Litigation against a plan sponsor inevitably draws in the plan’s investment advisor and can cause significant costs and disruption. Here’s what to do.
Employee Retirement Income Security Act (“ERISA”) litigation continues at a rapid pace and with massive settlement numbers. Most recently, General Electric agreed to pay a settlement of $61 million. Important lessons come from the suit, which claimed that “the 2022 Rule oversteps the DOL’s statutory authority under [ERISA and] is contrary to law”—and alleged that “the 2022 Rule is also arbitrary and capricious.” The court—in this case, a judge appointed by President Trump and one with a track record of rejecting regulations by the Biden Administration—actually disagreed.
Instances of retirement plan litigation have skyrocketed in recent years and show no signs of stopping.
Defending against fiduciary breach and related claims is time-consuming and expensive not only for the plan sponsor defendants but also for the plan’s service providers. Chief among these providers is a plan’s investment advisor, which likely will play a central role in the defending against the plaintiff’s claims.
This article explores what 3(21), or nondiscretionary, investment advisors can expect when their plan sponsor clients are sued, as well as what they can do to protect themselves and their clients and limit the cost and disruption of fiduciary litigation.
Litigation Stages After a Plan Sponsor Is Sued
Retirement plan investment advisors should anticipate being involved in all stages of litigation after a plan sponsor client is sued. This involvement ranges from being a source of information to the plan sponsor to providing deposition and potential trial testimony. At the first indication of a lawsuit, it would be sound risk mitigation for an advisor to seek representation from legal counsel who is experienced in ERISA fiduciary breach litigation.
Providing information to plan sponsor. Upon being sued, one of the first calls a plan sponsor typically makes is to its investment advisor. The plan sponsor may ask its advisor to elaborate on decisions about which it provided guidance and to fill in any gaps in information or documentation that the plan sponsor or its counsel finds. It is not uncommon for plan sponsors and their committees to be unable to locate important records from prior years. In some cases, they may need records from six or more years ago.
Responding to document subpoenas. Plan advisors can expect to receive extensive subpoenas for documents from plaintiffs.
While advisors may feel confident that they have not breached their fiduciary responsibilities, they should realize they are now in the legal arena. The cautious and prudent approach is to seek the advice of counsel without delay, as there are strict deadlines and rules for responding to subpoenas, and failure to comply with them could result in a waiver of the advisor’s right to object to the subpoena. In addition, there may be information or documents that create issues for the plan sponsor client or the advisor, and it is best to fully understand the potential implications of the documents before providing them to the plaintiff in the lawsuit.
Sometimes, the relevance of the information requested will be obvious. These subpoenas often seek information that the advisor already provided to the plan, but they also often request internal advisor communications, emails, instant messages, analyses, and other documents that are not provided to the plan. The subpoena may seek documents regarding the fiduciary process in which the advisor participated, the outcome of that process, and analyses of both the investments selected and rejected by the plan.
Other times, these subpoenas will seem like “fishing expeditions,” seeking documents irrelevant to the claims asserted but which plaintiffs hope will allow them to discover new claims against plan sponsors. In addition, they may seek information regarding the advisor’s other clients, hoping to discover potential claims against them.
Upon receiving a subpoena, especially one overbroad, counsel for the plan advisor should try to negotiate for a reasonable scope of production that discloses only documents relevant to the current dispute. Sometimes, advisors and their counsel may need to go to court to modify the subpoena’s scope or quash it altogether.
Depositions of investment advisors. Subpoenas for depositions of investment advisors frequently follow on the heels of document subpoenas. Plaintiffs may require depositions of officers or employees at the investment advisor who work with the plan sponsor. In the alternative, or in addition to those individual depositions, plaintiffs may seek to depose the advisory firm as an entity. In those entity depositions, sometimes known as Rule 30(b) (6) depositions, an individual is designated to testify about a list of topics provided by the plaintiff, and his or her responses are binding on the investment advisor. Depositions, particularly 30(b)(6) depositions, can be intrusive and time-consuming but are critical in defending fiduciary breach litigation.
In either case—individual or entity depositions—advisors should work with their litigation counsel to prepare.
While some admonitions are standard to all litigation—listen to the questions carefully, don’t answer more than the question asked—there are some unique legal and factual aspects to ERISA fiduciary lawsuits. The advisor should consider the benefits of going through a mock deposition to prepare, with a knowledgeable ERISA litigator asking the questions in the way that a plaintiff’s attorney would.
Representing the plan in a deposition. The plaintiff will most likely require a Rule 30(b)(6) deposition of the plan as an entity. Occasionally, due to turnover, acquisitions, or other unforeseen circumstances, there will not be an employee of the plan sponsor suitable to testify on behalf of the plan. In these circumstances, the plan may ask the investment advisor to provide someone who can testify as a representative of the plan. This representative’s testimony will be binding on the plan, not the investment advisor, even though the investment advisor employs him or her.
