigation. Listen in as we talk in depth about emerging litigation areas like data as a plan asset and the potential risks of cross-selling additional services to participants. You will also hear his thoughts on how litigation will become increasingly more complex over time, whether litigation will continue to come down market and his best advice for ERISA fiduciaries.
”It’s a very serious process to take a client on, and we probably deny about 90% of cases that come through.” - Jerry Schlichter
“You have to learn to pivot and see the direction that things are going.” - Jerry Schlichter
“It’s very important to take a long-term approach.” - Jerry Schlichter
“Disclosure isn’t enough.” Josh Itzoe
Josh Itzoe: Welcome to episode number 19 of the Fiduciary U™ podcast. My guest today is Jerry Schlichter, founding and managing partner of Schlichter Bogard & Denton. If you work in the retirement industry or you're a fiduciary to a large mega plan, you know all about Jerry. He's been featured in numerous national publications, including the New York Times, Bloomberg, USA Today, and the Wall Street Journal for his and his firm success in pioneering claims of excessive fees in defined contribution plans. He's obtained precedent-setting results involving claims of excessive fees against large employers, and for the reduction in fees his cases have caused throughout the retirement industry.
He's won or settled the three largest excessive fee lawsuits in history, including $62 million from Lockheed Martin, $57 million from Boeing, and $55 million from ABB. He's also been called "The Lone Ranger of the 401(k)" by the New York Times, "Public enemy number one for 401(k) profiteers" by Investment News, and "The Industry's Most Feared Attorney" by Chief Investment Officer.
On today's episode, Jerry and I had an awesome conversation. We discussed the economics of taking on 401(k) and 403(b) cases. The past, present, and future of retirement plan litigation, data as a plan asset, cross selling additional services to participants, and how litigation will become increasingly complex over time. And finally, whether litigation will continue to come down the market. We also discussed his best piece of advice for ERISA fiduciaries that you don't want to miss.
And so, with that introduction, I hope you enjoyed this episode of the Fiduciary U™ podcast. Jerry Schlichter, thank you so much for being a guest on the Fiduciary U™ podcast.
Jerry Schlichter: Happy to be here, Josh.
Josh Itzoe: Well, I'm really excited to chat with you today. I think you're one of the biggest stars on the podcast so far. And I've had a lot of well-known folks that's kind of high praise for you. And you've had a tremendous impact on the 401(k) and the 403(b) industry over the past 15 years or so. I'm really excited to kind of get into that conversation today. Maybe to start with, in 2006, I believe it was eight cases that you filed against the plan sponsors, I think, ABB, Boeing, Lockheed were three of those as well, which happened to be three of the largest settlements that were out there. Can you talk about how you originally got into the space and how it was brought to your attention and what you did in order to kind of prepare, to bring cases in the space?
Jerry Schlichter: Sure, well, in context, I and my firm have always only represented people, individuals taking on corporations or other institutions, and people who don't have the financial wherewithal to pay an hourly rate. So, my entire career as a lawyer has been spent, working only on a contingent fee, gives the key to the courthouse for the average person who takes on a larger entity.
I've also come from a position of wanting to use the law to benefit people. So that's just an overall arching view. We began getting as we saw the sea change in the American retirement system from the defined benefit model to the DC plan, 401(k) plan model. We began to get more and more questions from our individual clients about their retirement, along the lines of, "I don't know that I'm going to be able to retire when I thought I would. I'm not sure I'm going to have the lifestyle and retirement I was hoping to. And I can't figure anything out in the 401(k) plan that my employer now has. Can you look at any of this?"
And with those questions, we did a very, very deep dive into the industry coming from no knowledge of the industry whatsoever. I was a complete outsider. In fact, the first book I read was 401(k) Plans for Dummies, which described me as I was reading it. And it took a year and nine months to really understand and get our arms around the industry practices that were going on. Things like revenue sharing, paying for record keeping through revenue sharing lineups with the record keepers, investment products, things of that nature.
And I was astonished at two things. Despite the fact that 401(k) plans had become the American retirement system, and ERISA had been around for 30 years, as well as 401(k) plans, and despite the fact that any participant can bring an action for excessive fees or imprudent investments, no one had ever done so with 600,000 401(k) plans in America. And the Department of Labor as the overseer, the regulator, had that authority also.
Unbelievably to me, I couldn't believe that the Department of Labor had never brought a case for excessive fees in an environment where the fiduciaries, the plan sponsors have the obligation to make sure that fees are reasonable and add for the participants interest, as you know, with no litigation, and no regulation of that duty, and in a context where nobody's bonus, or salary, no company's bottom line depended on the performance of the 401(k) plan.
So, what we saw was, things going on in a dark closet, with no litigation or regulation, and American workers suffering from that. So, it was a difficult decision to take this on. And there's a reason that nobody had ever done it, among others, not understanding perhaps what was going on. But also, unlike the Department of Labor, which could have brought two or three cases and probably had a very broad impact throughout the industry, for a private lawyer, such as myself, and my St. Louis law firm, to take this on meant everything had to be financed out of our pocket.
And having been involved in other so-called bet-the-farm litigation in some environmental case and some other work civil rights cases, I knew that if we do this, this would be nuclear war, literally. And the strategy would be to try to kill the area of litigation before it ever got off the ground. So, to do that meant having the staying power, that perseverance for a long battle, a long journey, and that meant a monster amount of resources would have to be devoted for it.
So, I and my two partners put our houses on the line, everything on the line, to carry this forward. And not without a lot of sobering assessment of what that would mean. And I decided we would do this. And as you pointed out, we filed against some of the biggest companies in America, starting on September 11, 2006.
