Lawsuit: DC Plans More Vulnerable to ERISA Litigation Than DB Plans

Lawyers taking aim at a company’s retirement savings plan say firms with 401(k)s should expect to be sued more than those with traditional pensions.

Defined contribution (DC) retirement plans are far more susceptible to Employee Retirement Income Security Act (ERISA) lawsuits than defined benefit (DB) plans, lawyers argue in a lawsuit filed against The Wesco Distribution Inc. Retirement Savings Plan.

“The potential for imprudence is much greater in defined contribution plans than in defined benefit plans,” said the lawsuit.

The complaint, which alleges Wesco neglected its fiduciary duties by allowing excessive fees, said that companies with DC plans are much more likely to be sued than companies with DB plans because of the way they’re structured. Lawyers for participants of the Wesco retirement plan, who were from the law firms of Chimicles Schwartz Kriner & Donaldson-Smith and Franklin D. Azar & Associates, said that because the employer bears the financial risks in a DB plan, it is motivated to keep costs low.

“But in a defined contribution plan, participants’ benefits are limited to the value of their own investment accounts, which is determined by the market performance of contributions, less expenses,” said the lawsuit. “Thus, in a defined contribution plan, risks related to high fees and poorly performing investments are borne by the employee.”

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

According to the lawsuit, expenses, such as management or administrative fees, can significantly reduce the value of an account in a DC plan by decreasing its immediate value and by depriving the participant of the prospective value of funds that would have continued to grow if they had not been taken out in fees.

The lawsuit said that only 17% of private sector employees currently have access to a DB plan, while 64% have access to a DC plan. It also noted that The Wesco Distribution Inc. Retirement Savings Plan, with nearly 9,000 participants and more than $750 million in assets, is larger than 99.6% of DC plans in terms of participants and larger than 99.83% in terms of assets.

“Instead of leveraging the plan’s substantial bargaining power to benefit plan participants and beneficiaries, defendants caused the plan to imprudently pay unreasonable and excessive fees for retirement plan services in relation to the services being provided,” the lawsuit said.

According to the lawsuit, from 2015 through 2019 the plan’s retirement plan services provider was Wells Fargo Bank, which allegedly charged the plan fees that were excessive compared with the retirement plan services of other similarly sized plans. The lawsuit claims the excessive fees “led to lower net returns, eating into and substantially reducing plaintiffs’ and plan participants’ retirement savings.”

Wesco Distribution has not yet responded to a request for comment.