Right out of the gate in 2016, a number of Employee Retirement Income Security Act (ERISA) lawsuits were filed. The pace of litigation gained more momentum throughout 2016.
Aside from the typical excessive fee cases and company stock litigation of the past, Charles G. Humphrey, Employee Benefits and ERISA counsel at Fiduciary Plan Governance LLC, who is based in Buffalo, New York, says, “I think if you look at Bell v. Anthem, White v. Chevron, Ellis v. Fidelity and Johnson v. Fujitsu, I see something I haven’t seen in great volume before—a probing at quality of fiduciary process.”
Stephen Rosenberg, Esq., partner at The Wagner Law Group, who is based in Boston, adds, “The year 2016 saw an expanding panoply of theories for attacking investment options and other aspects of the administration of 401(k) plans, and more of the same can be expected going forward.” Humphrey notes, for example, in Bell v. Anthem, Anthem offered a Vanguard fund charging 4 bps and was called out for not using its bargaining power to get a similar 2 bps investment. In the Chevron and Fidelity cases stable value fund use as opposed to money market fund use was questioned; a case against Intel filed last year included an allegation of too many nontraditional assets in its target-date fund (TDF) offerings; and the Johnson case challenged the use of custom TDFs.
Nancy Ross, partner and head of ERISA litigation practice at Mayer Brown LLP in Chicago, adds that cases filed in 2016 have also targeted fee disclosures and arrangements between plans and service providers.
Ross says her firm is seeing a lot of sponsors who make changes being targeted with lawsuits claiming it must have been wrong before. “These are not remedial measures, but plan sponsors genuinely trying to improve their plans. They are improving on a perfectly acceptable arrangement,” she states. An example of this is the recent lawsuit filed against Starwood Hotels. In it, plaintiffs note that Starwood did reduce its fees, but for five years prior to that, participants paid excessive fees.
Targets of litigation have also changed. Ross notes that in 2016, not only corporate plan sponsors, but university and college retirement plan sponsors were hit with excessive fee suits. And, while not new to 2016, church plans have faced lawsuits challenging their non-ERISA status. A split in the circuits has led to cases being taken up by the U.S. Supreme Court.
“The Supreme Court’s decision to grant certiorari with respect to the definition of church plan under ERISA and the Code could produce a significant increase in litigation against these church-affiliated organizations if the Supreme Court agrees with the three Circuit Courts of Appeals that have addressed this issue and concluded that the long-standing view of the Internal Revenue Service (IRS) was incorrect and defined benefit plans of these church-affiliated organizations are not church plans,” says Barry Salkin, of counsel at The Wagner Law Group, who is based in Boston.NEXT: Drivers of new litigation trends and surge in cases
Ross believes one thing driving new allegations in ERISA fee suits is the Supreme Court decision in Tibble v. Edison, in which it said plan fiduciaries have an ongoing duty to monitor investments. “Plaintiffs are tacking on claims of failure to monitor investments over the years,” she says.
Humphrey says this is “low hanging fruit” if there is an absentee fiduciary with no record of selection and monitoring of service providers and investments.
According to Rosenberg, in 2016, litigation continued apace over dramatic declines in company stock prices and their impact on the value of retirement accounts. The highest profile court decision in 2016 in this area was likely Whitley v. BP, PLC, in which the court held that there was no viable defensive action the fiduciaries could have taken to protect the value of the company stock holdings in the plan that would not have simply inflamed the collapse in the stock price, and that this precluded liability for breach of fiduciary duty due to the loss of value in the holdings of company stock.
Whitley was revived by an appellate court after the U.S. Supreme Court’s decision in Fifth Third v. Dudenhoeffer, which rejected the notion of plan fiduciaries having a presumption of prudence and set a new standard for pleadings in stop-drop cases: namely, Rosenberg notes, the need for plan participants to prove, for their stock drop claims to proceed, that plan fiduciaries could have taken an action during, or before, the collapse in value of company stock that would have made the situation better, and not worse.
While the challenges portend to be targeted toward protecting the interest of plan participants, Ross says there are dollars here for the plaintiffs’ bar, and settlements are fueling the fire. “Attorneys want in on the action. In addition, the plaintiffs’ bar has more outreach—they are not just putting ads in local newspapers, they are trolling for business on Facebook,” she says.
Humphrey adds that lawsuits have had some success and plaintiffs’ attorneys keep hammering away, especially big plaintiffs’ firms that have resources to pursue these plans. He says these attorneys are trying to make law. “What is nature of fiduciary responsibility? Did you do your job well enough? We’ve never had specifics in ERISA and never had the kind of case law that makes law,” he says. “Now we will get that. It will be more difficult for plan sponsors to deal with and they will have to factor that into plan governance.”
Humphrey adds, “Hold on to your seats at this point, and hope courts will take a reasonable approach with their opinions.”NEXT: What’s ahead for 2017?
Ross says in 2017, ERISA litigation will not just question fees, but prudent administration, investment selection and types of investments. It will be much more of the same, she notes. She adds that the plaintiffs’ bar will be looking at new areas to attack. “We will see a continuation of the examination of relationships plans have with service providers,” she says. “My advice to plan sponsors is complete disclosure.”
Humphrey agrees there will be more of the same—fee cases will continue to roll in. And he believes more cases will focus on the quality of decisionmaking, as he says, “those bringing them are kind of experimenting.” Humphrey also doesn’t see stock-drop cases going away, as “Dudenhoeffer really provided a solid defense.”
Salkin says, “We can expect to see more litigation with respect to Code Section 403(b) plans alleging various breaches of fiduciary duty. This is a clear example of low-hanging fruit which is ripe for copycat litigation. While 403(b) plans have become closer to 401(k) platforms since the Pension Protection Act of 2006, there were significant differences prior to that date, so it remains to be seen whether those fiduciary breach claims will stand up.”
He also predicts the various defined benefit plans that engaged in derisking activities such as temporary lump-sum windows are a potential target of litigation, although these may be difficult cases for plaintiffs to prevail. “The allegation will be that there was a breach of fiduciary duty in disclosing to plan participants the advantages and disadvantages of selecting a lump sum,” Salkin says. “While in all cases some disclosure would have been made, the allegations will be that because the plan sponsor had the objective of maximizing the number of participants who would elect lump-sum distributions, the disclosure to plan participants was one-sided to some degree.”
Salkin adds that there will also be more cases exploring the contours of Article III standing, addressed earlier this year by the Supreme Court in Spokeo v. Robins, in which it held that Article III standing requires a concrete violation even in the context of a statutory violation. Salkin notes that two appellate court decisions have already addressed the application of Spokeo: the 8th Circuit in Braitberg v. Charter Communications, Inc. and the 5th Circuit in Lee v. Verizon. “Since plaintiffs will no longer be able to allege that a violation of ERISA automatically constitutes an injury in fact for purposes of Article III standing, there will likely be more motions to dismiss because of lack of Article III standing,” he says.
“The DOL [Department of Labor] fiduciary rule is a bit of a wild card because there is no assurance that it will continue, or at least continue in exactly the same form, under the Trump Administration as is scheduled to take place on April 10, 2017,” Salkin says. “It was intended to allow IRAs and non-ERISA plans to maintain civil actions; those actions will be forthcoming. Additionally, by increasing the number of entities that will be treated as fiduciaries, the likelihood is that there will also be an increased number of lawsuits in which a party is joined by a defendant alleging co-fiduciary liability.”