The Lawyer Gearing Up for a Fight on Private Equity in 401(k)s

The American retirement system is on the verge of one of its biggest changes in decades, with Wall Street’s private equity and credit firms close to getting a piece of the $14 trillion socked away in workplace retirement savings plans. They’ve created new types of investment funds for 401(k)s and clinched deals with household-name money managers to include them.

They may still need to get past one man: Jerome “Jerry” Schlichter.

“Buyer beware,” Schlichter says, referring to employers who are considering adding private equity and other alternative funds to their company plans. “You better be prepared for defending that choice.”

Over the past two decades, Schlichter, 77, and Schlichter Bogard, the firm he founded, have won precedent-setting cases over the types of retirement investments that plans offer workers and the fees they charge for them. He’s racked up more than $750 million in settlements since first suing in 2006 and created a whole field of litigation. Copying his tactics, other plaintiffs’ lawyers filed hundreds more lawsuits of their own in the past five years. Federal judges, in approving fees paid to his firm, have credited his litigation with saving workers substantial money each year on their investments.

Schlichter in his St. Louis office.

Photographer: Theo Welling for Bloomberg Markets

Schlichter has sued major companies, financial firms and top universities. After more than a decade defending itself in court, ABB, a global power and automation technology company, paid $55 million in 2019 to settle claims that it had excessive fees in its 401(k) plan. At the end of last year, Pentegra Retirement Services, a retirement plan outsourcing company, agreed to pay $48.5 million to resolve a lawsuit alleging it charged excessive recordkeeping and administrative fees and included funds with steep fees. (Both companies have disputed the allegations; ABB says it’s proud of its benefit plans.) Yale University is defending its retirement plan in federal court against a lawsuit Schlichter first brought a decade ago over the fees and performance of funds compared with their benchmarks. In 2023 a jury found largely in Yale’s favor. The case is ongoing in federal appeals court. Yale declined to comment.

Now the financial industry and its allies in the Trump administration are trying to make it harder for Schlichter and others to sue. The industry has lobbied Washington heavily over the issue, and Republican lawmakers in Congress have labeled the plaintiffs’ lawyers “pension predators” who are abusing the retirement system. The Trump administration’s top appellate lawyer filed a brief at the US Supreme Court opposing Schlichter’s position in a recent case, and the Department of Labor withdrew its brief supporting his side in the Yale case. That’s a change: In the past, when administrations have weighed in on Schlichter’s court cases, they’ve been on his side. His side has won all three of his cases decided by the Supreme Court.

Daniel Aronowitz, the top Labor Department official overseeing the employee benefit plan policy, has vowed “to end the era of regulation by litigation.” (He was previously president of Encore Fiduciary, which sells insurance to protect retirement plans and their trustees against lawsuits.) The Trump administration is preparing to give private assets in 401(k) plans a “safe harbor” against the type of lawsuit Schlichter helped create. It would be harder to sue a plan that can show it has processes in place to scrutinize new investments. An initial proposal is expected soon.

“If this is such a wonderful investment, why do you need a litigation shield separating you from everybody else that doesn’t have that?” Schlichter asks. “If they are so special and they’re so good, they wouldn’t need a litigation shield. The merits would determine fees are reasonable, end of story.”

Eugene Scalia, who served as labor secretary in the first Trump administration and is now a top partner at Gibson Dunn in Washington, says a formal rule is needed to reassure plan sponsors that lawyers or future administrations won’t second-guess them. “Private funds are already widely held by government pension plans and other defined benefit plans,” he says.

Financial companies that invest in private markets, as well as some of the biggest retirement fund managers, say the investments deserve a spot in 401(k)s. “We believe that private credit strategies deliver great value to investors,” says Jiří Król, deputy chief executive officer and global head of government affairs for the Alternative Investment Management Association, a global trade group for companies that invest in private markets. “A lot of pension systems have basically gone down the route of effectively and obsessively focusing on cost and cost only, as opposed to the overall value to the investor,” he says.

One study, by money manager BlackRock Inc., says private assets would increase returns potentially, on average, by 0.50% per year, generating about 15% more money in total over a 40-year period. The assets, which don’t trade on public exchanges the way stocks do, may have higher returns in exchange for less liquidity. Because retirement investors have long time horizons, money managers argue, these investment are suited for their goals. But private asset portfolios also tend to carry much higher fees than stock and bond index funds.

Schlichter is watching closely how the corporate executives and nonprofits tasked with running 401(k) and similar plans determine whether to include private equity and credit. As fiduciaries they must act in the savers’ best interests and can be held liable in lawsuits if they don’t. Schlichter has followed credit raters’ reports about defaults in companies owned by private equity; the rise of secondary private equity stakes, which could wind up in retail investor portfolios; and the compensation packages of CEOs of alternative companies. He’s keeping an eye on the potential “cash drag”: Plans may need to hold more in cash, which generates lower investment returns, when they invest in illiquid and private assets, because they’ll need money on hand to easily dispense to savers withdrawing or moving funds on a moment’s notice.

“There is huge exposure to risk that people are being—will be—subjected to, if private equity becomes a significant part of 401(k) plans,” Schlichter says, adding that being a fiduciary is going to be tough as a result. “Their job is going to be a whole lot more difficult to carry out that duty if private credit or private equity is in the plan, because it’s opaque, it’s quite a bit more expensive, and it’s illiquid.”

Schlichter.

