The 2017 NAPA DC Fly-In Forum featured a panel discussion with two leading ERISA attorneys about how they view today’s landscape of 401(k) and 403(b) plan litigation. The panel was moderated by David Levine of the Groom Law Group.
Evolving Plaintiffs’ Strategy
Addressing where we stand today with litigation threats, Nancy Ross, Partner and ERISA Litigation Practice Co-Chair at Mayer Brown LLP, explained that the types of cases that the plaintiffs’ bar has pursued over the last 25 years have evolved from retiree medical benefits in the 1990s, to company stock drop cases in the 2000s, and now excessive fee litigation.
But there seems to be one common theme with the cases. Even though the presumption of prudence that had benefited fiduciary defendants in company stock drop cases was generally blown away by the U.S. Supreme Court’s 2014 ruling in Fifth Third Bancorp v. Dudenhoeffer, the plaintiffs’ bar remains very aggressive and “big money” has always been the driver, Ross warned.
“What drives this litigation, as facetious as it sounds, is that it comes back to the money... when the plaintiffs’ bar is receiving [multi-million dollar] settlements, it fuels the fire and more and more attorneys want to get in on it,” Ross noted.
She explained that excessive fee litigation is the current “darling” of the plaintiffs’ bar, with many of the allegations involving what she called “a ‘pancake’ theory where they throw different claims against the wall and see what sticks.” Ross noted that the advisor community is now being targeted, explaining that “all it takes is just one firm to get past a motion-to-dismiss and other firms will come out of woodwork wanting a piece of the action.”
Noting that 98% of the cases settle out of court, Ross explained that one of the most important stages is whether the plaintiffs can get past an early dismissal motion — and that’s based solely on what’s pleaded in the complaint.
“There’s little rhyme or reason; depending on the judge’s ideology, you’re either going to kill the case early on or [the plaintiffs] are going to get past the dismissal motion and get into the discovery phase” — and that’s where it becomes very expensive to litigate, particularly with electronic discovery, Ross stated.
She noted that this is where it becomes a business judgment. Defendants will ask, “Is it worth spending the money and rolling the dice and, at the end of the day, still be found liable? Or should we take the same money we would put into e-discovery and just get out?” Ross explained.
The bad news is that it’s not going to stop, Ross warned, particularly when the plaintiffs’ bar continues to see large settlements. On the bright side, she noted that litigation over investments and investment selection has brought a number of best practices to the industry and, from that perspective, it has been beneficial.
Pendulum Swinging Back to ‘Process’
Thomas Clark, Jr., a Partner at the Wagner Law Group, has the insight of previously working at the Schlichter Bogard & Denton law firm, which has been the force behind the vast majority of excessive fee litigation cases over the past decade. Jokingly describing himself as a “self-reformed plaintiff’s lawyer,” Clark noted that Schlichter was not the first firm to bring a fee case, but was the first to professionalize the cases.
Similar to Ross’s description of plaintiffs’ approach to strategy, Clark noted that the plaintiffs’ bar used a “spaghetti against the wall” strategy, but that the first cases were all about process, with claims that certain funds should not have been used or firms did not disclose revenue-sharing arrangements. He noted that those cases did not go very well for plaintiffs once courts determined that the cases did not involve viable claims, as seen in the Hecker v. Deere decision.
Clark said that one of the most important decisions for the plaintiffs’ bar — and one that had the effect of sending decisions back in the other direction — was the Walmart ruling in the U.S. Court of Appeals for the 8th Circuit, which brought in self-dealing. Clark explained that every case thereafter for the next six or seven years involved self-dealing of some type, but he believes the “low-hanging fruit is gone” and those cases, for the most part, have run their course.
Clark believes we’re now entering a period of “Hecker 2.0,” with the pendulum swinging back to process cases because “that’s all the plaintiffs’ bar has left.” He noted that the claims involve vast allegations, such as not doing a good enough job of running the plan or not getting into the “right” type of investments quickly enough.
One example of the recent process cases can be seen in the lawsuits filed against colleges and universities. Clark said he is troubled by this latest wave of claims and worried about the 403(b) market, noting that the plaintiffs’ bar targets the universities because the claims are very easy to replicate from university to university.
Underscoring Clark’s point, Ross explained that there is nothing really novel about the 403(b) claims in that they involve the same types of claims as the 401(k) cases, such as charging excessive fees, using retail mutual funds, plans not performing to benchmark and so on. She noted that the only real difference is the use of multiple record keepers.
Since it’s hard to predict what’s going to happen in the courts, Ross and Clark recommend that advisors and plan sponsors reduce the risk of litigation by following a best-practices strategy.
While there isn’t necessarily one thing that can be done to “litigation proof” your firm, Clark noted, having a strong process in place can help your firm avoid being targeted.
Ross suggests focusing on the trends and the claims that are appearing in each of the lawsuits. In addition, she emphasized that careful documentation makes it much easier to show a court that you were acting prudently. Make sure your notes are thorough; if possible, have quarterly meetings, with minutes documenting that you as a financial advisor reviewed investment options and the proper benchmarks, she advised.
Ross listed three key roles advisors can play for plan sponsors:
- Keep your ear to the ground and know what’s going on within the industry (what would a prudent person do?).
- Conduct thorough benchmarking.
- Conduct quantitative analyses on a regular basis.
Underscoring her recommendations, Ross emphasized that, “the only thing that came out of the Tibble case is that plan fiduciaries have an ongoing duty to monitor.”
Turning to the DOL fiduciary rule, Clark noted that he is more nervous about the risk of litigation under the rule than perhaps many others in the industry are. “On this topic, there is no issue of being fair and balanced. I am very nervous that the plaintiffs’ firms are going to find a way to bring cases regardless of what happens under the fiduciary rule,” Clark warned.
He believes the plaintiffs’ firms will likely will go after the largest employers first, and are going to delay bringing cases in order to build up potential damages with the passage of time. The good news Clark sees coming out of this is that he believes the DOL and EBSA will not be as aggressive in going after plan sponsors as they were under the Obama administration.