After years of focusing on the securities and the tobacco industries, class action attorneys have discovered the Employee Retirement Income Security Act, warned Kaplan earlier this week. Kaplan, now an attorney with the law firm of Piper Marbury Rudnick & Wolfe, especially noted a “sharp spike in litigation over disclosure failures.” He urges plan sponsors to immediately review both their procedures and disclosure efforts.
“Having obvious procedural defects is like waving a red flag that says: Sue me! Sue me!,” says Kaplan. Procedures, internally and at all service providers, should conform to laws and be reviewed frequently.
You can’t win
“Whether you win or lose a case like this, you’ve lost,” says Kaplan. “The cost to defend a class action lawsuit runs hundreds of thousands of dollars.” Kaplan estimates plans of 200 or more participants are likeliest targets.
Recent class action lawsuits directed at plan sponsors include:
- A case against Humana for failing to deliver a certain promised level of healthcare benefits;
- A case against First Union for their handling of the transfer of 401(k) accounts of an acquired bank
- A $1.5 billion suit against SBC Communications over its handling of 401(k) plan holdings following a merger.
The 1996 Supreme Court case Varity Corp. v Howe (516 US 489) began focusing attention on disclosure issues. This ruling held Varity violated the fiduciary obligations of section 404 of ERISA when it mislead employees into changing employers and benefit plans by joining an insolvent subsidiary deliberately created out of the company’s unprofitable divisions. The case authorized suits for individualized equitable relief for breach of fiduciary obligations under section 502(a)(3) of ERISA.
“All companies large and small are at risk for such suits,” says Matthew Newman, an attorney with Mansfield, Tanick & Cohen in Minneapolis. “Disclosure lawsuits can affect any employee benefit, not just pensions.” Newman thinks this trend is likely to continue for the foreseeable future. Kaplan agrees: “All you need is one or two disgruntled employees to represent a class.”
The best defense, warns Kaplan, is sound procedures, followed by early and complete disclosure of any departures. “If the disclosure turns out to be something that would have influenced a participant’s decision, had they known, courts are far more likely to be sympathetic to participants in this gray area,” Kaplan said.
“How about just being honest?” asks Newman. “Have candor and honesty. If you’ve lied or misrepresented, you’ll be caught and sued. Whether the misrepresentation was deliberate may or may not be important; negligent misrepresentation happens, too.”
In a recent Plan Sponsor Magazine article, pension attorney Michael Gordon called for ERISA amendments to mandate “more frequent and timely disclosure to employees of (defined contribution) plans investment results.” He sees the absence of ERISA enforcement by the Executive Branch as contributing to an upswing in litigation. ERISA plan participants in downsizing, merger, spinoff, or other reorganizations, Gordon notes, pose particular risk to plan sponsors who do not properly handle communications and disclosure.