What can the Canadian pension industry learn from U.S. CAP litigation?

Read: What can Canadian DC plans learn from U.S. pension legislation?

The prevalence of legal action against U.S. CAPs is largely due to cultural and legislative differences, as well as the size of the plans themselves, he adds. “The U.S. is obviously more litigious and U.S. courts offer much larger awards; the biggest class actions we’ve ever had in Canada were surplus-related class actions. If there’s a big enough opportunity, you’re going to get people who are going to sue.”

Investment performance

Many of these lawsuits target CAPs’ investment strategies and performance.

In February, an American Airlines pilot sued the company alleging it breached fiduciary duties to its 401(k) retirement plan members because it used asset managers that pursued sustainable investment strategies. In May, the lawsuit was certified as a class action, expected to exceed 100,000 employees.

In March, a New York court ruled in favour of AllianceBernstein, after the company was sued in 2022 over the use of its own investment products in its US$1.3 billion 401(k) plan. According to the court, the lawsuit failed to show that the asset manager could have breached its duties of prudence and loyalty, nor did it successfully allege any prohibited transactions.

Read: New U.S. pension law strengthening retirement savings for workers

Last October, General Electric Co. agreed to pay $61 million to settle claims against an underperforming 401(k) plan. The lawsuit alleged that since at least 2011, five retirement funds managed by GE Asset Management (which is now owned by State Street Corp.) had underperformed relative to comparable investment options, causing hundreds of thousands of plan members to lose an estimated $283 million.

While there’s no magic number of investment options that a CAP should offer, it’s important that the plan is flexible and caters to as many members as possible.

“[CAPs] should have a reasonable amount of investment options — maybe eight to 15,” says Frazer. “But there are [plan sponsor] clients who would say, ‘They should have one choice, and the company should manage the choice,’ so there’s less volatility. . . . There shouldn’t be too many choices, but those choices should have reasonable returns and they should be benchmarked. [Every plan member] will have a different sort of growth cycle, so if someone wants more active growth, for example, they can take more risk.”

Fees in the crosshairs

In addition to investment performance, lawsuits against U.S. CAPs have also targeted alleged excessive fees by both investment managers and record keepers.

In March, U.S.-based technology company L3 Harris Technologies Inc. agreed to pay $650,000 to defendants following a 2022 class action that alleged the plan sponsor violated its fiduciary duties by failing to negotiate lower record-keeping fees for workers enrolled in its $5.2 billion 401(k) plan. The lawsuit argued that due to the size of the plan, the plan sponsor should’ve been able to negotiate a better price than the $68 to $80 charged to each plan member.

Indeed, this type of lawsuit can arise when a plan sponsor is working with one record keeper or one set of managers and doesn’t actively monitor the fees being charged, says Jordan Fremont, a partner at Stikeman Elliott LLP.

Read: 74% of U.S. DC pension plan sponsors to conduct plan fee review in 2024: survey

“The thinking is, if you haven’t monitored it, you effectively haven’t actually sought to negotiate these or tested the marketplace [to] see if you could get lower fees. . . . For the most part, a lot of those claims have been unsuccessful because the plan sponsor has been able to show either that they were prudent in their process of monitoring . . . or that there wasn’t sufficient evidence to demonstrate that they would’ve been able to negotiate lower fees or even if the fees could’ve been lowered, that there was a trade-off in terms of services. The lowest fee isn’t always the best option — a higher-cost option could be justified because of other factors such as performance and quality of the personnel involved.”

However, the relatively small size of Canada’s record-keeper market, which is dominated by a handful of large insurers, has likely kept such claims at bay among Canadian CAPs.

“They’re constantly measuring themselves against each other, so while there’s probably going to be differences in any particular situation or plan, the fees aren’t going to be dramatically different. There’s a much bigger [record-keeper] market in the U.S., so there’s going to be a lot more variability [in service].”

The importance of fiduciary duty

At the heart of many CAP lawsuits is plan sponsors’ fiduciary duty to members, which can be supported by strong pension policies and processes, says Fremont.

“That’s where having good processes [is important] — it’s not about the results. If you have goals in place, that’s your best defense. That’s constantly the issue that I’m looking for when working with [plan sponsor] clients — what is the process and how do we improve it? And not only do you have a good process, but that you’re recording what it is that you have in place, so you can be consistent and provide evidence in the event of any claim.”

Blake Wolfe is the interim editor of Benefits Canada and the Canadian Investment Review.