PANC 2013: Staying Out of Trouble – Part I

 Ever since the Enron scandal of 2001, Employee Retirement Income Security Act (ERISA) attorneys have become “exploitive” with regards to bringing lawsuits against defined contribution (DC) plans.

This was the warning of James Fleckner, partner with Goodwin Procter LLP, speaking at the PLANADVISER National Conference in Orlando, Florida, in a session titled “Staying Out of Trouble – Part I. Trends in litigation and best practices to avoid lawsuits.”

Indeed, in a polling of audience members, 52% said they were “somewhat concerned” that litigation could be brought against them or their clients, and 17% said they were “very concerned.” Another 29% said they were “not very concerned,” and only 2% said they were “not at all concerned.”

“There has been a real uptick in DC litigation in the past five to 10 years,” Fleckner said. “There hasn’t been much DB [defined benefit] litigation, so long as plans are solvent and employers make up any shortfalls. But in DC plans, all of the risk falls on the plate of participants. However, if you do a good job and participants get good quality products at reasonable prices, litigation likelihood is lower.”

Courts’ main focus is whether the person or entity being sued is a fiduciary, Fleckner said. “Fiduciaries under ERISA federal law have the obligation of prudence, loyalty and not committing prohibitive transactions,” he said. In many cases, “plaintiffs are trying to get courts to rule they are a 3(21) fiduciary kin that they give discretionary or investment advice, and are a functioning fiduciary,” Fleckner said. Other cases hinge on performance or fees, he added.

Retirement plan advisers can protect themselves from such lawsuits by “expressly writing in their contracts that they are not a fiduciary,” Fleckner suggested. “They would be very helpful in the event of a suit. That would go a long way to help with any liabilities.”

Those retirement plan advisers who decide to act as either a 3(38) or a 3(21) fiduciary must document a process that shows how they came to a plan or investment decision, he said, “that you evaluated alternatives, had reason to evaluate those alternatives, and gave the reason for your decision—be it fees, investment choice or mapping a QDIA [qualified default investment alternative]. That documented process will go a long way to throw out a case, because the courts don’t want to second-guess the market or fiduciaries.”

Don’t be lulled into complacency, Fleckner said. “Plaintiffs’ lawyers are getting very creative and expansive,” he said. “Some were asbestos or railroad lawyers. They see $4 trillion in 401(k) assets and see opportunities, so be very conscientious as to how you present information.”