And it became exactly what I anticipated, a nuclear battle. I remember very well, early on, the largest insure for fiduciary liability coverage for Fortune 500 companies. And there were eight or nine primarily who insure this kind of exposure and a fiduciary coverage, which have different layers of coverage in various plans.
I remember being told by the head guy from the largest of these companies, he said, "I've organized all the insurers against this. We're all going to fight. We're not going to settle any cases, and we're going to put you and your firm out of business." And we don't care what we pay our defense lawyers. We don't care what we pay in costs to do this, because we don't want to establish a whole new area of litigation. So that was sobering, but we launched nonetheless.
Josh Itzoe: Thinking about the economics of that, and really kind of the bet-the-farm litigation. It's funny and thinking about, obviously, fees, were a major thrust of the original litigation. And even today, it's interesting when I look at 2006, there were eight cases filed. I think in 2008, there was something like, maybe 107 cases filed, and then it kind of dwindled down. And I think in 2013, there were only two cases. But then it ramped back up in 2016 and 17. I think there were over a hundred cases. And then, last year there was something like, I think 200 cases in a 12-month period or so that were filed.
And it is interesting you hear in the industry, there's a big focus on wellness now. And you hear that a lot of people saying, "Well, it can't be about fees, fiduciary and funds any longer. But I would argue that if you look at what's happening, fees are still front and center, a lot of these cases, it's still very much front and center. And obviously, there's more conversation and more transparency now than there was 15 years ago.
I used to say that 15 years ago, the second-best skimming operation in America was 401(k) industry behind Las Vegas. And that was mainly because of the lack of transparency, a lot of these asset-based fees, revenue sharing, and nobody really had an idea, even fee structures. And we're going to get into that as well. These asset-based fees that allowed fees to grow kind of unchecked over a long period of time.
What do you think about when you take on a case? Because, I would imagine you don't take every case that comes your way. But so, what would you say in a normal year, what percentage of cases that you're presented with do you actually take on and what kind of the process you go through in order to determine whether or not a case is worthy to take?
Jerry Schlichter: Over the years, Josh, we've taken on probably less than 10% of the cases that have come across the radar screen. And the process, for us is a very serious process. Obviously, at the beginning, again, we spent a year and nine months before filing any case, that was much about learning the industry and industry practices. Even now, 15 years later, we will often spend up to six months of digging into the particular plan, digging into the practices, looking at fees, looking at the performance of investments, historically, and a variety of other things.
So, it's a very serious process to take a case on. And as I say, we probably declined to pursue over 90% of the cases that we look at, that may well not be true of other firms but that is what we do. Because I make the assumption in every case, this will be a battle to the end, no matter what that is. And we, in every case, make the commitment. We will take this all the way as far as the case requires, including seeking the US Supreme Court to take the case, if need be.
And that has been borne out in multiple cases you mentioned, ABB and Boeing and Lockheed. Well, the ABB case, which was the first case in the history of the United States to go to trial, went on 13 years. A major one-month trial against Fidelity and ABB. ABB had two national law firms and five lawyers at their table. Fidelity had three national law firms and six lawyers at their table in the courtroom. 11 lawyers at their tables, eight or nine more lawyers in the seats for the duration of that one-month trial. And they spent, we found out later, $42 million in attorney's fees fighting us just through the trial.
Josh Itzoe: On top of the $55 million that they ultimately settled for.
Jerry Schlichter: Yeah, well, and the original judgment that we won was 36.
Josh Itzoe: Right.
Jerry Schlichter: After that $42 million, they pursued to appeals, and sought leave in the Supreme Court before ultimately a settlement was reached. As I say, almost 13 years later for $55 million plus untold attorney's fees and untold expenses for expert witnesses and so on. So, that was representative of the battle and the commitment that we had. We had 27,000 attorney hours in that case.
Josh Itzoe: And you foot the bill for that, so there's obviously revenue over 13 years. It's not like you can have somebody on your team working for not paying them for 13 years. So, you're funding the cost of that litigation.
Jerry Schlichter: All those attorneys in my office get a paycheck every two weeks. And the expert witnesses, which themselves were very costly. When you're talking about reviewing, say a half a million documents, expert witnesses in investment finance, the usury practices, record keeping, and so on. They get paid, win or lose. They get paid when they do the work and you carry that cost. So, we carry those costs for over a decade as well. They were certainly massive and that was one case.
Boeing was the second largest plan in America with at the time, I believe $40 billion in plan. And that went on about over nine years. The Edison case, Tibble v. Edison, which was the case that we asked the US Supreme Court to take, and the first and only case the Supreme Court has taken and landmark decision, unanimous decision by the Supreme Court favorable to our position was also 12 and a half years of litigation, carrying those costs, carrying all that time. One person didn't get paid during all that time and that was me, right?
Josh Itzoe: That's the, being the business owner that right, you're in those cases, the one who gets paid last.
Jerry Schlichter: If at all.
Josh Itzoe: If at all. You mentioned and touched on a number of different things that we'll certainly get into. Those original cases, and just as an interested observer, does it seemed like, you had these arguments that you made early on and some of those cases that weren't settled favorably. But it seemed over time, you came in as you spent a couple of years ramping up the knowledge, but then, that's kind of practice in some ways, right? Once you get into the actual game, you have to see how courts ruled. And it definitely seemed you dialed in and honed over time, the arguments that you would make. There were some that didn't seem to be successful. There were other ones that did. And it seems like in looking at what you did, you developed this mastery over years of knowing what arguments were going to have a higher probability of being successful and ones that weren't. Is that kind of how things played out, that as you learn more and you saw more how courts were ruling that you honed in some of that mastery and that expertise?
