Q3 Litigation Landscape
Litigation under the Employee Retirement Income Security Act (“ERISA”) continues at a rapid pace and with massive settlement numbers. Most recently, General Electric agreed to pay a settlement of $61 Million (which is pending federal judge approval). Important lessons come from these cases but may feel irrelevant to smaller plans. However, trends and best practices that emerge in the mega plan market (like General Electric) apply to the plans of all sizes. Here’s what you really need to know about emerging trends happening in the most recent quarter of ERISA litigation.
Here’s What You Really Need to Know:
- The Labor Department (“DOL”) gets federal court backing for its regulation regarding considerations of ESG (environmental, social and governance) factors. A regulation that says those factors MAY be considered if (and only if) they have an impact on the financial interests of participants.
- Though traditionally not accepted by courts as a sufficient basis (in the absence of some other evidence of a conflict of interest or malfeasance), investment performance is now accepted as a legitimate indicator of fiduciary breach and has recently been accepted in a couple of cases as sufficient to go to trial.
- The level of “proof” needed to move past a motion to dismiss fiduciary breach lawsuits remains fluid, not only in different federal district courts, but even within the same district.
- A couple of cases have recently been filed (by a single law firm) challenging the use of forfeitures to offset employer contributions – even though the plan document (and ERISA) clearly allows for that.
Let’s Dive In…
DOL Gets a Big ESG Win
“Having considered the motions, pleadings, and relevant law,” a federal court judge in Texas has backed the DOL in a suit brought by twenty-six “red state” Attorneys General challenging the so-called ESG rule. Though called the ESG rule, this regulation became effective in January 2023 and outlined the obligations for all fiduciaries making investment decisions under ERISA. The suit claimed that “the [ESG Rule] oversteps the DOL’s statutory authority under [ERISA and] is contrary to law”—and alleged that “the [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.
Most of the arguments made in that suit—filed mere days before the regulation took effect in January 2023 —seemed grounded in positions taken in the Biden Administration’s proposed rule that was arguably more pro-ESG than what found its way into the final text that became effective in January. In United States District Judge Matthew J. Kacsmaryk’s words, there was arguably “little meaningful daylight” between the final rule left by the Trump Administration (in fairness, their proposed rule was a lot more anti-ESG than the final) and that of the final Biden Administration rule (which, in fairness, was less pro-ESG than their proposal). While there remains another suit pending (in Wisconsin) with similar allegations – one brought by a couple of plan participants against the regulation – the Department of Justice has already taken steps to make sure the judge in that case is aware of the Texas court ruling.
Another ESG case pending is one brought by an American Airlines pilot claiming that the ESG options in his 401(k) are putting his retirement at risk, and that the plan’s inclusion of ESG-friendly investment managers (even for funds that aren’t ESG-focused) on that menu is also a threat. Since the initial filing, American Airlines has responded that those options are all in a self-directed brokerage account, rather than on the main menu, and further that the participant wasn’t even invested in an ESG fund. Following that response, the pilot has said he was exposed via his investment in target date funds (TDFs) on the menu, notably significant percentages of those funds managed by BlackRock – even though those are not ESG-focused options. This may well require a trial just to find out what the actual circumstances are in this case.
Some “Wins” for BlackRock LifePath Target Date Funds Plaintiffs
We’ve noted previously that there are about a dozen suits against national employers whose plans invested in the BlackRock LifePath TDFs. 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 doing so ignored the (allegedly) 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 TDF families — though those funds all employed a “through” retirement date glide path, unlike the BlackRock TDFs that have opted for a “to” retirement date glide path. Thus far five of those cases have been considered by federal courts – and all have been rejected as not presenting a case that warrants going to trial.
However, and on what are essentially the same arguments, we now have one federal judge (in a case involving the Genworth 401(k) plan) that has ruled that the issues raised regarding appropriate benchmarks and the fiduciaries’ prudent process need to be dealt with at trial, rather than the preliminary review of a motion to dismiss. This judge not only acknowledged decisions in another Virginia federal court district that came to a different conclusion, but ruled that the arguments made in the case he was considering were different and required a different result.
In yet another federal district court, while the defendants won their motion to dismiss the suit, that judge seemed willing to accept the plaintiffs’ arguments about inferior returns as a basis to go to trial – but determined that the performance difference presented wasn’t large enough to make their case; however, he gave the plaintiffs an opportunity to reposition their arguments.
Neither of these cases is yet a “win” at trial, of course, but these two cases illustrate the reality that different jurisdictions (and different judges) can make different determinations as to the standards applied. Plan sponsors can never prevent litigation, but a sound process will help to create a good defense and end litigation sooner than later (and with greater degree of success).
A federal appellate court has held that a plan’s adoption of an arbitration agreement (which means staying out of court and handling cases via arbitrator(s) instead) was sufficient to require a class action suit on behalf of the plan (by a participant) to adhere to those terms. The suit was filed in mid-May 2020 in the U.S. District Court of New Jersey against the fiduciaries of the $4.4 Billion ADP TotalSource Retirement Savings Plan (including third-party investment consultant NFP Retirement Inc.) on behalf of participants in the multiple employer plan (“MEP”) by the law firm of Schlichter Bogard & Denton.
