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Industry Groups ‘Friend’ Fiduciaries in Excessive Fee Suit Fray


Noting that “a decision in this appeal has the potential to significantly affect Amici’s members, which include plan sponsors and fiduciaries…,” a group of industry trade groups has filed in support of fiduciaries and providers in a federal court.

Image: Shutterstock.comMore specifically, the ERISA Industry Committee (ERIC), the American Benefits Council, Society of Professional Asset Managers and Recordkeepers (SPARK) and Committee on Investment of Employee Benefit Assets, Inc. (CIEBA) have filed arguments in support of plan fiduciaries at AT&T in their challenge to a recent appellate court decision. The U.S. Chamber of Commerce also did so, albeit separately.

The Case(s)

That arguably controversial decision came in the wake of a suit filed by participant-plaintiffs of the AT&T 401(k) that had argued that after AT&T engaged Fidelity as recordkeeper, Fidelity engaged Financial Engines for additional services (new brokerage and investment advisory services)—which the plaintiffs alleged not only cost plan participants more, but that AT&T got a discount on administrative services as a result. They also accused AT&T of breaching its “duty of candor” by not listing the money paid to Fidelity on the Form 5500 annual reports.

These same plaintiffs lost twice previously at the district court level—once in September 2021 and again back in 2018 (when they had been accorded a chance to “fix” their arguments). Then in August 2023 the U.S. Court of Appeals for the Ninth Circuit (Bugielski v. AT&T Servs., Inc., 9th Cir., No. 21-56196, 8/4/23), acknowledged their conclusions differed from other federal courts, concluding that “AT&T, by amending its contract with Fidelity to incorporate the services of BrokerageLink and Financial Engines, caused the Plan to engage in a prohibited transaction.”

In August 2023 the appellate court remanded the case to the district court for reconsideration as to whether AT&T met the requirements for an exemption from the prohibited-transaction bar because the contract was “reasonable,” the services were “necessary,” and no more than “reasonable compensation” was paid for the services. Specifically, they wanted the district court to consider “whether Fidelity received no more than ‘reasonable compensation’ from all sources, both direct and indirect, for the services it provided the Plan.”

They also reversed the district court’s summary judgment on the duty-of-prudence claim, concluding that, “as a fiduciary, AT&T was required to monitor the compensation[iii] that Fidelity received through BrokerageLink and Financial Engines,” directing the lower court to also consider the duty-of-prudence claim “under the proper framework in the first instance.” Following that, the AT&T defendants moved to hear the case reheard by the full court and the industry organizations filing the friend-of-the-court brief are attempting to add their voices to that call—whether that’s a full court (en banc) rehearing or a full-on appeal.

Amicus Arguments

In lending their voice[i]—and that of their members—the trade groups assert that their constituencies “benefit from Congress’s decision to create, through ERISA, an employee benefits system that is not ‘so complex that administrative costs, or litigation expenses’ discourage employers from sponsoring benefit plans, or individuals from serving as fiduciaries.” Moreover, they assert that “this case presents questions of enormous practical importance to Amici’s members, because it threatens to make one of the most ubiquitous pieces of retirement plan operation (arms-length negotiations with third parties for necessary plan services) presumptively unlawful.” Oh, and if that weren’t enough, they also claim that “the panel’s decision is also inconsistent with Supreme Court precedent, and at-odds with prior decisions from the Third and Seventh Circuits, subjecting fiduciary actions to different standards depending on where in the country a case is initiated.” Indeed, the appellate court acknowledged its divergence from determinations in the Third and Seventh circuits.

Beyond that, the brief also asserts that “the panel’s decision undoes years of litigation establishing the pleading burden ERISA plaintiffs have in challenging retirement plan fees, and would add to the growing pressures plan sponsors and plan administrators face from serial filings and cookie-cutter complaints leading to protracted and expensive discovery.”

Turning to their specific arguments, the brief argues that the panel’s decision “suggests that any modification or renegotiation of existing service provider agreements would be a prohibited transaction, absent a showing that the ‘transaction’ (i.e., ‘the amendment of the contract’) fits within one of the statutory prohibited transaction exemptions.” Now, while the brief was willing to give that panel the benefit of the doubt (“[w]hile the panel did not believe its opinion would ‘frustrat[e] ‘ERISA’s statutory purpose’”), they saw as the natural outcome of that decision that “making every modification of service-provider agreements a presumptively unlawful, prohibited transaction (unless an affirmative defense is established)”—and that that “will have significant and far-reaching impacts. Although this opinion involved reversal of summary judgment for the defendant, the practical effect is that the decision would nullify years of jurisprudence on the standards plaintiffs must meet in pleading claims related to excessive retirement plan fees.”

“In theory, the panel’s framework seems workable: a fiduciary who follows a process and ensures it has satisfied § 408(b)(2) can enter into routine, necessary service provider agreements without violating § 406(a),” they write. “In practice, however, the diligence of the fiduciary’s process (or even the reasonableness of the service provider’s compensation) would be of little value in warding off speculative litigation. Courts—including this one—have interpreted ERISA’s prohibited transaction exemptions as affirmative defenses.”

