Asked why there has been such a proliferation of retirement plan litigation in recent years, Emily Costin, partner at Alston and Bird, says the trend has been a long time coming.

The roots of current litigation trends go back to at least 2005 and the start of a new regulatory focus on fee and conflict of interest disclosures, she says. Then came the financial crisis of 2008, which ushered in a wave of stock drop litigation.

As 2018 draws to a close, the early stock drop cases have largely been litigated or settled, though fresh examples now and again emerge. According to Costin, one new hot topic for litigators has become self-dealing by providers and conflicts of interest in recordkeeping and investment management arrangements. All of the cases center on the deceptively simple question of whether a tax-qualified retirement plan is profiting the sponsoring company (directly or indirectly) at the expense of participants.

Reflecting on lessons learned during 2018, Jamie Fleckner, partner at Goodwin Procter, says cases today are growing more diverse in their claims and outcomes relative to earlier waves of litigation.

“Many of these cases are still very early on in the process,” Fleckner says. “So far, they tend to have more success when the fiduciary plan committees cannot answer some straightforward process questions. How often have fees been assessed and negotiated? Who is minding the fees and what is their process? Have fees been pushed down as the plan grows? These are core questions in the current wave of litigation.”

Fleckner and Costin agree that, as a general rule, courts will defer to plan sponsors’ decisions when those decisions are documented and clearly supported by rational arguments. It is when plan fiduciaries appear unable to answer the questions above that cases more easily progress to the discovery and trial phases.

Emerging matters to consider in 2019

One case plan sponsors and consultants can learn from is the recent litigation involving the University of Southern California (USC), which tested important issues about arbitration agreements and the Employee Retirement Income Security Act (ERISA).

Challenged for alleged imprudence and disloyalty, USC’s first defense was to argue that arbitration agreements should be enforced in this case, rather than allowing for a full ERISA class action trial, Fleckner says. This argument went up to the 9th Circuit and was ultimately dismissed, with the court saying such agreements cannot preclude ERISA litigation. “A Supreme Court review may be possible here, in my estimation,” Fleckner notes. USC has petitioned the Supreme Court to weigh in.

Important to point out, the problem USC had in the 9th Circuit was more about the terms of its specific arbitration agreements, rather than about the general merits of this defense approach. Here, the agreement did not seem to cover the fact that participants are technically suing on behalf of the plan under ERISA for a harm to the plan. The arbitration agreements signed by employees at USC only covered individual claims brought on behalf of employees for personal damages.

“So, plan sponsors may reconsider these agreements and consider the possibility of having an arbitration agreement created by the plan itself, in plan documents,” Fleckner says. “Of course, there are pros and cons to arbitration. There is no appellate review and it’s not always cheaper or less risky, so caution is warranted.”

Another attorney keyed into the arbitration agreement topic is Bradford Huss, director, Trucker Huss APC. He says this might be a new frontier for plan sponsor fiduciary breach defense strategies, but like Fleckner, he warns that the issue has not really been tested outright in court yet. Therefore, he agrees, caution is still warranted, but he remains intrigued about this area of the law.

Under the column of advantages of arbitration, Huss lists the following: “It may provide speedier resolution, flexibility and customized dispute resolution rules not centered around statutory and case law rules and principles; it may provide lower cost to utilize a neutral decisionmaker; and it may provide an ability to select an arbitrator who has specialized knowledge and experience pertaining to the issues involved in the dispute.”

There are also disadvantages, he warns, which include first and foremost that appellate review opportunities will be very limited, and arbitration awards are rarely vacated. Further, claims regulations prohibit the use of mandatory arbitration of benefits claims involving health and disability plans. Finally, arbitrators are not bound by statutory and case law and therefore they may issue an award based upon perceptions of fairness or equity and not necessarily on the evidence or rules of law.

Strategies for success

Stepping back, Huss says that some best practices are starting to emerge when it comes to ERISA litigation prevention and defense, taken from the cases that have been settled or decided so far. These include formalizing service provider selection processes and ensuring periodic request for proposals (RFP) and request for information (RFI) processes; determining a per-head recordkeeping fee rather than simply assuming an asset-based fee is best; removing unnecessary or overly costly revenue sharing; instituting fee levelization or equalization where revenue sharing continues; setting a cap on recordkeeper fees; and directly addressing any excess revenue sharing by crediting it back to participants or establishing an ERISA expense account.

