erisa litigation and trends update marcia s. wagner, esq
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ERISA LITIGATION AND TRENDS UPDATE
Marcia S. Wagner, Esq.
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EMERGING TRENDS Renewed emphasis on deference to plan administrator
resulting from Conkright caseSettlements in Fee LitigationContinuing influence of Hecker v. DeereReplacement of retail class mutual funds as investment
options may be a new best practiceUpcoming Supreme Court ruling on faulty SPDs in Cigna
case is likely to have broad significanceThe Moench presumption of prudence in stock drop
cases is spreading but the DOL is fighting back
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Overview of Participant Complaints in 401(k) Fee LitigationUnderlying Factors: 401(k) plans have become the primary vehicle for
providing retirement security Employers have been shifting the costs of plan
administration to employeesGovernment reports, regulatory proposals, and media
interest have heightened public awareness of plan fees
Basic Ideas:Someone is getting too much Lack of transparency as to fees frustrates rational
pricing of 401(k) services
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Overview of Participant Complaints in 401(k) Fee Litigation –
Plaintiffs’ Legal Theorieso Defendants breached their fiduciary duties by
failing to inform themselves about, understand, monitor and control plan expenses, including hard dollar payments and indirect fees
o Selection of retail class is a fiduciary breach because they are more expensive but do not provide additional services commensurate with the added expense
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Overview of Participant Complaints in 401(k) Fee Litigation –
Plaintiff’s Legal Theorieso Failure to establish and follow procedures to
determine whether hard dollar and indirect expenditures are reasonable
o Unitized company stock funds generate unnecessary fees by encouraging frequent traders
o Failure to adequately disclose fees to participants
o Failure to adequately account for float
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401(k) Fee Litigation – First Generation of Cases
Claims by plan fiduciaries and/or plan sponsors against service providers:
Haddock v. Nationwide Financial Services Investment provider sued over its receipt of fees from mutual
funds offered under annuity contracts.o Class action certified; Nationwide counterclaim dismissed
Ruppert v. Principal Life Insurance Company Complaint that fiduciary standards were breached by service
provider’s receipt of revenue sharing payments from mutual funds.
o Class certification denied; claims dismissed except as to unregistered mutual funds
Phones Plus, Inc. v. Hartford Financial Services Complaint that The Hartford received revenue sharing payments
for services that was already obligated to provide to its plan clients.
o $13.8 million settlement approved June 2010
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401(k) Fee Litigation - The Second Wave: Cases Against Plan Sponsors Class actions brought on behalf of participants
First cases brought by small St. Louis litigation firm
Defendants are large employers, company officers, and plan committees
Allegation that plan fiduciaries failed to capture revenue sharing
Most cases have yet to go to trial◦ Exception Tibble v. Edison in which bench trial was completed in
July 2010 resulting in judgment for plaintiffs that excessive fees resulted from use of retail class mutual funds.
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The Second Wave – Cases Against Plan SponsorsIssues in Cases Against Plan Sponsors◦Whether service provider defendants were fiduciaries◦Whether defendants acted prudently in selecting
investment options◦Whether defendants are entitled to protection under
Section 404(c) of ERISA◦Whether plan fiduciaries have a duty to seek mutual
funds with the lowest expense ratios◦Whether the failure to disclose fees (direct or
indirect) constitutes a fiduciary breach
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Third Wave of 401(k) Fee Litigation New Tactics Joining Plan Sponsors and Providers as Defendants
Third generation of complaints focus on service providers as additional defendants
Primary allegation is that revenue sharing payments should have been used to benefit plans and participants
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Indirect Fee Cases - Hecker v. Deere Suit brought against employer and mutual fund whose
affiliates were trustee and investment provider District court granted defendants’ motion to dismiss (June,
2007) Seventh Circuit Court of Appeals affirms dismissal (February,
2009) and denies petition for rehearing (June 2009) Lower and appeals courts rely heavily on 404(c) safe harbor
defense to overcome claims that fees were excessive Reliance on market forces to police fees Courts were influenced by the inclusion of a brokerage
window allowing participants to access over 2,500 mutual funds
U.S. Supreme Court denies review (January 2010)
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Favorable Defense Rulings – Courts following Deere case – select cases
Loomis v. Excelon Corp. (N.D. Ill. 2009)Facts are similar to those in Deere, including same range of fees.
George v. Kraft Foods Global, Inc. (N.D. Ill. 2010) Court rules that unless investment is unsound or reckless, a large number of investment alternatives and adequate disclosures precludes fiduciary breaks.
Renfro v. Unisys Corp. (E.D. Pa. 2010) Court concluded that 70 investment options was a sufficient mix to satisfy requisite standard of care. Market forces ensured that plan investment fees would be set at reasonable rate.
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Notable Plaintiffs’ Victories Braden v. Wal Mart Stores, Inc. (8th Cir 2009)
Lower court dismissal is vacated on appeal because too many inferences were made in favor of defendants. The burden of rebutting possible explanations as to why higher priced mutual funds had been chosen was incorrectly placed on plaintiffs.
Tibble v. Edison International (C.D. Cal 2010)One of the first decisions to be reached on the merits. Judgment rendered for plaintiffs after bench trial. Court holds that duty of prudence was violated by investments in retail class shares of mutual funds.
F.W. Webb Co. v. State Street (S.D.N.Y. 2010)Claims against CitiStreet allowed to go forward. Claim was based on CitiStreet advice with respect to investment fund that had exposure to subprime mortgage backed securities. However, claim against State Street is dismissed because State Street’s advice preceded revision of the fund’s investment strategy.