“Categorizing routine arrangements with plan service providers as ‘prohibited transactions’ under § 406(a), then, undoes all of the precedent requiring an ERISA plaintiff to set out plausible allegations that the challenged fee is excessive. Indeed, a plaintiff would need only to allege that (1) the service provider was a party-in-interest, and (2) the fiduciary caused assets to be transferred to the service provider,” they claim.

“Plaintiffs should not be able to circumvent the established pleading burden for excessive fee claims by repackaging their prudence claims as ones for prohibited transactions,” they argue.

As another point, the brief argues that there would be “far-reaching negative consequences”—citing data that “since 2015, plan sponsors have paid more than $1 billion in settlements, including $330 million in legal fees that represent a direct and needless cost to plan providers, to say nothing of the costs associated with cases that did not settle.” Also skyrocketing, according to the brief, are the costs associated with fiduciary liability insurance. “Almost all fiduciary liability policies covering excessive fee and underperformance claims now feature seven- and eight-figure retention numbers,” the brief asserts.

“By opening the floodgates to prohibited transaction claims for routine service provider contracts, the panel’s decision here threatens to exacerbate all of these problems,” the brief continues. “Aside from the sprawling exposure and accompanying legal and insurance costs arising directly from this case, the panel’s ruling will subject fiduciaries to potential liability—or at least defense costs—even where they have clear evidence of providing well-managed, prudently priced plans, aided by expert third-party service providers, providing best-in-class services to aid participants in planning for retirement. This simply cannot be what the Supreme Court envisioned when it emphasized the importance of lower courts ‘giv[ing] due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.’”

The brief also challenges the panel’s interpretation of ERISA’s text—though they do refer to it as a “literal reading of those provisions,” though the brief claims doing so “ignores a circular effect” that it says has “been repeatedly identified and rejected by other courts.” That effect seems to stem from the reality that ERISA § 406 does see the contract for those services as a prohibited transaction—but then, via § 408, creates an exemption if those fees and services are reasonable. 

Chamber’s Claims

In a separate amicus brief, the U.S. Chamber of Commerce stated that “the transactions that the panel decision treats as presumptively unlawful are run-of-the-mill transactions that fiduciaries across the country are required to engage in every day to run a plan.” Alluding to the exemptions for such arrangements under ERISA, the Chamber commented that “many courts have construed those exemptions as affirmative defenses—which plaintiffs may artfully plead around to survive a motion to dismiss and drag fiduciaries into burdensome discovery, even though the claims are ultimately meritless.”

Picking up on the unleashing the litigation floodgates theme, they argued that “as a practical matter, therefore, the panel decision will increase the cost and complexity of providing retirement-plan benefits to employees—exactly what Congress was trying to avoid. Nor do the routine arms’-length transactions at issue here implicate Congress’s concern in enacting ERISA’s prohibited-transaction and exemptive provisions, which focused on commercial relationships that were not made at arms’ length and that created a risk that plans would have insufficient assets to pay out the benefits that participants had been promised.”

The amicus brief goes on to assert that the suit (and ensuing decision by the appellate court) “targets an arms’-length decision plan fiduciaries made to increase and improve the services available to plan participants from a third-party provider that makes these services broadly available in the retirement plan marketplace—the type of decision that, if unreasonable, is already actionable as a breach of fiduciary duty under 29 U.S.C. § 1104(a).”

And then—the ultimate threat—that not only will “[s]uch a holding … encourage plaintiffs to plead garden-variety fiduciary-breach claims as prohibited-transaction claims to take advantage of the more favorable burden of proof and pleading rules that many courts have afforded them. It will discourage plan sponsors and fiduciaries from transacting with third parties to offer the beneficial services that employees overwhelmingly favor and need. For plans that nonetheless continue to offer those services, it will make the plan sponsors and service providers sitting ducks for ERISA class actions that are ultimately meritless—an outcome that will, in turn, force plan sponsors to reduce the generosity of retirement benefits (e.g., employer contributions) that they voluntarily offer. All told, the cost and complexity of providing retirement-plan benefits to employees will increase significantly—exactly what Congress was trying to avoid in enacting ERISA.”

Contributing to the problem, according to the U.S. Chamber’s brief, are Labor Department regulations themselves. “DOL actually created brand-new disclosure requirements that are not present in the statute itself,” it asserts. “The regulation includes requirements that particular disclosures be made not by fiduciaries but to them, see id. § 2550.408b-2(c)(1)(iv), which means that a compensation arrangement struck by a plan fiduciary could be deemed not ‘reasonable’ (and therefore not exempt) based on an alleged error in a disclosure that was not even the fiduciary’s responsibility. DOL’s purported interpretation of the term ‘reasonable arrangements’ therefore creates enormous prohibited-transaction liability risk for fiduciaries and non-fiduciaries alike as a result of any technical noncompliance with the thicket of requirements that DOL has created.”

“Any of these outcomes causes harm all around—employees lose out on sought-after services, employers become less attractive workplaces, and third-party providers lose clients and are discouraged from innovating new service offerings. Nothing in ERISA compels that result,” the brief concludes.

Will those arguments turn out to be persuasive to the court? Stay tuned.


[i] Amicus briefs are filed by parties that typically take the position of one side in a case, in the process supporting a cause that has some bearing on the issues in the case.