COVID notwithstanding, the retirement plan industry has seen a record increase in court filings and litigation the past few years—and a recent session at the ASPPA Annual National Conference explored those issues and the underlying causes.
The session—led by Kizzy Gaul, Esq., ERISA Attorney at Ascensus, LLC, and Robert Gower, Director at Trucker Huss—started by talking about the origins of these actions, warning signs, if you will. This can be a claim for benefits, but also the larger type claims that have emerged in litigation; allegations of a breach of fiduciary duty, interference with protected rights, or even civil penalties for failure to provide certain documents, as well as criminal penalties (those sought by the Labor Department).
It was noted that participants generally must exhaust the administrative remedies for benefit claims prior to filing suit. Gower commented that there was a fiduciary exception to the normal rules about attorney-client privilege communications—since the services provided to the plan by legal counsel is work ultimately done for the benefit of the participant/beneficiary. “Remember that what you write, you might have to read that in a deposition, or in court,” Gaul cautioned.
As for signs that litigation is coming, the end of a claims/appeals process can be one, as well as solicitations from law firms (such as a document production request). “They’ll ask for the kitchen sink—but check to make sure what the law requires,” Gaul noted. It was also noted that service providers should notify plan fiduciaries as soon as possible following receipt of those type requests. Also of interest, Form 5500 Data, specifically Schedule C and Schedule H where it was explained that an “accurate and clear” presentation of fees and financial information—not to mention delineation of direct versus indirect compensation.
Fiduciary Breach Claims
There are three basic types of breaches—the major source of class action lawsuits:
1. ERISA duty of loyalty (exclusive benefit rule)—actions not solely in the interests of participants and beneficiaries for the exclusive purpose of providing benefits.
2. ERISA prudent person rule—actions that are not in keeping with the care, skill, prudence and diligence under the circumstances then prevailing.
3. Duty to diversify—minimize the risk of large losses to the plan/participant/beneficiaries.
It was explained that the typical process (following the filing of the initial suit) is a motion to dismiss—this generally challenges the legal right of the person filing the suit to do so (a.k.a. “standing”), whether the suit has been filed on a timely basis (within ERISA’s statute of limitations), or that they have failed to exhaust the prescribed administrative remedies required prior to doing so.
The panelists also discussed several of the large topics currently being litigated:
Participant Data
Harmon v. Shell Oil—a new area of law—the plaintiffs here have said that anything of value with regard to the plan is a plan asset. However, the court here cited definitions of plan assets in Labor Department regulations and affirmed that assets are investments or contributions—not participant data.
Berkelhammer v. ADP—here the plan fiduciary was said to have violated its fiduciary duty by disclosing participant data to the recordkeeper—but the court not only found that it was not imprudent to share, but that it might be imprudent NOT to share. Once again, citing the definition of plan asset in DOL regs—the court dismissed those claims without prejudice.
With regard to these issues, the panel noted that plan sponsors may negotiate limits on the use of participant data. In fact, they explained that there is an increased focus on service agreement provisions regarding participant data, and during the RFP process. Also, that DOL plan audits have probed the use of participant data, though there is industry concern that this focus on participant data use might have a “chilling effect” on financial wellness programs. That said, “Consent is a good thing,” referencing obtaining the affirmative consent of participants to this data use.
Cybersecurity/Cybertheft Cases
A recent case involved the CEO of a plan sponsor company suing the trustee and recordkeeper for a fraudulent distribution of some $124,000 to a newly opened account, despite discrepancies in the distribution form. In another case (Bartnett v. Abbott Labs) there was a theft facilitated through a service provider website—service provider held to be a fiduciary. DOL has issued subpoena to the service provider—and is currently investigating unauthorized distributions due to security breaches.
The panel highlighted several provider considerations:
- Cybersecurity is/should be a focus in the RFP process, ongoing annual plan audits/monitoring and DOL investigations.
- Service agreements, agreements with third-party providers and/or subcontractors should take this into account.
- Current controls and flows for distribution processes and identity validation should be considered, and attention should be paid to insurance against such transgressions.
- Ultimately, care should also be taken to consider the impact of state laws for breach or unauthorized disclosure of Pii (personally identifiable information).
- Staff training and awareness is also key.
Excessive Fee Cases
This is a large, and growing, area of litigation. There were “well over 100 cases filed in 2020,” while settlements of $800 million were booked in 2021 and $300 million in 2020. In January, the Supreme Court of the United States weighed in on one such case (Hughes v. Northwestern). More recently they cited cases involving BlackRock LifePath funds—ironically alleging a focus on fees, rather than performance.
As for ways to help plan sponsors mitigate risk, the panel noted:
- Formally establishing a committee to oversee the plan;
- To hold active and engaged (and documented) committee meetings;
- Make sure committee members receive fiduciary training; and
- Regularly benchmark plan costs.