Jerry Schlichter: Yeah, that's exactly what happened. So early on, multiple cases were dismissed by federal judges, who we felt didn't fully understand the nuances of these plans, and basically rule that as long as there's an array of options with an array of fees. It's participant choice, and that's the end of the inquiry. So, the mantra became, these cases are going nowhere. And that's why what happened was, there was a dearth of cases, other cases filed by law firms for years. Because these cases were being dismissed.
In fact, I had a federal judge, tell me at one point, "It looks like these cases are going nowhere. Have you thought about just dropping them all?" And I said, "No, we're in this for the long run. And if we hadn't had that commitment at the outset, to the long run, if it had been looked at simply on a case-by-case basis or short-term basis, one could say the rational decision would have been to do what that judge suggested.
Josh Itzoe: Right.
Jerry Schlichter: But I made the commitment when I decided to launch this journey, that we're going to be in this no matter what happens for the duration. And that resulted in a necessity to just, it's really akin to startup business. It's an entrepreneurial approach, because you're financing everything, the time and the expense, and risking all of that. Because if you lose, all that is down the tubes. Your client can't pay you anything.
So, you have to be ready to pivot, and to see the direction in which things are going. So as the law, keep in mind, there was no law as such developed under ERISA, in this part of ERISA. So, the law had to evolve. And as it evolved, it was vital that we watch what was happening and build on those precedents accordingly.
So that, as the nuances of some of these practices came out, and as judges began to dig deeper and understand what was going on, we in turn, presented the cases in ways that would perhaps help the judges understand more about what was going on, which again resulted in the first trial, the ABB success. And then ultimately, the US Supreme Court landmark decision in Tibble v. Edison, which in that case, was a landmark case because we had supporting briefs from the Solicitor General of the US and the AARP in support of our position.
Josh Itzoe: Are those like amicus briefs?
Jerry Schlichter: Amicus briefs, yeah, supporting briefs, agreeing with our position in making arguments. The other side had the Chamber of Commerce and the mutual fund industry trade group, but all agreed on both sides, it would affect every 401(k) plan in America. So that was of great importance in ultimately shaping the way the law has been developed.
Josh Itzoe: We talked about share classes and revenue sharing, and that was a big thrust, certainly early on and even today, this move towards lowest cost share classes. A lot of the issues and a lot of cases and the share classes, kind of the mutual fund industry is like an alphabet soup. And that can make it hard at times as what one person says is an institutional retail. There's not an apples to apples comparison across different fund families.
One of the things and this has become more prevalent in the industry. We have asset-based record keeping fees, so a percentage of assets or through revenue sharing. And that just by definition, as plans grow, revenue grows, and quite frankly, the industry is addicted to and loves these asset-based fees, because you get a pay raise, and you don't have to ask for it. It's just kind of automatically built in.
You guys really pushed the narrative and continue around the fact that record keeping fees are most prudent, if they are on a per participant basis or a per capita basis, instead of this, this pro rata basis. Can you talk a little bit about kind of your philosophy on fee structure? Because fee structure has a really big impact.
In a lot of cases, these plans don't grow because record keepers do a good job or because advisory firms do a great job, not to say that they don't. But that's not the reason these plans grow. They grow certainly because of market performance, but mostly because they get funded every single pay period and their contributions that are going in and we see that growth. So, what's your overall philosophy on asset-based versus per participant or per capita fees?
Jerry Schlichter: Well, this goes back to the original examination. As we looked at record keeping, it became apparent that it's a commodity service. It's something that has nothing to do with asset size. So that if you have $100,000 in your account, and I had $5,000 doesn't cost multiples, for record keeping your account as mine. And it was to me, it looked like a square peg in a round hole. Why? And coming from outside the industry, I think... I asked this question, because it just made common sense to ask.
Whereas had I been a part of the industry, I'm not sure the question would have been asked. It was taken for granted by people. Why do you take a commodity service like that, that has nothing to do with asset size, yet pay for it out of an asset-based charge?
In fact, when we brought these cases, I got a call from the DOL in DC, asked me to come there, to the EBSA folks, to explain what we were doing so they could understand this. And I did that. And they asked me what are some practices that are common to your cases? I said, "Well, here's one, paying for record keeping that has nothing to do with asset size, by an asset-based fee that grows just because somebody puts more money in their plan, in their account. They clearly had not thought about that at all.
Josh Itzoe: Which is kind of crazy when you think about it.
Jerry Schlichter: Yes, this is the regulator who is responsible for America's retirement system. And I said, "Here's another one. Paying retail fees or retail share class for a billion-dollar plan that a $500 investor would pay when the obligation of the fiduciary is to get the best rate for somebody in their life status. And in the investment management industry, it's a very fundamental principle that size matters.
Again, they did not see anything wrong with that. They do now and to their great credit. They have filed supporting briefs and numerous cases, taking on retail share class fees and record keeping on asset-based charges. But it was just astonishing to me that nobody had ever brought this up. And it was costing workers a lot of money.
One of the most compelling statistics I know of in this industry is actually on a DOL website that a 1% difference in fees over a 35-year work career makes a 28% difference in the retirement assets at the end of that career. It's a big deal. By the average person say, well, 1%, that doesn't sound like much, that's not a big deal if you don't have an appreciation of that.
Josh Itzoe: Yeah, it's interesting. If I say to you 50 basis points or $50,000, which one of those has a more visceral effect on you?