Photographer: Theo Welling for Bloomberg Markets

One of five children—his father was an Air Force veteran and aircraft mechanic, and his mother was a homemaker—Schlichter grew up in the small town of Mascoutah, Illinois, and was the first in his family to go to college. He paid for it by working variously as a janitor, at a steel mill and by digging lines for the phone company. He turned down a scholarship to the University of Illinois law school to head to the University of California at Los Angeles just as student movements against the Vietnam War were intensifying. “I became a quintessential student protester,” Schlichter says.

While joining Teamster union truckers on a picket line for higher pay, he was pulled out by Los Angeles cops, handcuffed and arrested, he says, for allegedly resisting a police officer. He disputed the arrest and went to trial: “We’re not pleading guilty to anything. We’re not going to cut our hair,” he says, describing his thinking at the time. He was convicted in 25 minutes. Fortunately for his legal career, it was a misdemeanor. (Schlichter says it was later expunged.)

He worked a summer helping to represent a group of students at Washington University in St. Louis who were facing federal charges stemming from an antiwar demonstration during which a federal building on campus serving as an ROTC center was burned down. He later returned to St. Louis because the city, a nexus for railroads and Mississippi River shipping, was also a hub for trial lawyers who brought high-stakes injury claims for railroad and barge workers.

In the early 2000s, Schlichter says, he started getting more and more questions from workers and union officials, including one at Boeing Co., about whether they’d have enough money to last through retirement. Traditional pensions were declining, and 401(k)s were rising, putting more of an onus on individuals to manage their savings. But employers still had a big impact: They selected administrators and fund options, and the costs and fees borne by workers could eat into their nest eggs.

Schlichter and colleagues spent almost two years immersing themselves in the inner workings of the entire retirement plan industry. The first book he says he read was the primer 401(k)s for Dummies. Then the firm went looking for cases. They investigated retirement plans at some of the nation’s largest employers. He says he mortgaged his house to pay for the up-front costs. No other law firm had embarked on that type of bet-the-farm litigation against pension funds before him, Schlichter says.

Featured in the February-March issue of Bloomberg Markets.

Illustration: Derek Abella for Bloomberg Markets

Boeing and ABB were among the firm’s earliest cases. Boeing, which said it did nothing wrong, agreed in 2015 to pay $57 million to settle allegations of excessive fees and inappropriate investment choices in the plan. The ABB suit was the nation’s first retirement plan excessive-fee case that went to full trial. It took Schlichter more than 12 years and roughly 27,000 of his firm’s attorney hours. Legal fees for the defendants, which also included other fiduciaries, were more than $42 million through the trial portion of the case.

Demonstrating the financial stakes of such cases, the federal judge who signed off on the fees at the end of the case in 2019 noted that just one piece of the defense’s research cost $3.2 million, more than the $2.3 million Schlichter sought for reimbursement of expenses. Schlichter’s firm was ultimately awarded about $18 million for its legal work, or roughly a third of the settlement tally, which is typical in contingency-fee cases.

The litigation has evolved over time, as fees have come down, and even ardent opponents of Schlichter’s type of litigation say fiduciary practices have improved. A current spate of cases increasingly focuses on forfeiture of 401(k) assets that aren’t vested when an employee leaves their job. Schlichter’s success has led other trial law firms to file many more suits over the past few years. According to plan insurer Encore Fiduciary, there were almost 450 fee or forfeiture lawsuits filed from 2020 through September of last year. The vast majority of them targeted plans with more than $500 million in assets. That’s still a tiny percentage of the roughly 800,000 401(k) plans in the US.

But lawyers who represent employers say the lawsuits have become an increasing burden. “We’re just seeing a steady stream of dozens of copycat sort of lawsuits,” says Rick Nowak, co-leader of the Employee Retirement Income Security Act litigation practice at law firm Mayer Brown. That’s a shift from earlier years of the litigation, in which “old guard” lawyers brought more sophisticated lawsuits, he says. “Even if you disagreed with the merits, you could certainly understand why Jerry Schlichter was bringing the claims he was bringing.” The point of a safe harbor isn’t to get rid of all retirement plan litigation, Nowak says, but “separating the wheat from the chaff.”

All the litigation has made companies cautious about being innovative in their plan mix, says Lynn Dudley, senior vice president for global retirement and compensation policy at the American Benefits Council, which represents retirement plan sponsors. “The less you do, the less likely you are to be sued,” she says. The group has asked the Labor Department to clarify the standard of review applied to fiduciary decisions and recommendations. Such a change would go beyond a more narrow litigation shield for only private credit and alternative assets. It would force plaintiffs to focus on whether decisions were arbitrary or capricious.

BlackRock CEO Larry Fink told analysts in January that plans are still going to need to be vigilant. “Each and every firm is going to have to validate and authenticate the risk that is being implied when they add private markets,” he said.

Schlichter says the new tone in Washington won’t cause him to back away from legitimate cases. Although the shift in the Labor Department’s interpretation and policy is likely to be adverse to his clients, the law is still ultimately determined by judges. “I’m not going anywhere,” says Schlichter. His grandmother, he notes, lived to almost 112.

Brush covers asset management in New York, and Beyoud reports on financial regulators in Washington, both for Bloomberg News.

To contact the authors of this story:
Silla Brush in New York at sbrush@bloomberg.net

Lydia Beyoud in Washington at lbeyoud2@bloomberg.net

To contact the editor responsible for this story:
Pat Regnier at pregnier3@bloomberg.net

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