ERISA breach of fiduciary duty litigation in 401(k) and 403(b) cases continues to persist, with new litigants rapidly emerging. Though these cases remain primarily confined to the mega-plan market where plan assets are typically more than $1 billion, “copycat” filings are beginning to move down market, betting on quick settlements (which they are increasingly getting).
That said, the “new” standard of plausibility mentioned last quarter continues to prevail in some federal court districts, dismissing suits prior to trial—as long as the insurance policies cover those expenses.
Here’s what you really need to know:
- Different federal court districts are applying various standards in determining what has to be established to go to trial; a growing number want more than just comparisons of fees paid by plans of similar size, while others continue to view recordkeeping services as “fungible”.
- A new litigation threat looms with regard to a plan sponsor’s role as health plan fiduciaries.
- The politicization of environmental, social, and governance (ESG) investment focus has produced a lot of headlines and some litigation (with the potential for more to come).
Let’s dive In...
What’s Enough to Be Considered 'Plausible?'
Lawsuits based solely on comparing plan fees per Form 5500 against plans of allegedly comparable size (participants and assets) are being ruled as insufficient to beat a motion to dismiss by fiduciary defendants — particularly where there is evidence of a prudent, thoughtful process. In those districts, courts expect an accounting based on services provided for those fees.
But some courts are still persuaded that recordkeeping (not investment management) is “fungible”, a commodity for which plans of similar size should pay pretty much the same fee. There remains a significant cost in time and expense in responding to suits, regardless.
Picking up on the trends noted in the last quarter, there were several settlements with common factors. These excessive fee suits are settling more quickly and for less money than in the past, likely a function of insurance considerations. However, there has also been—particularly in federal court districts in the South and Midwest—a tendency for the courts to require more than a “mere” assertion that fees in excess of those paid by plans of similar size (assets and/or participant count) to be sufficient reason to move past a motion to dismiss and proceed to discovery and trial.
Consequently, suits in those districts are increasingly dismissed for lack of presenting a “plausible” argument for proceeding. (Though many of these cases allow the folks bringing the suit an opportunity to improve their lawsuit, this is known as dismissal without prejudice).
A Prudent Process (Still) Trumps Excessive Fees Allegations …
In this vein, the fiduciaries of the Georgetown University 403(b) plan won their appeal. While even the judge in the case admitted it had a “complicated” history, this was another case where the judge insisted on more than mere allegations.
More specifically, the court commented, “Although they have supplied examples of defined contribution plans that consolidated the recordkeeping function for all funds with a single provider, they do not include facts comparing the scope and quality of the recordkeeping services being provided; the number and variety of funds or tools and options offered to plan members; the size of the plans, the number of participants in the plans, or the total amount of assets under management; or even the recordkeeping fees paid by the plans.”
Think of this as a fiduciary checklist that a prudent fiduciary should consider when selecting a service provider.
As the quarter ended, Yale University finally won its excessive fee lawsuit (filed in August 2016) in an unprecedented (for this type of suit) jury trial. Yale prevailed despite the jury’s findings of a breach of reasonable fees (but a determination that the damages were $0.00), and their view that the decisions made by the plan committee were in alignment with those of a prudent fiduciary. Another win for prudent process.
BlackRock Target Date Suits Stumble in Court
We’ve also been tracking a group of about a dozen suits against national employers1 whose plans invested in the BlackRock LifePath target date funds. The basic argument made by the plaintiffs in these cases (all represented by the law firm of Miller Shah) was that the plan fiduciaries “chased low fees” and in the process myopically ignored the poor performance of the BlackRock LifePath TDFs.
While those funds arguably performed well compared to the selected benchmarks, the plaintiffs said they should have been compared with the performance of a half-dozen leading target-date fund families—though those funds all employed a “through” retirement date glide path, unlike the BlackRock funds that have opted for a “to” retirement date glide path.
That said, suits against Capital One and Booz Allen Hamilton had their cases dismissed, and subsequently, after announcing their intention to appeal that decision, have now said they do not plan to do so. Additionally, the suit brought against the Microsoft 401(k), which had been dismissed, was allowed to amend their claims and did so (basically by adding additional benchmarking comparisons2 that the court felt added nothing) but then had those amended claims dismissed in May as well.
In dismissing the case, U.S. District Judge James L. Robart said, “Plaintiffs’ allegations, which again are based solely on the BlackRock TDFs’ alleged poor performance during a brief timeframe, are insufficient, without more, to raise Plaintiffs’ claim above the level of speculation and into plausibility.” Significantly, the judge in the Capital One and Booz Allen cases commented that the plaintiffs’ arguments were, “completely devoid of facts about the particular decision-making process undertaken by Defendants with respect to the Plan at issue here” — a reminder that a prudent (and documented) process can prevail.