Jerry Schlichter: No question about it.
Josh Itzoe: $50,000, right?
Jerry Schlichter: Right.
Josh Itzoe: Well, 50 basis points on a $10 million plan is $50,000. And I think that's, it's interesting, here's having done this, been in this space as a fiduciary for 16 plus, 17 plus years. One of the things and this is, what I wish would change is that, and I think the reason why there was a lack of focus on fees is because, unlike with health benefits, for instance, a company, when they pay health benefits, it comes out of their P&L. It hits their bottom line.
Whereas with retirement, because of your administrative versus settler fees under ERISA is that they can put all the costs... It actually doesn't, they can, but they don't have to pay it from corporate assets. And so, if they're putting all of the costs into the plan, which is being borne by participants, they really don't feel the actual cost, because it's not hitting their bottom line.
And because of that, whether it's an act of omission or an act of commission, when you're not actually having to pay for it, you're going to be much less vigilant or committed to trying to negotiate because it doesn't feel like it impacts you. And that's kind of one of my theories over the years as why there hasn't been more of a focus on not just benchmarking, because I think that's in the industry.
We get really focused on benchmarking. And if somebody benchmarked your plan and my plan, and my plan is really crappy with high fees, and your plan is a little bit less crappy, but still has high fees, you'll feel good about the benchmark, because you're better than my plan is. And unfortunately, one of my goals is to bring more awareness to the industry, that it's not simply about fiduciary benchmarking, but it's more about negotiating using economies of scale, using common sense approaches to try to ultimately get a fair and equitable and reasonable deal for participants. Because ultimately, like you said, those fees are insidious. And as they grow over time, there's a cost to services, no doubt about it.
But, ultimately, if fiduciaries aren't watching out for their people... Participants have very little control over a plan. They can only determine, do I participate? What do I contribute? And what investments do I select from this menu that has been given to me? And if the fees are high, you might be able to pick the lowest cost fund in the plan, but it could still can be really high and that has an impact ultimately on outcomes and successful retirements.
Jerry Schlichter: The need is for these fiduciaries or advisors to a plan to keep very much in mind that service providers who are not fiduciaries are going to be trying to maximize their revenue. And that's not illegal under ERISA. But the gatekeeper for those fees, the police person is the fiduciary or the advisor, and they have to be a break on those fees.
And it's very easy, obviously, for a service provider so you can maximize its profits to see whether that fiduciary is taking their role seriously or not. So, if they say, "Well, gee, what's your age? What funds, charge, what fees, and do nothing more, then obviously, they're not going to get the best fees out of that service provider unless they're stretched. We see that all the time in cases. And even now, even in recent years, when there's been industry wide reduction in record keeping fees, for example, as well as investment management fees.
We've seen unilateral moves by record keepers to reduce fees where somebody, a record keeper will come along and say, "Gee, we want to come to you and reduce your record keeping fees or give a rebate for the revenue sharing that we've never done before. We're really working with you." And so, some of these plan sponsors jump at that opportunity, of course.
But what they don't recognize is this is being done because of fee pressure, fee compression. And it isn't necessarily are in most cases, the best fee they could get if they simply negotiate it.
Josh Itzoe: Right.
Jerry Schlichter: They should use that as a starting point, not the endpoint.
Josh Itzoe: Not the endpoint. And so, one of the things that is interesting in these cases, in these settlements, or when they're fully adjudicated, and what you seem to have done is, there's the monetary settlements. But then there's non-monetary relief, as well. So, things like commitment by the plan sponsor, that they're going to go out and do an RFP every three years, let's say.
And I kind of think, the monetary relief is the plan sponsor saying, "I'm sorry, but the non-monetary relief..." is them going a step further and say, "And I'm not going to do it anymore," as opposed to just, "I'm sorry, please forgive me." Is that how you see it? Talk a little bit about the importance in your mind of non-monetary relief, in addition to the actual monetary settlements.
Jerry Schlichter: I would agree with that assessment, I'm sorry, and the non-monetary piece being, "I'm not going to do it again." But I will add, "I'm going to do better," also as part of the non-monetary relief. This non-monetary component is hugely important, Josh, and goes back to the fundamental philosophical viewpoint that I had in starting this, which is to try to accomplish something for American workers and retirees, beyond just having a job or getting an income as a lawyer or law firm.
To me, to take on all this, and put everything on the line, and then only get past compensation, and present the possibility that an employer could go right back to the old practices, and do it all over again and require a whole new lawsuit after years, was just unacceptable. So, I decided early on that we would always insist on non-monetary relief to benefit the plan participants going forward, if that were necessary to correct some practices.
What we've seen is, in a lot of cases, there are changes that are made during the litigation, in the direction of what we've said should happen. That didn't happen so much in the earlier cases. I think, probably, because companies were reluctant to admit, by action, that they should have been doing things differently. Eliminating asset-based record keeping, for example, doing RFPs on a per participant basis or replacing retail mutual fund share classes with institutional share classes, things of that nature.
But, as things have evolved, many companies and institutions and 403(b) plans have made these changes after litigation has been introduced, because they see the handwriting on the wall. But in those cases, there have been some where virtually everything we asked to be done was done by the time the case was over. But where that's not been the case, yes, we have insisted on and fought for changes to the plan along these lines. RFPs, and that shouldn't be controversial. Even DLL says it should be done every three to five years. Industry experts say that that's the only true test, whether you're getting a good deal, put it out for bids.
