Compliance October 18, 2017

District Court Halts Some Portions of MIT ERISA Challenge

Interpreting and applying a series of detailed recommendations from a magistrate judge, the district court will allow some parts of the litigation against MIT’s retirement plan fiduciaries to proceed. 
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The U.S. District Court for the District of Massachusetts has issued a preliminary ruling on an Employee Retirement Income Security Act (ERISA) lawsuit alleging mismanagement and disloyalty on the part of Massachusetts Institute of Technology (MIT) defined contribution retirement plan fiduciaries.

Readers may recall how this suit was introduced alongside a series of others targeting big-ticket U.S. universities—all of them filed by Schlichter, Bogard & Denton seeking various damages and remedies for many tens of thousands of employees enrolled in the universities’ defined contribution (DC) retirement plans. The suits contend these universities, as ERISA fiduciaries, breached their duties under the law to protect the retirement assets of their employees and retirees. Common to all three complaints are allegations that each of these universities “breached their duties of loyalty and prudence under ERISA by causing plan participants to pay millions of dollars in unreasonable and excessive fees for recordkeeping, administrative, and investment services of the plans.”

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In the MIT case, plaintiffs allege breaches of the ERISA duties of loyalty and prudence arising out of the plan’s inclusion of retail class options instead of institutional class options in the funds provided by Fidelity Investments. In addition, plaintiffs allege that Fidelity was paid excessive compensation for its recordkeeping services and that MIT never engaged in a competitive bidding process for those services. According to plaintiffs, the plan was structured to fund “an illicit kickback scheme whereby Fidelity received inflated fees at the expense of the plan’s participants in exchange for making donations to the MIT endowment.”

Carefully considering the arguments at hand, as well a report and recommendation from Magistrate Judge Marianne B. Bowler, the district court has “approved the dismissal of the duty of loyalty claim under §1104(a)(1)(B) in Count I but not the duty of prudence claim under §1104(a)(1)(A) in the same count.”

This was in fact the recommendation from Judge Bowler, as laid out in the district court order: “Magistrate Judge Bowler found that the conduct regarding the excessive management fees did not plausibly state a claim of violation of the duty of loyalty because plaintiffs’ theory was speculative. This court will accept and adopt that conclusion. Plaintiffs rely on untenable claims such as that Abigail Johnson, CEO of Fidelity, sits on MIT’s Board of Trustees. Plaintiffs do not allege that Ms. Johnson was involved with the plan, however, and she was not on the Board when Fidelity was selected as the investment provider.”

NEXT: Important ERISA caveats 

The district court decision spells out a number of key caveats impacting this type of ERISA litigation, explaining why it is dismissing some aspects of the various claims while permitting others to go to a full trial. As an example, the court makes the following distinction: “Defendants contend that MIT’s 2015 investment plan reconfiguration, which eliminated hundreds of options and retained only one Fidelity option out of 37, demonstrates that the duty of loyalty was not breached. That argument, although accepted by the magistrate judge, is discounted because ameliorative measures taken after disloyal actions do not absolve defendants of their breach.” This line of thinking stems directly from Tussey v. ABB, in which the Eight U.S. Circuit Court of Appeals concluded that although the fiduciaries “did not always favor Fidelity as much as they could, or seize every opportunity to send Fidelity more of the participants’ money such conduct does not satisfy one’s fiduciary duties.” Nevertheless, the district court will accept and adopt the recommendation to dismiss the loyalty claim in Count I as speculative.

The district court’s order continues by noting that Magistrate Judge Bowler found the allegations with respect to the excessive management fees plausibly state a claim for breach of the duty of prudence. This district court “will accept that conclusion.”

“Reading the amended complaint in plaintiffs’ favor, they plausibly allege that defendants failed to obtain identical lower-cost investment options,” the decision states. “Defendants dispute that those options were identical but, at this stage, plaintiffs’ allegations state a claim. If defendants did, in fact, include higher fee options when identical lower fee options were available, they failed to act with the care, skill and prudence required by ERISA. The court will accept and adopt the magistrate judge’s recommendation that the prudence claim in Count I may proceed.”

Turning to some of the additional allegations, Magistrate Judge Bowler recommended dismissal of the duty of loyalty claim under §1104(a)(1)(B) in Count II but not the duty of prudence claim under §1104(a)(1)(A) in the same count. “The district court will accept and adopt that recommendation,” the decision confirms. Further, Magistrate Judge Bowler “recommended denying defendants’ motion to dismiss plaintiffs’ claim for a prohibited transaction involving assets of the plan under §1106(a)(1)(D). She recommended dismissing the §1106(a)(1)(C) claim arising from mutual funds in the Plan but allowing the claim as to non-mutual fund options to proceed. The district court will reject the former recommendation but accept and adopt the latter.”

