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Retirement plan litigation continues at a rapid pace and with massive, surprisingly quick, settlement numbers. The last quarter of 2023 saw a continued variety of litigation under the Employee Retirement Income Security Act (ERISA), including:
New litigation involving the use of forfeitures has emerged as well as a “campaign” by a law firm seeking to reach settlements with plan sponsors without even filing a lawsuit. Here’s what you really need to know for emerging trends happening in ERISA litigation during the 4th quarter of 2023 and how it impacts your retirement plan(s).
Here’s What You Really Need to Know:
Target Date Challenges Tumble
In 2023, approximately a dozen suits were filed alleging that plan fiduciaries “chased low fees” and ignored investment performance in choosing the BlackRock LifePath Target Date Funds. To date, only one of the 12 cases has made it past the motion-to-dismiss phase.
One of the 12 cases had a unique twist and in October 2023 it was dismissed. Similar to the others, this case “targets” the Marsh & McLennan Companies’ 401(k) Savings and Investment Plan’s holding of the BlackRock LifePath Index Funds—and especially their selection as the plan’s qualified default investment alternative (QDIA), which had approximately 17% of the plan’s assets. However, this case additionally challenged the selection and retention of the Mercer Emerging Markets Fund, which was managed by Mercer Investment Management, LLC, a subsidiary of Marsh & McLennan. In dismissing the suit, the judge cited prior case law in concluding that “[T]he duty of prudence does not compel ERISA fiduciaries to reflexively jettison investment options in favor of the prior year’s top performers.” Beyond that, the judge did not see a sufficient gap in performance vis-à-vis the alleged benchmarks to support the claims made by the participant plaintiffs.
In a separate instance of these suits, in November, the participant plaintiff Jermaine Anderson, a former worker at Advance Publications Inc., and a participant in the firm’s $1.5 billion 401(k) plan, proactively dropped the case rather than pursue it.
CommonSpirit Consequences
In a different target-date fund related suit, the fiduciary defendants of a $4.3 billion 401(k) plan won their revised motion to dismiss a fiduciary breach suit involving the selection and retention of a suite of TDFs. The plan fiduciaries were accused by a handful of participant plaintiffs (represented by the law firm of Schlichter Bogard LLP) of retaining a suite of allegedly unproven, underperforming TDFs from Northern Trust, which the plaintiffs said had “significant and ongoing quantitative deficiencies and turmoil” resulting in losses ranging from $45 million and $73 million when identical, lower-cost alternatives were available.
Despite those claims, the judge concluded that the allegations fell short of the necessary "context-sensitive" inquiry for ERISA fiduciary duty breach claims. “Without any additional context, Plaintiffs' theory is nothing more than a ‘naked assertion devoid of . . . factual enhancement…Plaintiffs essentially ask this Court to find that any time a plaintiff alleges a large plan did not obtain the lowest-fee shares, plan beneficiaries and participants have stated viable ERISA fiduciary duty claim. To Plaintiffs, no other factual allegations are required—only the size of the plan and the existence of shares with lower fees must be pleaded.” And, the case was dismissed.
Add this decision to the line of cases decided since the CommonSpirit case, which marked something of a shift in the standards for “plausibility” that would be required to move past a motion to dismiss. While a court might be required under the law to accept the facts presented by the plaintiffs, courts do not have to embrace them without a critical mind.
Another 403(b) Fiduciary Win
On the heels of Yale University’s win in an excessive fee suit involving its 403(b) plan, Cornell University also prevailed in an action brought on behalf of participants by Schlichter. Cornell had previously fended off most of the claims in 2019 when the judge ruled that the plaintiffs had plausibly argued that it was imprudent to pay annual recordkeeping fees of more than $115 per participant, but presented no evidence that this caused the plan to suffer losses.
This court noted that “whether fees are excessive or not is relative to the services rendered,” and that it is not unreasonable to pay more for superior services. “Yet, here, Plaintiffs have failed to allege any facts going to the relative quality of the recordkeeping services provided, let alone facts that would suggest the fees were ‘so disproportionately large’ that they ‘could not have been the product of arm’s-length bargaining.’” The appellate court affirmed the district court’s dismissal of that claim as well. However, the court actually went with a standard of review that was somewhat of a middle ground between other circuit courts—leaving plan fiduciaries with yet another standard to consider. Because of the split in circuits for the proper standard of review, there may be an opportunity for this type of case to be heard by the United States Supreme Court to resolve the circuit split.
Despite Yale University’s win in their excessive fee case, Schlichter has now appealed the decision of the district court. The suit against Yale University was one of the first to be filed in 2016, as well as the first (and, to date, only) jury trial in this genre of cases. Yale University fiduciaries prevailed; though the jury did conclude that they breached their duty of prudence "by allowing unreasonable recordkeeping and administrative fees to be charged" to retirement plan participants—the jury found that no damages resulted.
Given the appeal, the DOL has weighed in on the case, arguing in a “friend of the court” amicus brief that the federal judge in that case mis-instructed the jury on the burden of proof in an excessive fee suit and that an appeal of that decision is warranted. Stay tuned on this one.
The Meaning of ‘Meaningful Benchmarks’
When it came to excessive fee suits, those suing plan fiduciaries have long been able to get past a motion to dismiss by merely asserting that the recordkeeping fees paid by a plan (often based on data from the plan’s Form 5500, which has certain shortcomings) were either out of line with fees paid by plans that were allegedly comparable based on either asset size or participant count or based on industry surveys or data (e.g., 401(k) Averages Book). However, in recent years, a new standard has been applied in certain federal district courts; in December, federal courts in two different districts upheld motions to dismiss excessive fee suits, noting a lack of “meaningful benchmarks” presented by the plaintiffs.