And then more recently, we've seen as, and this is a whole separate subject, but as fees have compressed, we've seen what I call whack-a-mole. Other revenue opportunities pop up for record keepers and service providers. For example, using the data collected to record the confidential information, the most confidential information comparable to health information to your doctor, used by record keepers to sell their products and things like wealth management or insurance policies or IRAs. So, we think that's wrong. We think that's a misuse of the information that the record keeper receives.
And we have insisted in multiple cases in recent years, that if that was being done, that practice be stopped. And that information not be used to sell and market other products and services.
Josh Itzoe: I actually, I think maybe the first place that I saw that, and maybe it appeared before that, but I believe in the Vanderbilt settlements...
Jerry Schlichter: That was the first case ever to have that.
Josh Itzoe: And this idea of them, and I believe I could be wrong, but I think maybe TIAA was record keeper for that plan, but essentially requiring that TIAA did not solicit using that participant data as an asset to cross sell other services. And so, in thinking about that, I know recently in the shell case, I believe the judge basically ruled that data was not a planned asset. And I think, he had gone back and he had looked at the ERISA statute, and it mentions investments, but it doesn't mention data. It does reference the fact that the Department of Labor is able to define data or define plan assets in ways that aren't in the ERISA statute. But not surprisingly, it's a nearly 50-year-old regulation and this kind of concept of data didn't really, to that extent didn't exist back then.
The DOL, I also believe, hasn't provided any guidance about data being a plan asset. I suspect that, that will become, there'll be some guidance at some point. But that was kind of I think, is those of us in the industry, common sense would say, "Well, if you're using data to sell other things or to solicit, then that is, you're getting benefit from that."
And so, I think with Vanderbilt, what you got is non-monetary relief is that the record keeper couldn't solicit. However, if a participant requested information, that would be okay. Is that kind of how you see the world? Is that they're not using, they shouldn't, and even though with that ruling, plan sponsors could still negotiate and require, perhaps via the contract that they have with the record keeper, not to do any outbound solicitation, but still be allowed to respond to a request by a participant? Is that kind of how you see the world?
Jerry Schlichter: Yes, that is exactly how we see it. And that's exactly what we have said in Vanderbilt for the first time. And now in other 403(b) cases and 401(k) plans. And we see this more in the 403(b) context with these universities. I'll give you an example.
Josh Itzoe: The 403(b) space is the Wild West?
Jerry Schlichter: Yes, yes. And that itself was its own set of factors to make the decision to launch those cases, which we did in 2016. Again, before that time... So, at that point, we had a decade of 401(k) litigation, which was being accepted more and more in courts, but never a case brought against a fiduciary and a 403(b) plan.
Now, obviously, there are some differences in terms of things like annuities being used and the products in the plan. But the fiduciary duty is exactly the same. And we spent over a year apart from what we did in the 401(k) space, looking at the 403(b) industry separately, before we ever filed any 403(b) cases.
And there was a risk in filing those cases that courts would say those distinctions, were the whole ballgame. And some of the things that 401(k) sponsors should be doing don't apply to 403(b) sponsors, so they could have been dismissed. As it turned out, two were dismissed, PAN and Northwestern. PAN, we took an appeal and that dismissal was reversed, and that case was recently settled.
Northwestern, the reversal was upheld on appeal. And we've asked the US Supreme Court to take that case. And the Supreme Court recently asked the solicitor general for its views of whether they should take the case or not. So more to come on, on the Northwestern case.
But I'll give you an example, a practical example of how this is being done. And this is all a matter of public record in the NYU trial, which was the first 403(b) case to go to trial. In that case, one of the named plaintiffs was a professor of endocrinology in the medical school whose plan was also part of the case.
She said, she's a 39-year professor and knows a lot about endocrinology. But she's a financial illiterate. Those are her terms. And she had a very large seven figure balance in her 403(b) account. TIAA, she testified in open court, approached her and said she should take $300,000 out of her account and give it to TIAA to manage. And so, she said, "Well, I'm not financially literate. So, I thought they were what my employer picked to run the plan, I thought I should do what they said. So, I did that."
They then took the $300,000, again, matter of record, and charged over 80 basis points for managing it, and put it into various mutual funds, some of which were TIAA proprietary mutual funds, and all of which had their own fees. So, fees on fees and taxable income. And then she said, to top it off, she said, she was asked by the person that she thought was acting her financial interest, but who is actually selling products and services, do you have kids? She said, "Well, no. My husband and I don't have children, but we do have a dog." So, he said, "Well, have you ever thought about what happens to your dog if you and your husband die before your dog does? Who's going to take care of your dog? You need insurance to protect your dog." At which point she said...
Josh Itzoe: That's ... I mean that, if it weren't kind of tragic, I mean, it's kind of funny in some ways. But it also is, that's why it's so important, I think, this idea of the DOL and just the importance of fiduciary standards. It's amazing to me that in 2021, we're still fighting over whether or not the financial services industry should be fiduciaries to clients.
Jerry Schlichter: And the problem is with that when you have a record keeper with this confidential information, who's got the biggest balances? When will they be retiring? What are their selected investments, their social security number? To take that information, and then target the people who have large balances, and then contact them when they believe that the representative is there on campus to just answer questions and be of service and be acting in their best interest, and to do this kind of thing.
Our position is yes, this information is a plan asset in the shell case, that was held not to be the case, but we are continuing to pursue this position. Because a plan asset is something of value that arises out of the plan. And there is no question that this information has great value. Look at the ads, Superbowl ads. Fidelity runs for IRAs, to the general public. Well, you've got a captive audience, whose balances you already know, and you got the imprimatur of your employer's approval to be involved in their retirement assets, that's a tremendous marketing advantage. That gives you three legs up over somebody advertising to the public and has great value. So, we believe it is a planning asset.
