Art by Serge Bloch

Plan sponsors can apply a trio of defensive provisions to their retirement plan documents that aim to lessen exposure to participant claims brought under the Employee Retirement Income Security Act (ERISA), according to retirement industry experts.

Many plans use a basic provision whereby participants must first exhaust whatever the plan’s claims procedure is before a lawsuit can be filed. Retirement plan sponsors and advisers should consider adding to the plan limitation periods, implementing mandatory arbitration clauses, and including class action waivers and venue provisions to reduce exposure to lawsuits, says Michael Weddell, director, retirement, at Willis Towers Watson.

“At least the first two should be considered,” Weddell says. “Whenever Willis Towers Watson does a voluntary compliance review, we’ll mention ‘If your plan doesn’t already have these provisions, think about doing them and think about making sure that they’re prominently displayed in the SPD [summary plan document] as well.’”

For plan sponsors, including defensive clauses in plan documents is an opportunity, “and they’re not all taking advantage of it,” Weddell adds.

“This is tremendously good news for employers and it’s underutilized,” he says. “This is an area where the courts have been much more employer-friendly than employers realize. Employers can write provisions into the plan document and the employer can decide on many of the basic ground rules if there is a dispute between the plan participants and the employer.”

Plan sponsors adding and including these provisions have greater control of when, where and how litigation arises, says Matthew Renaud, partner at law firm Jenner & Block.   

Defensive clauses can be used to “reduce the cost of administering the plan because the plan sponsor is in more control of the pace and cadence of when litigation arises and where it arises,” he explains.  

Each of the provisions in the trio of clauses provides specific, distinct features that can mitigate or prevent lawsuits, sources say.  

The basic provision mandates that participants must initially go all the way through the plan’s claims procedure. This can be helpful because the participant and plan sponsor might be able to work out an agreement before a participant hires a lawyer, or files a suit and the potential lawsuit might never reach a court, Weddell says. 

Statute of limitations periods can restrict the time in which a claim can be brought; forum or venue provisions are used to dictate where plaintiffs can file a lawsuit.

Limitation periods can be particularly beneficial for plan sponsors, Weddell explains.

“If the damages extend back only over, say, three years instead of six years, it might slice into half the potential damages just by having an extra paragraph written into the plan document and in your SPD,” he says. “That’s a tremendous benefit to, potentially, cut in half your damages. There’s not much downside.”

Including venue or forum provisions in plan documents is likely to benefit plan sponsors by possibly preventing lawsuits, Weddell says.  

“A lot of plaintiffs’ law firms would rather look for a national employer and then file a suit where the plaintiffs’ law firm is headquartered,” he adds. “It’s often in a state that’s participant-friendly. To say ‘I can choose which state the lawsuit is filed in,’ on its face that doesn’t sound like a big advantage, but this one is more likely to eliminate lawsuits from even happening.”

Employers can use mandatory arbitration provisions and class action waivers for ERISA-covered plans to compel arbitration and to waive participants’ rights to bring any class or collective action, respectively.

When weighing the pros and cons of including each defensive clause, plan sponsors might want to pick and choose among the provisions, says Joseph Torres, partner at Jenner & Block.

“Historically, there was not a lot of movement by plan sponsors to try to take on issues like ‘where am I going to be sued or can I require arbitration,’” he says. “There is a movement among plans to think about whether their particular plans should include these types of provisions, and I don’t think this is a one-size-fits-all proposition.”

Weddell adds that among the trio of plan sponsor defensive clauses to include, “only the mandatory arbitration clause is debatable.” He notes that Willis Towers Watson advises its plan sponsor clients that are considering whether to include mandatory arbitration clauses to work with in-house or retained legal counsel to ensure these are written properly.   

Arbitration clauses may be more appropriate for plan sponsors with employee populations that are already accustomed to arbitration in order to settle disputes. Additionally, arbitration clauses are harder to enforce, Weddell adds.

“If the plan has a binding arbitration clause, it’s less clear whether it’s going to be enforceable,” he says. “There could be a lawsuit filed and the plan would have skirmishes on whether the binding arbitration clause is enforceable, which is just going to create litigation on a different topic rather than eliminate it. The exhaustion of the claims procedure—which everybody pretty much has—the limitations period and forum selection, all employers ought to make sure that these are included and to get those things on the plate already.”