Providing supporting affidavits. Counsel for the defendant plan sponsor may request that the investment advisor provide one or more affidavits during the case. An affidavit is a form of written testimony that may be used in place of or to supplement previous deposition testimony. For example, a plan sponsor may request an affidavit from its advisor in connection with summary judgment – in essence, a decision from the judge that one side or the other wins without the need for a trial.
Trial testimony. Finally, if the case is not dismissed or otherwise resolved before trial, representatives of investment advisors may be asked to testify at trial. Plan sponsors are becoming increasingly emboldened to defend fiduciary breach cases through trial and to not knuckle under unreasonable settlement demands. Investment advisors may be asked to testify about the advice they provided, the plan’s procedures and decisions, their interactions with fiduciary committee members, and other topics related to the claims (for example, the particular share class selected for the investments or the monitoring of the fees of the recordkeeper including revenue sharing payments).
How to Prepare
Unfortunately, fiduciary breach litigation is now a factor in the retirement plan world…and may be hard to avoid.
No matter how diligently an investment advisor performs its duties, it is possible, or even likely, that one of its plan sponsor clients will be sued. But while it might be inevitable, there are steps an advisor can take to protect itself and its clients, to minimize the cost and disruption of fiduciary litigation, and to put plan sponsors in a position to achieve a successful outcome.
Be mindful of the possibility of litigation. The first duty of an investment advisor is to provide accurate, complete advice such that a plan fiduciary can fulfill its obligation to make reasoned, informed decisions regarding the plan’s investment lineup. Within that context, a plan sponsor should consider how that advice and the ensuing discussions are presented and how that package will look in the event of litigation. Assume every document, memorandum, minutes of meetings, call recording, or email will be provided to a plaintiff’s lawyer and act accordingly. Voice mails, instant messages, and emails may seem informal at the time and lead to casual statements or conversations, but they can be introduced as evidence at trial. All notes and communications should be treated as formal parts of the fiduciary process.
Maintain complete and comprehensive files. This probably goes without saying, but it is imperative that the investment advisor keep meticulous records of their advice, communications with the fiduciary committee, and the advisor’s own deliberative process. An investment advisor that does not properly document its advice to and the decisions made by the plan fiduciaries may inadvertently be suggesting that there was a substandard fiduciary process. And, as discussed earlier, investment advisors will likely be asked to provide copies of reports and compliance evidence that the plan sponsor cannot find in its files.
Exercise care when responding to RFPs. Requests for proposals are critical to plan sponsors, who are under a fiduciary duty to secure appropriate services and investment options at the most reasonable costs for the plan. RFPs may ask prospective investment advisors for opinions or suggestions regarding the plan’s current investment lineup. Prospective advisors, in turn, are eager to demonstrate their expertise and may suggest alternatives to the current lineup that they believe are better performing, more cost-effective, or both.
The plaintiff’s lawyers hunt for these RFP responses. At a minimum, they point to potential areas for the plaintiff to investigate for potential claims. And sometimes, they can be used as evidence that a plan sponsor included underperforming and/or overly costly investment options in the plan – just look, their new advisor, who is not affiliated in any way with the plaintiff’s counsel, said so!
Although such an RFP response does not implicate the current advisor, plan sponsor clients may not be pleased if their current advisor’s analysis leads to increased exposure. Exercise care and diplomacy when responding to RFPs, particularly when commenting on prior decisions.
Implement appropriate document retention policies. A proper document retention policy does not mean “keep everything,” but “keep everything you need to.” Over-inclusive retention policies, particularly concerning email, can be counterproductive. Stray emails, particularly internal communications that have no real relevance to the advice provided to a plan, can be taken out of context and put the plan sponsor or advisor in a bad light. Emails and other documents directly relevant to a plan advisor’s process and analysis should be maintained in a client file, but otherwise, consider whether they should be kept or discarded. In addition, consider implementing an automatic retention policy whereby emails not specifically saved are discarded after a defined period of time (for example, one year).
As an added benefit, a reasonable document retention policy can significantly reduce costs in the event a case is filed. One of the biggest cost drivers in modern litigation is electronic discovery, and reviewing years of email can quickly become ruinously expensive. Sensible auto-delete policies can dramatically reduce these costs. Counsel can assist plan advisors in drafting document retention and auto-delete policies that comply with the law but minimize the volume of potential e-discovery.
Conclusion
Litigation against a plan sponsor inevitably draws in the plan’s investment advisor and can cause significant costs and disruption. But for a prepared investment advisor who knows what to expect and has considered the possibility of litigation, the process, though annoying, does not have to be painful. Indeed, though never welcome, plan advisors can use litigation to reiterate to their clients that they keep thorough records, properly document all advice and communications, and always act with their clients’ interests foremost in their thoughts.
Glenn Merten and Fred Reish are partners with Faegre Drinker Biddle & Reath LLP and Emily Kile-Maxwell is a litigation associate with Faegre Drinker Biddle & Reath LLP. This column originally appeared in the Winter issue of NAPA Net the Magazine.