But even if it is not a plan asset, our position is, this is an abuse of the role of record keeper. It's a breach of their obligation to keep that information confined to uses in the plan, not outside the plan. The same way as you expect your doctor wouldn't take your medical information and sell that to a drug company.
Josh Itzoe: Right.
Jerry Schlichter: It's basic even if...
Josh Itzoe: Just common sense, if you think about it that way.
Jerry Schlichter: Yeah. This is an ongoing battle that will continue to be asserted in the courts.
Josh Itzoe: I mean, you think about just in general, big data, the value of data in general and why, just think about from the technology industry and all these apps. And you think about with a Google or a Facebook or an Amazon, for instance, right? That they are able to use data to determine likes or needs and then offer up services or products.
Now, the difference is that Google and Facebook and all these technology companies, Amazon, are not held to a fiduciary standard. So that's the difference. So that's the data privacy piece. So not using participant data to get a leg up.
The other aspect and we're seeing more and more of a focus on cybersecurity. I mean, even look on the East Coast, where I live, the hack of petroleum pipelines. I mean, it looked like the 1970s last week when I went to fill my truck up, because it looked like, that gas was going to be disrupted. And I mean, there were lines with 20, 30 cars waiting to fill up. And so, this idea of hackers being able to get data... There was a case, I think that was filed that ultimately got dismissed against Abbott Labs, but I think still pending against Alight Solutions who was the record keeper.
The gist of it was, there was a participant, and she had $245,000 stolen from her accounts. Because of the allegations were that there weren't appropriate security measures in place to protect that data, and a hacker was able to go in and change her password and ultimately transfer money into a separate bank account. The case was brought against Abbott Labs and Alight Solutions as the record keeper. I believe the allegations were dismissed against Abbott.
Jerry Schlichter: Right.
Josh Itzoe: They're still pending against Alight. So, what are your thoughts around data privacy and what plan sponsors need to be doing in terms of monitoring or prudent monitoring of data security as it relates to their plan and the assets and the data within the plan?
Jerry Schlichter: Well as to data privacy, they should be having a bright line prohibition against using the information gathered in the role of record keeper for any function outside the plan. And there are many institutions that now do that. Lots of them do that, including institutions that have settled with us 403(b) plans.
As to data security, two things, duty of the record keeper and the fiduciary duty. As to the record keeper, the record keeper's duty is akin to a fiduciary duty to protect the confidentiality of that information, that very sensitive information it has access to, by virtue of its role as record keeper. And so, as the court held in the Abbot case, there the record keeper, the case is being allowed to go forward to show potentially that the record keeper didn't take necessary cyber security precautions to protect that delicate information. And that's the duty of any record keeper in a plan.
But there's an additional duty on the part of the fiduciary. While the fiduciary isn't keeping the records, the fiduciary, in its role as fiduciary, has an obligation to determine whether the record keeper has necessary cyber security protections for that information before the fiduciary allows the record keeper to have it and should be monitoring that information, those cyber security precautions on an ongoing basis as part of its obligation as fiduciary. That's the position that we take.
Without that the fiduciary would be saying, "Well, it's not our problem, even though it's our participants information." Because this has potential to have severe impact on participants.
Josh Itzoe: When I read that complaint, if memory serves me correctly, I think the representative from Alight actually provided personally identifiable information with the hacker and said, "Is your address still... something along those lines, which is pretty incredible from that perspective.
Jerry Schlichter: I'm thinking part of that arises from the fact that this has not been the subject of, as you said, DOL guidance and has not answered. It's a recent phenomenon, they have all this hacking going on.
Josh Itzoe: Right.
Jerry Schlichter: And it has been the subject of litigation. We've seen that the litigation in this space of fiduciary practices has shaped behavior on the part of plan sponsors and advisors and fiduciaries because of the fear of being silent. So, at this point, there hasn't been that fear so much created on the part of fiduciary for the cybersecurity of plan information.
Josh Itzoe: It's interesting too, is this idea, and I don't see disclosure as a cure all. I think a lot of, and actually this was, I think in the Supreme Court case, I believe the ERISA statute of limitations is six years or three years, if there's actual knowledge. And in that case in the ruling, Judge Samuel Alito had basically said that disclosure isn't enough.
And I think historically that's what, if you look at 404(c) as an example, right? Providing access to information and disclosure, but not being a cure all and he talked about that. In actual knowledge, it can't simply be giving information to participants if it can't be proven that participants actually read the information.
And he differentiated between actual knowledge, and I believe what he called, willful blindness. Willful blindness, as I understood it, and I'm obviously not an attorney, but willful blindness, having the information and choosing not to look at it would be considered actual knowledge. But just getting information but never looking not reading through it, wouldn't be actual knowledge. Can you describe what the difference between those two concepts are?
Jerry Schlichter: Yes, that is the distinction Justice Alito drew in the Tibble v. Edison case. You see, these disclosures... Well, look at a prospectus, for example, 50 pages of material. And keep in mind in a plan, where you have, let's say, you have 15 options. And then some of these 403(b) plans have hundreds of options. Does anyone really believe, first of all, that the participants read 50-page prospectuses on 10 funds? Of course not. But even more so, does any fiduciary read prospectus on each fund in the plan? No way. I've never seen one yet.
Josh Itzoe: Me neither. So, I agree.
