Anticipating the Next Wave of ERISA Lawsuits

For almost a quarter of a century, Jamie Fleckner has chaired the ERISA litigation practice of his firm, Goodwin Procter, and seen an increasing number of retirement plan facets come under legal fire: forfeitures, managed accounts, stable value funds, pension transfers. Asked at the PLANADVISER 360 Conference in Scottsdale, Arizona, on Tuesday what could be the next main target of litigation related to the Employee Retirement Income Security Act, Fleckner, a defense attorney for retirement plans, predicted that pooled employer plans have grown to the point of inviting legal scrutiny.

“One of the PEPs recently got over the $5 billion mark. … That makes it as attractive a target as a single-employer plan,” Fleckner said. “I don’t think there’s anything wrong with [PEPs]. … I think that the plaintiffs’ lawyers are entrepreneurial.”

Fleckner said plaintiffs’ lawyers often bring cases and seek settlements that will bring a larger return of investment, citing his firm’s research that a majority of last year’s ERISA lawsuits involved retirement plans with at least $1 billion in assets. He noted that Daniel Aronowitz, the recently confirmed assistant secretary of labor for the Employee Benefits Security Administration, pledged to decrease the amount of ERISA litigation during his confirmation process.

Whether Aronowitz, who worked as a fiduciary liability insurer and previously wrote about ERISA litigation for PLANADVISER, can impact the current litigious atmosphere is unknown (in part due to the current government shutdown), but Fleckner commented: “I think Dan really wants to bring some clarity, and I’m hopeful he’s able to do some of that.”

Best Defense Is Documentation

According to Fleckner, ERISA plaintiffs’ lawyers frequently build cases based on publicly available Form 5500s, which list plans’ funds and outcomes, but do not share the decisionmaking behind fund selection. Therefore, Fleckner recommended that ERISA defendants present documentation explaining how they made their fiduciary decisions.

“The best defense to any kind of fiduciary issue is to have had a good process in place for the plan,” Fleckner said. “I don’t think judges are looking to punish fiduciaries for trying to do the right thing.”

Fleckner said plan fiduciaries need to prove they followed standard practices like quarterly meetings, regular requests for proposals and audits, reviewing watch lists of investments, and routine market analysis. That way, plan fiduciaries can argue their investment decisions were well-informed and made with the best interest of participants in mind.

Getting a ruling on fiduciary decisions is a different matter. Some courts allow settlements earlier in the proceedings, while others only allow settlements after pre-trial discovery and depositions. Fleckner said some judges want fiduciaries on the witness stand so they can “look the fiduciary in the eye and make a credibility determination.”

Regardless of how a court handles ERISA cases, a trial typically takes months to begin and years to resolve. Even the U.S. District Court for the Eastern District of Virginia, which Fleckner called a “rocket docket” for its speedier processing, still takes “less than a year” to bring cases to trial.

Motions to dismiss can be immediately filed in response to a complaint, but Fleckner said it usually takes two to three months for a hearing and another six months to a year for a judge’s decision. It has become easier for ERISA plaintiffs’ claims to survive motions for dismissal after the U.S. Supreme Court’s unanimous April decision in Cunningham v. Cornell that plaintiffs need only allege that a prohibited transaction took place, placing a greater burden of proof on fiduciaries to claim and prove an exemption permitting their transaction. The decision could lead to an increase in complaints, but Fleckner said he has not seen such a trend yet.

In general, Fleckner said the process from ERISA complaint filing to pre-trial discovery to the start of a trial takes an average of four years, but he knows of cases lasting even longer than a decade. All these legal maneuvers take up time and money. While there is no guarantee that a retirement plan can avoid an ERISA lawsuit, Fleckner stressed that fiduciaries can best defend their choices by documenting their work.

“If there’s a good process, I think we can reasonably expect a good outcome,” Fleckner said. “If the fees are reasonable for the services provided, then even though the burden [of proof] is on the fiduciary, … that should be eminently provable.”