The View from the Courts

To better understand the impact of recent ERISA litigation on your business, Marcia Wagner, attorney and founder of The Wagner Law Group, said advisers need to know; “At what point in your desire to assist clients do you become a fiduciary?” and “Are you an investment advice fiduciary?” She referenced the case of Ellis v. Rycenga Homes Inc., where a brokerage firm was found to be an ERISA fiduciary because it allegedly gave investment advice for a fee. “It’s a duck test,” she said, noting that actions can make you a fiduciary, “regardless of what you call yourself.”

Regarding revenue-sharing fee litigation, Wagner noted that, under ERISA 406(b), if you are a fiduciary, you cannot get a “kickback” from plan assets. “Disclosure is no cure under ERISA,” she said. The first salvo of these cases focused on the role of providers. “You create a platform, you decide what goes on that platform—that makes you a fiduciary,” she said, explaining the perspective of the courts. Wagner said the second salvo of suits has been brought by a “personal injury firm in St. Louis” that is “changing ERISA.” Those suits, which targeted not only the “titans of industry,” but also individual directors of HR, served as a reminder that “ERISA is a personal responsibility statute.’ Wagner said the suits alleged that fiduciaries did not inform themselves what the “hidden fees were, so you couldn’t know it was reasonable.” And she cautioned that the dismissal of the Deere case—one of the first in the series to come to trial—was done in “such a heavy-handed fashion that it could come back to bite us.” She noted that the DoL has filed a brief in support of the plaintiffs’ position.

Roberta Ufford, Principal of Groom Law Group, noted that litigation is not always about the key issues, but that procedural matters can make a big difference. LaRue, decided earlier this year by the Supreme Court, reset certain presumptions about when a participant had standing to bring a suit. However, unlike some commentators, Ufford said her firm doesn’t see the case setting off a flood of lawsuits. It’s a type of situation that she said arises regularly—and generally, if there is a case, the account is made whole.

Another issue is the certification of a class action, “a trial in and of itself,” according to Ufford. In Ruppert v. Principal Life Insurance Co., plaintiffs tried to create a single class of all clients served by Principal, but was rejected because the court said the options, plan features, and fees offered to plans varied widely. Ultimately, Ufford said, plaintiffs will continue pursuing these, but will probably seek “smaller, more narrowly defined” classes. Finally, Ufford spoke to the impact of the statute of limitations—three years for ERISA cases—but noted that fiduciaries still have a duty to monitor on an ongoing basis.

Jason K. Bortz, Partner of Davis & Harman LLC, focused on fiduciary responsibility when you are soliciting 401(k) rollovers. In the recent case, Young v. Principal Financial Group Inc., it was alleged that Principal was giving ERISA advice when they reached out to participants in plans that they recordkept, based on information they had by virtue of that role. According to Bortz, the district court said these facts would, if proved, establish a fiduciary relationship. The case illustrates the risk that an adviser selling product might be considered to be selling investment advice, he said.

Still, he said that, while plaintiffs attorneys can “drive us nuts,’ these cases were “driving the industry in the right directions.”