Jerry Schlichter: That shows vividly, in my view, the idea of actual knowledge, not being enough to simply be attributable to a participant, because there's some in the fine print on page 37, footnote four, there's some reference to whatever is the subject.
And as the willful blindness, that would be akin to somebody saying, "I'm going to be not informed about my retirement plan, because I want to be in a position so that I can sue over a longer period of time, six years rather than three, so that I don't know what's going on." Nobody does that. Nobody is even aware of that. And it would be, if you had a sign with three-foot lettering and neon lights, saying, you could be paying institutional rates, but you're paying retail in this billion-dollar plan, and you close your eyes, that would be willful blindness. But that just doesn't exist. People care too much about their retirement assets. And they don't have the level of knowledge to make that distinction.
And people simply don't read these things. And even if they do, they don't understand.
Josh Itzoe: No.
Jerry Schlichter: They don't have the knowledge to really... The industry provides a lot of data and information, but what really matters is insights. Being able to take that data and information and interpret it. And that's where I think disclosure falls short, and even disclosure, even if you look at the 404(a)(5) and the 408(b)(2) disclosures that the DOL provided leeway. And I think, with pressure from the industry, so you don't necessarily have a consistent format across those disclosure documents. You have the DOL specifying, these are the types of information that need to be provided, but they can be in different formats.
And I've seen just throughout my career that in some cases, some record keepers are actually really good about providing simpler language and information around disclosures. And some have made it really, really, really difficult to understand. I mean, I do this stuff, I've done this stuff for a living. And there are times where I've come across disclosures, and I'm like, "I can't make sense of what's up and what's down."
I think about from an SEC standpoint. Last year, before this requirement for in addition to the ADV and the form CRS. Well, some ORAs as an example that didn't have other lines of business. That CRS forms has a couple of pages. But for a lot of these bigger institutions, they could be 120, 150 pages to reference all the different lines of business that create conflicts of interest and misalignment of interests over time.
Who's going to read through 120-page disclosure? And even if they do, are they really going to be able to know what questions to ask to get the answers they need? If you don't ask the right questions, you're not going to get the right answers.
Josh Itzoe: Yeah, it's just common sense. And you see in a lot of disclosures, some listing of something and then the statement, "This may present a conflict of interest." Well, what does that mean?
Jerry Schlichter: Right. How does an average person, let alone, in the example I gave earlier, a 39-year accomplished academic physician with years and years of training, even that kind of person? How does that person determine what that means, right? It is not actual knowledge of what's going on at all. And it certainly is not willful blindness to the reality of what's going on.
Josh Itzoe: Let's kind of pivot as we start to wrap up. Where do you see the future of litigation going? It's been interesting. There's been a couple of other firms, Capozzi Adler is one, Nichols Kaster, that have gotten into this. I believe that Capozzi Adler filed over 100 cases last year. And it's interesting because they are literally taking the language almost verbatim from complaints you filed and then kind of slapping their name on it.
What's been interesting is, it seems to me that, while you kind of honed your knowledge over what works and what hasn't worked, they kind of use the playbook that you created years ago. I know Salesforce is an example that I believe might be under repeal, but that the charges were, the allegations were dismissed. And it was interesting, the angles they were arguing were things that, I think, you probably learned years ago, weren't the ones that were most successful in terms of driving outcomes you were looking for.
So, number one, kind of, what are you feeling about, they say that imitation, I think, is the highest form of flattery, right? That that you've got these other firms now that are essentially taking your work products and using it in some ways as their own. But then also, where do you see the future of litigation going? And historically, and I think it's because there aren't punitive damages. This isn't like an asbestos case or anything. There's no punitive damages on ERISA.
And so, you hear a lot about fiduciary fearmongering, I think. I'm just not sure the size of plans down the market. You see, litigation has really been in the largest companies in America, and really large plans probably used to be over a billion dollars. It seems to come down to maybe half a billion dollars. But it's really still litigation is in the large market.
And I suspect that's because the economics, if you have to mortgage your house in order to fund the case, you got to go after a target that's big enough where you can make the business case for it and downmarket small plans. You hear a lot about fear around 10 or 15 or 20 or $30 million plans. The risk of litigation, I would say that the risk of operational failure is much higher than the risk of litigation in those plans, just because I don't think they provide the economics that could make it work for someone like you.
What's your thought on where the future of litigation is going? And in terms of size of plan, but also around what topics and after kind of fees have been worked through? Where do you see it going?
Jerry Schlichter: Yes, it's a good question. Having been in the wilderness alone, for many years, when the last thing anybody wanted to do is to file one of these cases and see that these cases dismissed as they were getting dismissed in the early years. It doesn't bother me to see these cases, even cases that have been, without mentioning firms, that have used even our own language, much less our theories against various defendants.
I can speak to what we do. And I think it's important that any law firm that takes on a case like this, do this, which is to thoroughly investigate what's going on, really yet every bit of available information. And also, there is information you can request, any participant can request of the sponsor to look at what is obtained, and make an assessment with the idea being that you will take that case to its conclusion, no matter what the commitment of resources is that's required.
That's the commitment we make in every case. Whether somebody, other firms that have filed these cases make that commitment or not, only they can say. But my hope is that people do this, take this approach, and then stay for the end, because that's the important thing for the workers that they represent and the retirees they represent. As opposed to thinking that they will shortcut things or cut corners. And I'm not saying anybody's doing that. But I am saying that it's important to take the long-term approach, if the benefits are going to be maximized for the participants in a plan.
