The new year has brought with it two new genres of Employee Retirement Income Security Act (ERISA) litigation, including the first-ever case of an employee alleging a fiduciary breach by the employer’s health care plan practices.
That said, cases involving prudent selection and monitoring of investments persist and continue to dominate the ERISA litigation arena.
Most importantly for plan sponsors, several victories for plan fiduciaries remind us that a prudent process (generally) prevails and may be effective in fending off litigation.
Here’s What You Really Need to Know
- Two new types of ERISA litigation have emerged. One deals with specific pension risk transfer (PRT) decisions by defined benefit plan sponsors seeking to shift pension obligations to a third party. The other is the first of what are likely to be multiple suits regarding fiduciary duties owed by plan sponsors to their healthcare plan participants.
- Litigation alleging underperformance as indicative of a fiduciary breach continues to be a “loser” for plaintiffs bringing suit. Courts continue to want more evidence of a flawed or non-existent process to allow the suits to go to trial.
- A recent decision reminds us that in 2013, the Department of Labor (DOL) provided guidance on TDF fund selection, noting that fiduciaries should consider the plan demographics and needs in selecting and evaluating a TDF.
Let’s dive in.
New Fiduciary Focus for Healthcare Plans
Johnson & Johnson has been sued by an employee who claimed that “over the past several years, defendants breached their fiduciary duties and mismanaged Johnson and Johnson’s prescription-drug benefits program, costing their ERISA plans and their employees millions of dollars in the form of higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, higher copays, and lower wages or limited wage growth.”
The suit would appear to have its basis in the provisions of the innocuously labeled 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.”
In essence, ERISA Section 408(b)(2)—which greatly expanded fee disclosure responsibilities for retirement plan providers—now applies to health care providers. Plan sponsors are on the hook to ensure that those fees/services rendered are reasonable.
If you’re wondering what this has to do with retirement plans, it’s an area of focus for the law firm of Schlichter Bogard, which has been trolling social media for months asking workers of a dozen different national firms if they had participated in their employer’s healthcare plan – and if so, “You may have a legal claim—and we’d like to speak with you.”
In sum, plan sponsors, most of whom are not accustomed to a retirement-type focus on healthcare plan practices should be aware of this potential new litigation threat.
'Risking' Business
While it’s early yet, three recent suits—filed by different law firms in different federal district courts—might be the first of a new wave of litigation. Each focus on decisions to mitigate corporate risk exposure to pension obligations by a PRT.
The suits—two now targeting AT&T and the other against Lockheed Martin—acknowledge that the process itself is perfectly legal but question the prudence of the decision to “offload” that pension responsibility to parties—deemed less financially viable to fulfill those obligations.
For those unfamiliar with the foundation of a PRT, Interpretative Bulletin 95-1, issued by the DOL in 1995 (in the wake of the Executive Life collapse), outlines the fiduciary standards to be used in selecting an annuity provider for a PRT.
That includes considerations of the provider’s investment portfolio, size relative to the annuity contract, level of capital and surplus, liability exposure, and availability of state government guaranty associations.
The SECURE 2.0 Act of 2022 required the DOL to review IB 95-1 and recommend possible modifications to Congress by the end of 2023—but that has not happened yet.
Granted, this type of litigation will only apply to companies with defined benefit pension plans that have taken steps to offload the pension liability to another entity—and right now at least—just this one particular entity.
There has been a lot of interest in PRT among large employers, particularly given the volatile interest rate environment. Since those bringing the suits have not (yet) suffered harm, and since the law does not require that the annuity provider selected be the safest (just a prudent choice), the prospects for these suits remain questionable.
ESG Suit Pivots to Proxy Voting
A case that initially challenged the impact of ESG (Environmental, Social & Governance)-focused funds on a 401(k) menu has morphed into something quite different.
In the case of Spence v. A. Airlines, Inc. et al, the plaintiff alleged that he and other participants in the defendants’ 401(k) plan, were defaulted into underperforming funds that utilize ESG factors in investment selection. The suit had also challenged “the unlawful decision to pursue unrelated policy goals over the financial health of the Plan.”
Since then, the two parties have repeatedly gone back and forth. American Airlines argued, among other things, that the plaintiff hadn’t even been invested in the funds at issue.