In addition to these suggestions, Huss says fiduciaries should explore whether and how their plan documents can be amended to include contractual limitations periods, forum selection clauses, mandatory arbitration clauses and anti-assignment clauses.

David Kaleda, principal, Groom Law Group, adds a few items to the list. He says it is important for retirement plan advisers and sponsors to ensure that settlor and fiduciary decisions are kept separate. Furthermore, if an investment committee has placed a fund on a watch list for a long period of time, say two years, but has not made any subsequent decision, the Department of Labor (DOL) would likely see this as cause for an audit or investigation.

A note about adviser investigations

“The Department of Labor has become very focused on investment advisers,” Kaleda says. “The Employee Benefits Security Administration [EBSA] manual says they will continue to target the adviser and provider communities.”

In particular, DOL is interested in compensation disclosures. Groom Law Group is currently helping clients handle more than 30 DOL investigations, Kaleda says. In 1996, it was typical to be working on only five.

What prompts the DOL investigations are referrals from the Securities and Exchange Commission (SEC) about non-level compensation from a third party or other indirect payments that could potentially be construed as conflicted, he says, as well as private lawsuits or complaints lodged with the DOL by a retirement plan fiduciary or participant.

Kaleda says DOL investigations are handled by regional DOL offices, and some are more sophisticated than others, particularly those in Kansas City, Chicago, Atlanta and Los Angeles. If they start an investigation, they send a 15- to 20-page questionnaire with a 30-day deadline, he says. “Call them to ask for an extension and ask them to scale back their requests,” he recommends. It is also helpful to “take the time to educate them on how your business works, such as whether you are a dual registrant or an affiliate. It is also important to demonstrate your compliance procedures to comply with ERISA.”

In the case you or a client are sued

Sometimes it is simply going to be impossible to avoid a lawsuit, even in cases where plan sponsors and their service providers feel completely confident that they have acted expertly and loyally.

Fleckner says the recent appellate court decision in a lawsuit alleging self-dealing by Wells Fargo should be instructive for plan sponsors and consultants facing this prospect. In that case, the 8th U.S. Circuit Court of Appeals confirmed a lower court’s dismissal of claims alleging Wells Fargo engaged in self-dealing and imprudent investing of its own 401(k) plan’s assets by offering its proprietary target-date funds (TDFs) to participants. In short, the appellate court agreed that allegations that the bank breached its fiduciary duty simply by continuing to invest in its own TDFs when potentially better-performing funds were available at a lower cost are, on their own, insufficient to plausibly allege a breach of fiduciary duty.

“This case shows the importance of motions to dismiss, from my perspective as a defense attorney,” Fleckner says. “It’s an important tool that plan sponsor defendants have to try and get a meritless case thrown out before going through an expensive discovery process.”

Unfortunately, Fleckner adds, because of many judges’ lack of familiarity with these types of cases, more motions to dismiss have been unsuccessful than an industry expert might anticipate. Judges frequently decide that they can’t tell up front whether the fiduciary process was appropriate or not without the benefit of discovery. In turn, the expensive and time-consuming nature of discovery often leads plan sponsors (who otherwise feel they have an effective defense strategy) to opt for a settlement.  

A new flavor of litigation likely in 2019

According to Huss, in a number of recently filed cases, plaintiffs allege a fiduciary breach based on the conflicted use and mismanagement of their personal data. In one suit against Northwestern University, plaintiffs allege a breach by defendants allegedly engaging in a prohibited transaction when they allowed the recordkeeper to use employees’ confidential information.

The court agreed with defendants that the information in question was not a plan asset, and there was no breach, but the whole affair should inspire plans to review their data management policies—as well as the data policies of their service providers.

In another suit against Vanderbilt, plaintiffs allege a breach occurred when fiduciaries allowed the recordkeeper to access personal information such as contact information and age, and use it sell products outside the plan such as insurance.