Josh Itzoe: It's interesting that you say that because there was a case I just read about a couple of weeks ago. I think, WakeMed was the plan sponsor in North Carolina. And I don't know who the law firm was. It's basically under a year, you talked about taking it to the end. When you look at an ABB or you look at a Boeing or you look at a Lockheed, where you're talking about nearly a decade. In some cases, more than a decade of seeing it through to the end.
In this case, it was a settlement. They went to mediation, I think in the summer. It was filed and the complaint was filed in maybe April 2020. They agreed the mediation in the summer. They recently agreed to a settlement. And it was $975,000. There were 13,000 participants and a billion dollars in assets. And if I take out, if I just think just using 30% maybe as a contingency fee, those participants are going to get on average about 50 bucks towards their retirement out of that. I mean, just when I read that, I was like, "This feels more like a shakedown than anything."
Jerry Schlichter: That is a danger. And let's look at it from the standpoint of a law firm or an insurance company or a plan sponsor, making an assessment. If they know that they are in for a multi-year battle, a battle where the other side is going to take it wherever it goes, as long as it goes, no matter what the resource commitment is, and no matter what the length of time is, which is the approach we take, and then when they consider the question of a settlement, it's just simple fact that they're going to assess whether that kind of an approach will be taken by the plaintiff's law firm in the litigation.
And if they conclude you won't, there's no reason to settle for the maximum amount or to settle for an amount that they would sell for if they believe that it would go all the way. It's no different than any other negotiation. If you think your opponent is going to bail out early, then why would you offer more money in a negotiation situation?
So, and again, I'm not criticizing here anyone. I don't know who handled the case you just mentioned. But it's so important to make that long-term commitment. And if it isn't made and the defendant can't see that it is made, and frankly, the way you show that is what you do over time, over a group of cases, over a period of time, or the defendant knows that they're in it for the duration, then and only then will they evaluate the case with the true exposure that they face.
Josh Itzoe: Right.
Jerry Schlichter: So, where I see things going...
Josh Itzoe: Yes, thanks.
Jerry Schlichter: There's been an explosion of cases filed in the last couple of years, especially by a couple of firms. We have continued to file cases, but in a very much the same approach we've always used. Digging into the case deeply and committing to in every case, to take it all the way to its duration even if that's a decade or more.
Fees have obviously come down greatly in the industry. One, multiple judges have said, in our case is that, that litigation has brought fees down by over $2 billion annually, which is a great thing for American workers and retirees. And there will come a day in my view, when the cases, there aren't many cases that are out there that will be brought because of the fee reductions and the process improvements by fiduciaries and advisors in looking at what they should. And operating within what the law says is, and I single to the participant's interest with that always locked in as a beacon to follow.
There will likely always be employers who still are sponsors, who still don't take that duty seriously enough. The result being excessive fees or imprudent investments in some plans. But I look for the litigation to continue and to continue in lower levels of asset size than has been the case in the past. But you're right, it is a matter of resources. And for a plaintiff's attorney to prove what's got to be proven in these cases, it takes just as much money paying an expert to review the documents that make up the process in a let's say, $100 million plan or a $50 million plan as in a $500 million plan.
And again, those costs are not contingent, those are real costs you put out. It takes much the same time to fight a motion to dismiss and to fight other motions, such as class certification and summary judgment in a case where it's a $50-million-dollar plan compared to a billion-dollar plan. So, there is a finite limit, in my view, to the size of plans that will result in likely litigation, at least involving firms that are really willing to make a commitment to the long term.
Josh Itzoe: And what do you think, what would you say in your estimation is that kind of lower boundary, if you will?
Jerry Schlichter: I don't see it as a bright line, Josh. But I think that, when you start talking about plans that have less than $250 million dollars in assets, the economies of scale, so to speak, are very difficult for a firm to take on, and take on the risk and the cost for the likely outcome.
Josh Itzoe: Got it. So, as we wrap, the whole purpose of this podcast is to help make ERISA fiduciary smarter. One of my favorite lines that I ever read years ago in a judge's ruling was that, "It's not enough for fiduciaries to have a full heart and an empty mind." And so, I'm really committed to trying to help make ERISA fiduciary smarter. So, I typically wrap up and end by asking guests what their single best piece of advice to ERISA fiduciary is in order to help them perform at their best. So, what would you, this would kind of work you out of a job, perhaps, but...
Jerry Schlichter: And that's fine. I mean, if that happens, that's a great thing for American workers and retirees, and we'll move on to something else.
Josh Itzoe: Right. So, what would you, in order to avoid getting a call from you and your firm one day, what would be your best piece of advice to ERISA fiduciaries?
Jerry Schlichter: Follow the absolute beacon, that you should operate this plan with the sole exclusive interest of the participants fully at heart. If you do that, the decisions will flow from that, that are the right decisions, and you'll be free of fiduciary liability exposure.
Josh Itzoe: That's great. I think that's a great idea to end on. So, it has been a real pleasure, Jerry. I've really enjoyed the conversation and your insights and just appreciate you coming on the show.
Jerry Schlichter: Well, Josh, I appreciate your interest and your work on behalf of participants. And for all the right reasons, you've had a major impact yourself. I think, the kind of attention you're devoting to this issue can only benefit people as they try to develop their retirement across the country.
Josh Itzoe: Thank you. I appreciate that. Thanks for listening to today's episode with Jerry Schlichter. If you'd like more information or to learn more, go to fiduciaryworks.com/podcast. I've got some great resources there for you, including each episode along with show notes, articles, and free tools. Make sure to sign up on the site so we can stay connected. I'd love to help you stay in the know about what's happening in the world of corporate retirement plans.
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