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Lessons Learned from a Litigation Settlement

Litigation

There’s generally not much you can learn from litigation settlements—the parties mostly agree to disagree, and the issues raised remain largely unresolved. But there are exceptions.

When the parties to a potential settlement present it to the court for approval, they take pains to point out that the terms are fair to all parties, are the product of diligent, open arms-length negotiations, and that in approving the terms, the court is resolving issues that, left to trial might well linger on for years, tying up the court’s time and energy, leaving both parties uncertain as to a potential outcome. As the Neuberger Berman settlement proposal explained, “Instead of a drawn-out decade of costly litigation, with a risk of no recovery, class members will receive a certain benefit now whether they are current participants in the Plan or former participants.”

Perhaps put more simply, “A bird in the hand is worth two in the bush.” 

In making that case, it’s not unusual for the parties seeking approval of the settlement (especially the plaintiffs, who, after all, initiated the action) to point to the uncertainty of the outcome, and to do so by reference to cases in other jurisdictions that have ruled on similar issues against the position(s) taken by the plaintiffs. But, generally speaking, those references are made in a kind of judicial shorthand—with more space allotted to the case citations themselves than to the point argued. 

But the recent $17 million settlement involving Neuberger Berman stands out because, while those case citations remain, the narrative provides a kind of checklist for fiduciaries who might want to make their own plans more secure from random litigation. 

Consider the points this settlement agreement said might arise—and be decided against the plaintiffs’ case—and pointers to take from these:

POINT: Because Mr. Bekker knew he was investing in a Neuberger-managed fund, and had a general understanding of the VEF’s[i] performance, was his claim barred under ERISA’s three-year “actual knowledge” statute of limitations?

POINTER: Make sure participants are aware of the details and history of plan investments—and document acknowledgement of that information.  

POINT: Because the Plan included alternative active and passively managed large cap investment products in addition to the VEF, are Plaintiff’s claims subject to a defense that the Plan offered a prudent range of options? See Hecker v. Deere & Co., 556 F.3d 575, 586 (7th Cir. 2009) (affirming dismissal where 401(k) plan participants were offered funds with “a wide range of expense ratios” that were “also offered to investors in the general public”).

POINTER: Have both active and passive options on the menu.

POINT: Because the VEF outperformed its benchmarks at various extended times during its history in the Plan, and was blessed by an independent investment consultant, could Plaintiff prove the decision to continue offering the VEF was imprudent?

POINTER: Make sure the fund options are reviewed regularly, preferably by an independent advisor/consultant, and that that review is documented.

POINT: Had the VEF been removed,[ii] could Defendant prove the assets would have been reinvested in less aggressive investment products, such as the Plan’s target date funds or spread among the Plan’s other equity and bond funds, such that the proper measure of damages reflects the lower returns of a more conservative asset allocation?

POINTERWhile all plan investments should be regularly reviewed for prudence and appropriateness, be particularly attentive to the option(s) that attract most of the plan’s contributions, understand why, and be attentive to plan design features such as defaults that produce, or contribute to, that result. Generally speaking, courts have been sympathetic when participants have access to a variety of options, whether they take advantage of them or not.    

POINT: What is the appropriate measure of damages? See Tussey, 850 F.3d at 960 (remanding for determination of method of calculating damages where mutual fund was imprudently added to 401(k) plan[iii]).

POINTERThe calculation of damages—the financial injury suffered by plaintiffs—often seems as much art as science, laden with assumptions, and predicated on the notion that, had a (more) appropriate investment been available at a particular point in time, the plaintiffs would have availed themselves of it. Perhaps the best way to limit potential damages is to ensure that (a) participants have adequate alternatives and the opportunity to choose them, and (b) providing sufficient information regarding investments—and achieving proof that the information became “actual knowledge” such that the time period of exposure is constrained or eliminated by the statute of limitations.    

POINT: Other recent ERISA 401(k) cases involving proprietary funds have resulted in trial judgments in favor of the defendants…  

The Ultimate POINTER: While most of these cases have ended in settlement ahead of adjudication, the cases that have found in favor of defendants continue to suggest that a prudent, well-documented process can prevail—on the merits.


[i]In the Neuberger Berman suit one fund in particular—the Value Equity Fund—was singled out (little wonder, since it held about half the assets in the plan) for being “larded with high fees and has suffered from consistently abysmal performance.” The suit alleged that the decision to continue to offer this fund, and to open the fund to new investments (it had been closed to new money following the firm’s acquisition by Lehman Brothers, and then reopened following the reseparation of the firms), were fiduciary breaches which cost the plan more than $130 million.

[ii]In fact, the VEF had been removed from the plan ahead of the settlement, and was therefore not an element in that settlement.

[iii]In the cited Tussey case, the appellate court stated that it had issues with a comparison between what an investment in the Wellington Fund would have provided and that of the target date funds in the absence of evidence that the participants in that former option would have retained it. “A reasonable inference is one which may be drawn from the evidence without resort to speculation,” it said.

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