Additional details and argumentation on claims that will be dismissed versus allowed are available in the text of the district court order, here.

Compliance October 18, 2017

PANC 2017: Washington Update

Wagner Law Group attorney underscores: The fiduciary rule is in effect.
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In the “Washington Update” panel at the 2017 PLANADVISER National Conference (PANC), Thursday, Thomas Clark Jr., a partner with The Wagner Law Group, informed the audience that “the fiduciary rule is in effect. It became effective in 2016 and was put into practice this past June,” he said, to kick off the discussion.

“What is being delayed, until the end of this year, [is implementing] the complicated exemptions,” he said. “The DOL [Department of Labor] has proposed delaying them an additional 18 months, until 2019. It is processing the comment [letters] and will send [the proposed rule] to the OMB [Office of Management and Budget]. It will then need to publish [the rule] in the Federal Register. Consumer protection groups have threatened to sue if the 18-month delay is put into effect.”

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However, noted David Levine, a principal with Groom Law Group, Chartered, “The U.S. Chamber of Commerce might countersue, or the DOL might say that the fiduciary rule wasn’t done properly. It’s kind of like the bills to repeal Obamacare,” in that the efforts to squash the fiduciary rule’s best interest contract exemptions (BICE) have, so far, been for naught. “For those who wish for this to die, you might get it and regret it because the DOL might interpret the old rule in a new way,” Levine said.

In addition, Levine continued, “The SEC [Securities and Exchange Commission] is talking about a combined fiduciary standard for brokers and RIAs [registered investment advisers], although it doesn’t have oversight of ERISA [Employee Retirement Income Security Act]. [DOL] Secretary Acosta said he is talking with the SEC, and the states themselves can take their own actions.”

The bottom line, Levine stressed, is that “even though everyone has ‘fiduciary rule fatigue,’ the rule is not dead.”

Clark added, “The only thing delayed is the exemptions.”

Levine told the audience that, in the interim, advisers will “have to follow impartial conduct standards and document their processes, even though the processes are vague.”

NEXT: Determining whether fees are reasonable

Certainly, Clark said, a big part of these standards for advisers is ensuring that “their own fees are reasonable” and benchmarking them.

Levine conceded that “there is no hard and fast way to determine if your fees are reasonable” but that advisers should not be too concerned about this. “I think this is a litigation loser, a tempest in a teapot,” he said. “DOL is not pushing too hard on this.”

The important thing for advisers to remember, Clark said, is to “have a process to document their fees and meet the impartial conduct standard.” It is also a good practice to charge level fees, he said, rather than fees based on commissions or revenue sharing.

Turning to the rash of lawsuits that have been brought against retirement plans in the past few years, Alison Cooke Mintzer, editor-in-chief of PLANADVISER and moderator of the panel, noted that PLANADVISER.com covered 52 lawsuits in 2016 and that litigators have become so determined to find plaintiffs for class-action lawsuits that they post ads on billboards.

Levine said he does not foresee an end to the increase in lawsuits, primarily due to the fact that “we keep funding them through settlements.” Cases have ranged from accusations of self-dealing and charging unreasonable fees to offering proprietary funds or company stock, he noted.

Clark said the judges in many of these cases view the facts as black and white, and the litigators are now accusing plan sponsors that have acted to improve their plans of not doing enough. “There is a difference between prudence and perfection,” he noted, adding that the most deleterious effect of these cases is they inhibit many plan sponsors from “innovating.”

One case faulted a plan sponsor for offering a stable value fund and not a money market fund, and another case did the exact opposite, Mintzer noted.

“You are damned if you do and damned if you don’t, especially if you have $500 million in assets in the plan or more,” Clark said. “These plans will always be targets. At the end of the day, all sponsors [and their advisers] can do is move forward in the best interest of participants,” ensure that you have processes in place to prove you have done that and document it, he said. If you follow these procedures, Clark maintained, “99.9% of the time you will be all right.”

NEXT: The importance of insurance

To guard against such lawsuits, Levine said, it is important to ensure that plan sponsor clients have insurance, and that the adviser himself has errors and omission (E&O) insurance, particularly because litigants now target advisers because of their “deep pockets.” Levine also predicted that the DOL will “investigate every new ESOP [employee stock ownership plan].”

As far as whether the current administration will pass tax reform, Levine said, “Don’t bank on it. The devil is in the details, and, so far, the White House and Congress have issued “fewer than 10 pages” on reform. Levine also said he doubted the Senate would be able to amass 50 votes to pass tax reform. “It’s health care all over again,” he observed. “Congress is going to continue to be paralyzed. Things aren’t moving.”

Clark said the most likely tax reform the retirement plan industry will see is further acceptance multiple employer plans so that they can combine plans of companies that are not within the same industry, which, he said, would be “fantastic” in terms of expanding retirement plan coverage to midsize and small employers.

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