The first was a case filed in August 2022 where a $285 million 401(k) plan allegedly failed to leverage their size to negotiate better terms with their recordkeeper. In that case, the judge held that, in order to raise an inference of imprudence due to pricing differences alone, a plaintiff had to allege a “meaningful benchmark” to which the defendant’s plan can be compared. Moreover, the judge noted that, “for a comparison to be ‘meaningful’ in the administrative-cost context, the plaintiff must allege facts showing ‘that the recordkeeping services rendered by the chosen comparators are similar to the services offered by the plaintiff’s plan.’”
The judge rejected the notion that comparison of the defendant’s plan to “industry-wide averages,” such as the generalized figures published in “the 401(k) Averages Book,” was appropriate, as those “measure the cost of the typical ‘suite of administrative services,’ not anything more.” Finally, the judge also found shortcomings in the plans that the plaintiffs had positioned as comparators due mostly to a lack of specificity with regard to services provided, but also in some cases, differences in assets and/or participant sizes.
We are often reminded that “it’s not just about fees.” And most would agree that what makes a fee for services reasonable (or not) is the type/level of services that you get for those fees. That said, for years folks have been describing recordkeeping services as a commodity (including individuals who are leading those enterprises), and plaintiffs’ attorneys have, thus far, managed to coast along using that argument, frequently describing those services at best as being comparable/identical for plans of a certain size—and at worst as “fungible.” The “meaningful” benchmark standard now being applied in some districts is clearly a higher threshold for plaintiffs to clear—though it’s not a consistent requirement across all federal court jurisdictions. That means that plan fiduciaries will need to continue to be sensitive to those concerns.
Arbitration ‘Cause?
This quarter (October 2023) also saw the nation’s highest court, once again, decide not to weigh in on the applicability of an arbitration clause in fending off an ERISA suit. The case was decided in favor of the participant plaintiffs by the U.S. Court of Appeals for the 10th Circuit, which in January affirmed the decision of the district court that the arbitration clause in the plan document impermissibly blocked rights afforded under ERISA. For now, anyway, the Supreme Court’s (non)decision leaves that judgement in place in the 10th Circuit.
A Look at Forfeitures
A California law firm has now filed five cases charging plan fiduciaries with a breach of fiduciary duty by using plan forfeitures to offset employer contributions. The plans in question all appeared to give fiduciaries the discretion to do so, but the challenge seems to be that choosing to do so, as opposed to reallocating them to participant accounts (which was also within their discretion), was not in the best interests of participants.
In one of those cases (involving Clorox), defendants filed a motion to dismiss, arguing that “it effectively seeks (i) to bar the long-standing practice, expressly required by a sixty-year-old IRS regulation, of reallocating forfeitures to cover other benefits promised by the Plan and (ii) to require instead that forfeitures be diverted to individual participant accounts to provide additional benefits not promised by the Plan. The Court should reject Plaintiff’s novel, and strained, construction of ERISA.”
Defendants argued that the participants bringing suit suffered no injury and received all benefits they were entitled to under the plan because they were not entitled to forfeitures. The court has not yet responded to this motion to dismiss (or others filed since the beginning of the year by Intuit or Qualcomm).
The DOL has also taken an interest in the use of forfeitures. In September, a judge issued a consent order and judgment ordering Sypris Solutions Inc. to restore $575,000 to the plan participants who were harmed by defendants’ use of the forfeiture funds. According to the DOL, on Dec. 27, 2017, the DOL filed a complaint, alleging that Sypris Solutions Inc. failed to follow its own governing documents regarding the use of forfeiture funds for several of its 401(k) plans.
Specifically, the DOL alleged that from 2012 through 2015, the 401(k) plans’ governing documents required defendants to use forfeiture funds to pay plan expenses, but defendants used the forfeiture funds to reduce employer contributions to the plans. The DOL argued that in doing so, the employer benefited by reducing its contributions to the plans at the expense of plan participants who saw their plan account balances reduced by payments of plan expenses from plan assets and not from forfeitures.
Unlike the plans that have been targeted for their decisions regarding the use of forfeitures (all of which seem to have allowed for discretion in the application of forfeitures), this one appears to have made the decision to offset employer contributions in violation of clear language in the plan document that stipulated how those forfeitures were to be applied. It is certainly a timely reminder that, while the law may allow certain latitude, the flexibility can be limited by the plan document. This action serves as a reminder that following the plan document is critically important.
In late September, a California law firm by the name of Lieff Cabraser Heimann & Bernstein started what appears to be a pre-trial “shakedown.” More specifically, Leiff Cabraser has engaged in a letter-writing campaign to plan sponsors, alerting them to a series of assertions about ERISA litigation, allegations about the fees paid by participants in their plans (relative to a standard that has been repeatedly criticized in that context at trial), all alongside the fact that they’ve allegedly found an as-yet-unnamed plaintiff-participant in the plan in question that is said to be willing to represent a class action alleging the plan’s fiduciary breach.
According to the letter, Lieff Cabraser is “open to discussing our client’s ERISA claims in hopes of reaching an early resolution…before a great deal of time and expense is incurred by any party in litigating this matter.”
And if the threat of litigation was not sufficient to garner their attention, the letter closes, “This may be the last time that the parties have total control over the outcome of this matter without leaving it up to the Court. A settlement now, before the parties have incurred significant litigation expenses, will benefit both parties.” For plan sponsors that may find themselves in receipt of these letters, contact counsel before responding.
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:
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