In what seemed to be an extraordinary “pivot” (in a case full of these types of abrupt shifts), the plaintiff dropped the prior arguments about fund performance and argued that “Defendants violated their fiduciary duty by knowingly including funds ‘that are managed by investment managers that pursue non-financial and nonpecuniary ESG policy goals through proxy voting and shareholder activism’ on their investment portal.”
More specifically, the plaintiff argued that the plan “primarily contains funds administered by investment management firms like BlackRock, Inc.,” and that those firms “pursue pervasive ESG agendas”—an “engagement strategy” that “. . . covertly converts the Plan’s core index portfolios to ESG funds”—which, in turn, harms participant financial interests “because BlackRock focuses on socio-political outcomes instead of exclusively on financial returns.”
The suit also claimed that the defendants’ corporate embrace of ESG principles had permeated the perspectives/judgment of the plan’s investment committee.” And with those arguments, the plaintiff was able to persuade the court to let his case go to trial.
However, the ink was barely dry on that denial of a motion to dismiss the suit when the defendants filed a motion of summary judgment, claiming that “there is no genuine issue as to any material fact and the [movant] is entitled to judgment as a matter of law.”
Note that a number of experts have opined that this case could open a door that could have a significant impact on active manager selection. That said, allowing a case to go to trial is not the same as winning at trial. Stay tuned.
Another BlackRock 'Block'
We’ve been tracking a dozen or so suits filed on behalf of participant-plaintiffs by Miller Shah LLP regarding plans that included the BlackRock LifePath TDFs on their menu. These suits alleged that the plan fiduciaries “chased low fees” rather than focusing on performance, which the participant-plaintiffs bringing suit claimed put their retirement savings at risk.
You may recall that those suits had pressed for a benchmarking comparison with other leading TDFs, though those all relied on a “through” retirement date glidepath, rather than the “to” focus employed by the BlackRock funds.
In January, yet another of these—involving CUNA—was dismissed. Not only did the judge in the case disagree with the allegations that the fund performance was consistently lower, he also reminded that “the duty of prudence requires a fiduciary to make reasonable judgments; it does not require them to pick the best-performing fund each year or even each decade. Too many variables are at play to make that a viable basis for holding a plan administrator to have violated its fiduciary duty.”
The judge also noted that the plaintiffs needed to not just allege underperformance, but that they “must plead sufficient facts from which a reasonable jury could find that the selection and retention of the BlackRock TDFs fell outside the range of a fiduciary's reasonable judgments.
He found nothing in their suit that did so (citing things such as investors abandoning the BlackRock funds, reports critical of the funds or its managers, gross, sustained underperformance or allegations of self-dealing, conflict of interest, excessive costs, or anything else of that nature).
All that said, only one of these cases has survived the motion to dismiss stage, generally coming up short of a judicial assessment of whether the comparator TDFs are indeed comparable or whether underperformance alone is a sufficient basis for finding a fiduciary breach.
That those determinations have been made, and made consistently, across a wide variety of federal court jurisdictions, should be a comfort to plan fiduciaries with thoughtful, documented, processes in place.
Fiduciaries Fight Back on Forfeiture Suits
We’ve also been tracking a series of suits claiming a breach of fiduciary duty by using forfeitures to offset company contributions, rather than allocating those to remaining participant accounts.
The latest target was Tetra Tech Inc., though similar (if not identical) claims have been filed by this law firm against Honeywell, Thermo Fisher Scientific Inc. 401(k) Retirement Plan, Clorox, Intel, Qualcomm, Intuit, and HP.
The most recent was filed on behalf of a participant-plaintiff by Hayes Pawlenko LLP—the same firm behind a half-dozen such suits—alleging that “while Defendants’ reallocation of the forfeitures in the Plan’s trust fund to reduce its contributions benefitted the Company by reducing its own contribution expenses, it harmed the Plan, along with its participants and beneficiaries, by reducing Company contributions that would otherwise have increased Plan assets…”
Intuit, Clorox, and Qualcomm have already filed motions to dismiss these suits—primarily arguing that the participant-plaintiffs suffered no injury (having received all the benefits/contributions required by the plan) and that the decision to offset employer contributions was a settlor, non-fiduciary decision in accordance with the plan document.
There is no official ruling on these motions to date, but they serve as a reminder to be aware/attentive to the language in the plan document regarding forfeiture reallocation.
