Follow the Money: What Happens to the Proceeds of Class Action Settlements

When you read in the paper about a large settlement in an excessive fee case or other claim involving a 401(k), ESOP or other ERISA governed plan, do you think about what happens next, and about how to distribute the money among the plan participants? I do, in cases where I have represented the class, but also in cases where I have defended the plan or its fiduciaries. As this article from Plan Advisor discusses, there are a lot of issues that go into deciding how to distribute the settlement among current plan participants and those who have left the plan. The article gives a good overview, and drives home a key point: there is a lot of complexity behind the scenes in figuring out how to distribute the money, which the media, reporting on the large figures of the settlement itself or on the large award to class counsel (which are both sexy subjects), tend to ignore or simply be unaware of, because it just isn’t that interesting to the public as a whole. But in real life, this part of a settlement is crucially important, and creates a fair amount of work for those who administer class action settlements and those who administer plans themselves.

Here are a few things I have observed and lessons I have learned over the years. First, the class definition in the litigation and which is used by the court in approving the settlement is hugely important. In class action litigation involving these types of plans, the class of affected participants is typically defined by the litigants and eventually approved by the court. If the parties and the court really focus on the definition, its terms can provide a great deal of guidance to the administrator with regard to exactly which current and former plan participants should receive distributions. Often, though, the class may have been superficially defined, in a manner that the lawyers feel will be sufficient to win court approval, but which may not, in fact, be precise enough to guide distribution of the proceeds and provide real guidance in that regard to the plan administrator. A focus on this issue by the lawyers negotiating the terms of a class action settlement can make a real difference when it comes time for the administrator to do the hard work of allocating the settlement proceeds.

Similarly, settlement documents in a class action, negotiated by the parties as part of closing a deal and obtaining court approval of the settlement, are usually replete with detailed explanations of as many facets of the settlement as the lawyers for both sides can think to cover. This is often, I hate to say, more often due to self-interest of the lawyers involved than to any higher motivation, as a detailed, comprehensive explanation of the settlement is often crucial to winning court approval of the settlement and to defeating objectors to the settlement who are part of the settlement class. There is nothing wrong with that per se, in that the class action system, with its awards of attorneys fees out of settlement proceeds and the checks and balances imposed by court oversight, is designed both to be driven by self-interest and to tamp down its unchecked excesses (I should note here that unlike many of its critics but like many of those who, like me, actually toil in the orchards of class action litigation, I find that this aspect of the system works pretty well in the vast majority of cases). A focus in these papers on settlement allocation – perhaps by including a subsection expressly directed at describing allocation of the proceeds in as exquisite of detail as possible - can greatly aid the administrator later on in distributing the settlement proceeds.