The court ruled that since the injuries alleged were to the plan—and since the plan agreed to the arbitration—the arbitration clause took precedence.
It may seem odd that an agreement to which the participants weren’t a party should limit their actions, but it has cut both ways in the past, with individual arbitration agreements also being found insufficient to block claims on behalf of plan(s). This ruling does not, of course, preclude a future action; it simply requires that those claims be aired, and a resolution attempted via the arbitration process. For plan sponsors, it is important to consider the use of arbitration clauses in plan documents and other agreements with plan participants (as the “claws” and force of these provisions could be deadly).
For the second time in a month, a law firm has brought suit challenging the use of forfeitures in a 401(k) plan. The lawyers are from Hayes Pawlenko LLP, a South Pasadena, California-based duo (who met in law school, according to their website) positioning themselves as an employment litigation firm “representing employees in disputes with their employers.”
The most recent suit (Rodriguez v. Intuit Inc., N.D. Cal., No. 5:23-cv-05053, complaint 10/2/23) has been filed against Intuit, less than two weeks after filing an identical action against the Thermo Fisher Scientific Inc. 401(k) Retirement Plan. This suit, filed in the Northern District of California, acknowledges that “the Plan provides that forfeited nonvested accounts may be used to pay Plan administrative expenses or reduce future Company matching contributions.”
The suit then goes on to acknowledge that “although the Plan expressly authorizes the use of forfeited funds to pay Plan expenses, throughout the class period Defendants chose to utilize the forfeited funds in the Plan for the Company’s own benefit, to the detriment of the Plan and its participants, by reallocating nearly all of these Plan assets to reduce future Company matching contributions to the Plan.” The suit continues, “while Defendants’ reallocation of the forfeitures in the Plan’s trust fund to reduce its future matching contributions benefitted the Company by reducing its own contribution expenses, it harmed the Plan, along with its participants and beneficiaries, by reducing future Company matching contributions that would otherwise have increased Plan assets and by causing participants to incur deductions from their individual accounts each year to cover administrative expenses that would otherwise have been covered in whole or in part by utilizing forfeited funds.”
The two suits are using identical language to make their case in two different federal court jurisdictions. It seems likely that others will follow, though it’s by no means certain that they’ll gain traction or get past the motion to dismiss.
Several federal district courts have embraced the need for those bringing excessive fee suits to make their case against a “meaningful benchmark” – a standard that plaintiffs have had a hard time overcoming thus far.
In late September, participants in the Barrick Gold 401(k) plan filed suit against Barrick Gold of North America, Inc., Barrick Gold’s Board of Directors, and the Barrick U.S. Subsidiaries Benefits Committee for breach of fiduciary duty and failure to monitor fiduciaries. A three-judge panel in the Tenth Circuit noted that “there is no doubt a claim for breach of ERISA’s duty of prudence can be based on allegations that the fees associated with the defined-contribution plan are too high compared to available, cheaper options.” But they went on to explain that “to raise an inference of imprudence through price disparity, a plaintiff has the burden to allege a ‘meaningful benchmark.’”
As for what constituted a “meaningful” benchmark, the court said that the answer to this question will depend on context because (citing the Supreme Court’s Hughes v. Northwestern University decision) “the content of the duty of prudence” is necessarily “context specific.” With regard to comparing investment management fees, the judges wrote that a “meaningful comparison will be supported by facts alleging, for example, the alternative investment options have similar investment strategies, similar investment objectives, or similar risk profiles to the plan’s funds.” As for recordkeeping fees, the court said such a “comparison will be meaningful if the complaint alleges that the recordkeeping services rendered by the chosen comparators are similar to the services offered by the plaintiff’s plan.”
The judges noted that “a court cannot reasonably draw an inference of imprudence simply from the allegation that a cost disparity exists; rather, the complaint must state facts to show the funds or services being compared are, indeed, comparable. The allegations must permit an apples-to-apples comparison.”
The court here clearly aligned itself with other jurisdictions (the Third, Sixth, Seventh and Eighth circuits) in embracing a pleading standard that requires a higher threshold for determining plausibility for moving past a motion to dismiss. Along the way to that decision, they also permitted the defense to include evidence that supported their claims (such as the impact of revenue-sharing), which other courts have not allowed until trial.
The court acknowledged that the reasonability of fees cannot be ascertained without some associated indication of services provided for those fees. For plan sponsors, this is a critical takeaway that evaluation of fees is lacking without inclusion of the associated services. Further, the court employed the emerging standard of a “meaningful benchmark” alongside some objective standards against which those can be evaluated.
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 and supported by experts; create an investment policy statement (the latter has been a noted factor in several of the cases).
- As a growing number of courts are looking for a “meaningful” benchmark, make sure that you understand (and document) not only the fees, but the service(s) provided for those fees in recurring benchmarking exercises (think: annually or once every two years).
- 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 shouldn’t).
- 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.
- If forfeitures are used to offset employer contributions, make sure that language specifically permitting use of forfeitures is in the plan document.