(Some) States Challenge DOL’s ESG Regulation
The politicization of ESG-focused investments has resulted in a variety of suits—primarily by and on behalf of public pension plan investments. It has also produced a challenge to the Labor Department’s (DOL’s) so-called “ESG rule” (more precisely the Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights) led by a coalition of 25 state attorneys general,3 along with Liberty Energy, Inc. (a Delaware corporation and publicly traded energy company), Liberty Oilfield Services LLC (a Texas limited liability company and subsidiary of Liberty that sponsors a defined contribution 401(k) plan for its employees), Western Energy Alliance (a 501(c)(6) nonprofit trade association that “represents 200 companies engaged in all aspects of environmentally responsible exploration and production of oil and natural gas across the West”), and James R. Copland (a participant in a retirement plan subject to ERISA).
As expected, the DOL has pushed back on the claims made in the suit, though it’s been filed in the same federal court district in Texas that rejected the DOL’s fiduciary rule. So far, the only ruling on the case to date has been a rejection of the DOL’s motion to move the case to the D.C. Federal Court.
In addition to the Texas case, a second and similar case in Wisconsin is tracking the same trajectory. Filed by two plan participants, this case also seeks to reject the DOL’s ESG rule based in part on the argument that because the rule doesn’t have the same documentation requirements as a prior version of the rule under the Trump administration, plans can unjustifiably add ESG without documented reasoning.
In what remains an outlier case, in June, an American Airlines participant filed suit against those plan fiduciaries, claiming that they put retirement savings at risk by investing with managers and funds that “pursue leftist political agendas through [ESG] strategies, proxy voting, and shareholder activism.” Oddly enough, his suit appears to be based on holdings within the plan’s self-directed brokerage account rather than the main menu.
Conversion Delays Trigger Participant Suit
Transitions to new recordkeeping platforms have been known to result in some bumps along the way, but a recent lawsuit charges those overseeing and operating the federal government’s $766 billion Thrift Savings Plan (TSP) with “breaches of fiduciary duties, negligence, unjust enrichment, and breach of contract.”
The suit charges both the plan fiduciaries and the recordkeeper hired by the plan fiduciaries for damages resulting from substantial delays in providing funds related to participant loan and distribution requests. This is a reminder that plan fiduciaries have a responsibility not only to prudently select but to monitor the actions of the service providers it engages on behalf of the plan participants and beneficiaries.
Attention: Health Plan Fiduciaries!
While it’s not yet active litigation, we’ve taken note of the “trolling” for potential participant-plaintiffs by the law firm of Schlichter Bogard LLC—the firm responsible for the flurry of excessive fee litigation in both the 401(k) and 403(b) space. This time, they’re contacting employees of several large national firms who participated in their employer’s health plan.
This all comes following the passage of the Consolidated Appropriations Act of 2021 (CAA)—provisions said by some to be “the most significant compliance challenge employers have faced since the Affordable Care Act.” The law requires, among other things, a determination of “reasonableness” of vendor fees and services for healthcare by employer-fiduciaries. And it looks like it may open a whole new litigation arena for plan sponsors.
As always, plan fiduciaries (and those who support them) should remember that it’s ultimately about prudence and a documented process, not results per se.
Action Items for Plan Sponsors
Even if you are the fiduciary of a smaller plan that might not be the perceived subject of a class-action case, these back-to-the-basics best practices apply to plans in all market segments. For plan sponsors of all sizes, consider:
- The importance of having an investment committee that is qualified and engaged, supported by experts and the structure of an investment policy statement (the latter has been a noted factor in several of the litigation decisions).
- Remember that prudence is important both in selecting AND monitoring the products and services engaged on behalf of the plan.
- Be thoughtful about the information that the committee makes publicly available, including agendas, minutes, and reports. Decisions can and should be summarized—the discussion itself need not be.
- Make sure you have an ERISA fiduciary liability policy in place. Generally speaking, your standard E&O policies do not cover this type of litigation, and ERISA fiduciary liability is personal. To be clear, this is different from the fidelity bond the plan is required to have.
Nevin E. Adams, JD, is former Chief Content Officer of the American Retirement Association, and Bonnie Triechel is Chief Solutions Officer, Endeavor Retirement.
1 The suits have been filed against the 401(k) plans of Citigroup Inc., Cisco Systems Inc., Genworth, Stanley Black & Decker Inc., Microsoft, Marsh & McLennan Cos., Advance Publications, and Wintrust Financial Corp.
2 Specifically, they added comparisons of the BlackRock TDFs against the S&P Target Date Indices and also added a new metric — the Sharpe ratio — to illustrate the BlackRock TDFs’ risk-adjusted returns relative to the Comparator TDFs. They had done so in the Capital One and Booz Allen cases as well, with identical, unsuccessful results.
3 The states in this coalition are Alabama, Alaska, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Utah, Virginia, West Virginia and Wyoming.