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Settlements Martin v. Caterpillar
o $16.5 million settlement, net proceeds of which of participant accountso Restriction on use of retail mutual funds or core investment optionso Limitation on cash holding in company stock fundo Enhanced participant communications o New procedures for hiring plan service providers
Phones Plus v. Hartford Financialo $13.8 million settlemento Clarifies that Hartford does not have the right to substitute other investment options for
those chosen by plan sponsoro Liberalization of types of investments available to planso Enhanced disclosures to Hartford customers as to revenue sharing
Will v. General Dynamicso $15.15 million settlemento Payment of recordkeeping expenses on per participant rather than asset basiso Enhanced participant disclosure of feeso Prohibition on allowing investment manager that was run by former officers of General
Dynamics from recommending itself as investment manager
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Class Action Certification Rule 23 Federal Rules of Civil Procedure requires legal or
factual questions common to all class members
Most courts have no problem in finding class status, because class commonality is based on the defendant’s actions which are usually the same as to all plan participants
Exception: Ruppert v. Principal Life Insurance Co.
Class certification denied where the plaintiffs were benefit plans (as opposed to plan participants) serviced by the defendant insurance company
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Implications of Indirect Fee CasesHard to tell because most cases have not gone to
trialDeere and its progeny will discourage filing of
additional complaints and may influence other courts
Deere is not an appropriate guide for plan administration, since it does not follow legislative and regulatory initiatives that change the rules
Publicity generated by indirect fee litigation will result in greater oversight of revenue sharing
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Other ERISA Litigation – Supreme Court Rules on Standing to SueLa Rue v. DeWolff, Boberg & Associates
(decided Feb. 2008)o Overturns lower court rulings that lawsuits for
fiduciary breach must benefit the plan as a whole, not particular persons
o Case allows participants to recover losses to their own 401(k) accounts
o Open question remains as to whether claims must be brought as an action against the plan
o Subsequent lower court cases indicate that it will not be necessary to bring fiduciary claims directly against the plan
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Other ERISA Litigation - The Supreme Court Rules on Conflicts of Interest by Plan Administrators
• MetLife v. Glenn (decided June 2008) deals with decision as to benefit eligibility by conflicted plan administrator
• Holding: the conflict is one of a number of factors that must be taken into account by a court in deciding whether to uphold the conflicted administrator’s decision
• Ruling has implications beyond health and welfare plan decisions
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Other ERISA Litigation - The Supreme Court Rules on Deference to Plan Administrators
Conkright v. Frommert (decided April 2010)◦ Plan administrator with discretionary
authority to interpret plan is entitled to judicial deference even if it has previously made a mistake in the same matter
◦ Case will deter judges from substituting their own judgment for that of the plan administrator
◦ No special tests for reducing the plan administrators authority
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Other ERISA Litigation - Stock Drop Cases Churn On Di Felice v. US Airways (4th Cir. 2007)
No fiduciary breach resulted from allowing participants to continue investing in company stock during period leading up to company bankruptcy. The key factor in this decision was the appointment of an outside independent fiduciary for the company stock fund that directed the fund’s closure.
Citigroup ERISA Litigation (S.D.N.Y. 2009)Holding that plan document mandated that employer’s stock be offered as an investment option in 401(k) plan; plan fiduciaries had no discretion to eliminate the stock as a plan investment option. DOL officials have indicated disagreement with this premise.
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Circuit Court Cases Involving Reformation of Scrivener’s ErrorCross v. Bragg (4th Cir. 2009)◦ Reformation of plan documents must be sought in
the courts. Party seeking reformation must show that mistake was mutual, i.e., that employer as well as plan participants had a different intent. This is a very difficult standard.
Young v. Verizon (7th Cir. 2010)◦While reformation of the plan document must be
sought in the courts, the applicable test is whether there is “clear and convincing” evidence that the document, as written, does not reflecting a reasonable expectation of benefits.
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Rollover Advice – Legal Challenge to Cross SellingYoung v. Principal Financial Group (S.D. Iowa 2008)◦ District court allows claim for fiduciary breach to
proceed against financial services company whose agents had encouraged plan participants to roll over 401(k) accounts into IRAs invested in the company’s proprietary mutual funds. However, in March 2010 the same court refused to certify a class action for such claims.
o DOL Advisory Opinion 2005-23A indicates that advice as to distributions/withdrawals of plan account is a fiduciary act. Advice that results in a rollover to an investment managed by the adviser that recommended a distribution on withdrawal could be a prohibited transaction.
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Best Practices Arising From 401(k) Fee Litigation Identifying fees and expenses
o Under new DOL regulations, service providers are automatically obligated to disclose fees to plan sponsors
Compare fees/expenses against benchmarks o Avoid making decisions based on the cheapest option
Continuously monitor whether fees are reasonable Document the review process
o Maintain records showing solicitation of bids from multiple providers
Hire independent experts to analyze the plan’s investment menus
Conduct fiduciary audits Create fiduciary manual Provide participants with meaningful fee information
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Best Practices in Response to Rollover Litigation and DOL GuidanceConflict of interest rules prohibit
investment advisers who are fiduciaries from recommending a rollover into an IRA that will generate fees for the adviser◦However, the adviser may educate participants as
to the availability (but not the advisability) of rollovers
◦Advisers should be provided with guidance as to the difference between recommending a rollover and providing general information regarding rollovers
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Marcia S. Wagner, Esq.
99 Summer Street, 13th FloorBoston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.erisa-lawyers.com
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