Defined contribution (DC) plan sponsors have faced waves of litigation since at least 2005.
Emily Costin, partner at Alston & Bird LLP, shared with attendees at the 2018 PLANSPONSOR National Conference that the wave in 2005 was focused on the disclosure of plan fees and the concern that plan participants didn’t know what they were paying for their plan and investments. The Department of Labor (DOL) has since issued fee disclosure regulations.
Then, there was a wave of stock drop lawsuits, following the 2008/2009 recession. Costin said those have largely been litigated or settled, and many plan sponsors have pulled company stock from their retirement plan investment menus. She noted that the Supreme Court decision in Fifth Third v. Dudenhoeffer has made it harder for those cases to move forward in court.
Now, Costin said, DC plan sponsors are facing a wave of conflict of interest and self-dealing lawsuits, as well as cases focused on the reasonableness of fees plans and participants are paying for services and investments. These lawsuits are questioning how often fees have been negotiated, who is monitoring fees, and whether particular investment options offer the best deal available. She noted that these types of cases have enough of a hook to get past the pleading stage, so the plaintiffs’ attorneys can get into discovery and really find out what fiduciaries are doing.
Some cases seem to conflict with each other, which can be very confusing for employers, Costin pointed out. “No good deed goes unpunished. We’ve seen cases where the committee did look into fees and switched investment options, then they got slapped with a lawsuit saying they didn’t do so soon enough,” she said.
“The best way to ensure you are doing the right thing is to have particular processes and conversations before making decisions,” she told conference attendees.
Jamie Fleckner, partner at Goodwin Procter, said there are so many cases because plaintiffs’ lawyers have the ability under the Employee Retirement Income Security Act (ERISA) or other statutes to get an award. Where there are settlements, there are sizable payments for the class as well as attorneys, which encourages them to bring more cases.
Fleckner said more cases are going to trial, but courts continue to struggle with decisions. He hasn’t seen many solid trends, but noted that in university 403(b) cases, courts have been pushing back to some extent, giving plan sponsors latitude on the number of investment options they offer. In addition, in cases arguing whether stable value or money market funds are more prudent, courts are hesitant to say that having one investment over another is a breach of fiduciary duties, according to Fleckner.
Having a prudent process
Regarding DC plan litigation, Fleckner said plan sponsors are in a situation where they are not seeing clear guidance in courts about what is right to do, except that if plan sponsors have an unconflicted, diligent process, they have done what they should. He noted that in Tibble v. Edison, the court found a breach for not offering cheaper share classes because there was no evidence of a conscious decision made in choosing the investments. “If they had offered this evidence, I think there would have been a better decision [from the employer perspective],” he said.
Fleckner also noted that in Tussey v. ABB, fiduciaries in that plan had switched from a balanced fund to target-date funds (TDFs) offered by the recordkeeper, and the court made factual findings that the investment policy statement (IPS) for the plan hadn’t really accounted for TDFs, so the funds were new and untested and could have been chosen for reasons other than for the benefit of participants. “The court was not saying a plan sponsor can’t use TDFs over a balanced fund, but that the plan fiduciary did not have a prudent process for making its decision,” he pointed out.
Costin said the Sacerdote v. New York University 403(b) plan excessive fee suit is the first suit of this type to go to trial. She said the interesting thing from the transcripts for the case is that the judge seems to be focused on whether fiduciaries knew their duties and knew enough to be in a position to choose investments. “The judge seems to be struck by how uninformed and uneducated committee members were,” she told conference attendees.
Insurance for fiduciaries
Rhonda Prussack, senior vice president and head of Fiduciary and Employment Practices Liability at Berkshire Hathaway Specialty Insurance, said fiduciary liability insurance at its core is designed to protect directors and officers and any organization’s fiduciaries in ERISA litigation. “It provides a defense for these types of litigation and covers damages whether from a court finding or a settlement,” she told conference attendees.
Prussack suggested that plan sponsors do not list individuals in the insurance policy because they want as broad coverage as possible. “In these lawsuits, many name committees and members of committees, but also name members of the board of directors who select members of committees,” she noted.
The sponsor organization is insured and the plan is insured, and insurance companies shouldn’t require a listing of plans. There are exceptions to this for multiemployer plans and certain governmental plans that may have separate boards or trustees.
Fiduciary liability insurance should cover violations of employee benefits law, not just ERISA violations, and coverage for ministerial mistakes in the day-to-day handling of the plan is provided, Prussack continued. Benefits promised are not covered under the policy; it covers damages for actual breach of fiduciary duties.
Fleckner stressed that these are complicated cases to defend, and there are a lot of depositions. Plan sponsors may have to bring in experts to say whether they would have done something similar or testify about what they see. Trials are very expensive, so availability of fiduciary liability coverage to pay those costs is hugely important.
Prussack added that plan sponsors don’t want to use company counsel for these cases, but want an expert in ERISA class actions of the particular type of case—excessive fees, stock drop, etc. She noted that what underwriters look for has gotten more detailed, but what Fleckner and Costin talk about is what Berkshire Hathaway looks for—a diligent process. “We ask how the plan sponsor determines the reasonableness of plan fees. We want to see they have a robust process in place that is not new, but has been in place for a while,” Prussack said. “Committees should have fiduciary training. What we’re trying to get at is that fiduciaries know what they are doing and know their duties.”
According to Costin, documentation is a good thing, but whether it should be general (committee looked at this and decided to do this) or very specific (committee considered this and for these three reasons decided to do this) is hard to answer. “Take meeting minutes. You will never will capture every word, but I don’t see a problem with having more detail,” she told conference attendees.
Prussack added that up until several years ago, there wasn’t a type of coverage for settlor functions, like amending the plan or doing a re-enrollment, for example, because there is no breach of fiduciary duty under ERISA for these functions. But, Berkshire Hathaway offers settlor coverage, and some other carriers may offer it.
When deciding how much coverage to purchase, plan sponsors should look at how many plans and how many transactions they have. Prussack said insurance brokers should be well-versed in what is appropriate. She noted that the threshold for plan litigation used to be $1 billion, but the threshold has fallen quite significantly as more attorneys become active in the space. For this reason, all plan sponsors should consider the adequacy of coverage and get as much of a coverage limit as they can.
Fleckner concluded that plan sponsors should always make changes they think are better for participants; that is the ERISA standard. “If you are taking steps just due to litigation fears, you are breaching your fiduciary duty because you must be looking at the best interest of participants,” he said.