Prudent Process Prevails (Again)
Litigation that involved a multiple employer plan (MEP), merging plans, a 3(38)-investment advisor, a plan sponsor—and at one point an advisor (NFP)—has been resolved in favor of the fiduciary defendants, while reminding us of the value and importance of a prudent process in TDF selection.
The plaintiffs bringing suit alleged that rather than acting in the exclusive best interest of participants, “the Wood Defendants and NFP caused the Plan to invest in NFP’s collective investment trusts managed by its affiliate flexPATH Strategies, which benefitted the NFP Defendants at the expense of Plan participants’ retirement savings.
The Wood Defendants and NFP also failed to use their Plan’s bargaining power to obtain reasonable investment management fees, which caused unreasonable expenses to be charged to the Plan.”
Notwithstanding those allegations –and the complexity of the litigation parties (as noted above), in a “findings of fact & conclusions of law” filing, a United States District Judge walked through a remarkably comprehensive analysis of TDF history and policy, examined the genesis and structure of fiduciary reviews, and concluded that the flexPATH defendants provided a solid case for the selection of their funds by the plan in question.
He outlined what seemed to be a thorough process, with plenty of consideration and debate about the choice over several years, and an evaluation of the relative performance of those funds. There was discussion of the advantages of TDFs that took into account more than retirement date, particularly given the diverse employee populations and plans that were being combined.
This is not the first (nor will it be the last) time that a party perceived to have a conflicted interest has been sued for allegedly abusing that position.
However, it is also not the first time that a documented, prudent process has been sufficient to prevail in litigation, and as such, serves as a potent reminder of the value of having that in place.
A judgment rarely provides such a thorough and descriptive analysis of that process, as well as its applicability to divergent participant populations.
The case also provides a good reminder of the DOL’s 2013 guidance on TDF selection and how fiduciaries should take into account the plan demographics and needs in selecting and evaluating a TDF.
Another good case made for prudent process was the February decision of the U.S. Court of Appeals for the Second Circuit in a case involving Goldman Sachs.
In affirming the summary judgement decision (and echoing the findings) of that district court, the three-judge panel cited “evidence that Defendants employed a robust process to manage potential conflicts of interest: the Committee required its members to participate in fiduciary training sessions, which is not a standard market practice, and retained an investment consultant to act as an independent advisor and provide unbiased advice about the Plan’s fund offerings.
Moreover, there is no evidence in the record that either the independent investment advisor or the Committee members had any personal incentive to favor the [challenged funds],” going on to note that the “conclusory assertions” of the plaintiff here were “unsupported by the record.”
“At best, [the plaintiff] takes issue with the timeliness of removal of the [funds at issue],” the panel commented. “But a fiduciary does not breach its duty of loyalty by choosing to retain an investment that, in the fiduciary’s reasonable assessment, may perform well in the long term despite short-term underperformance. And more to the point with respect to the duty of loyalty, there is no evidence that Defendants’ weighting of long-term versus short-term performance with respect to any particular fund was somehow skewed by favoritism toward GSAM funds.”
Once again, a well-documented prudent process—buttressed by committee members with expertise, reinforced by training, and supported by the advice of expert investment advice (and legal counsel)—has prevailed.
Action Items for Plan Sponsors
Even if you are the fiduciary of a plan that might not be the perceived subject of a mega class-action lawsuit, these back-to-the-basics best practices apply to plans of all sizes. For plan sponsors, consider the following:
- Establish an investment committee that is qualified and engaged, supported by experts, and creates an investment policy statement (the lack of one has been a noted factor in several of the lawsuits – and the presence of one noted in several litigation decisions in favor of plan fiduciaries).
- Consider regular fiduciary updates/training for plan committee members. This has been a factor in favor of fiduciary defendants and a requirement that some plaintiffs’ firms have imposed in settlement agreements. Make sure new committee members have an opportunity to participate when they join the committee.
- 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 (and arguably should not be).
- If forfeitures are used to offset employer contributions, make sure that specific language is in the plan document. Consider changing language that provides discretion in applying forfeitures to language that simply directs how they will be used.
- If the plan has target date funds, revisit the DOL’s tips from 2013 and ensure selection and monitoring is in-line with the same (plus: be sure that is documented).
Bonnie Treichel, JD is Founder and Chief Solutions Officer with Endeavor Retirement.
Nevin Adams is the former Chief Content Officer with the American Retirement Association.
