In this seventh episode in a series of Ropes & Gray podcasts addressing emerging issues for fiduciaries of 401(k) and 403(b) plans to consider as part of their litigation risk management strategy, litigation & enforcement partner Dan Ward, ERISA and benefits partner Josh Lichtenstein, and benefits consultant Jack Eckart discuss some recent updates on the continued ERISA retirement plan litigation landscape, including current trends and important takeaways for plan sponsors.
Jack Eckart: Hello, and thank you for joining us today on this Ropes & Gray podcast. I’m Jack Eckart, a consultant in our benefits group, and I am based in New York. I am joined by Josh Lichtenstein, an ERISA partner who is also based in New York, and Dan Ward, a Boston-based partner in our litigation & enforcement group. One objective of this podcast series has been to analyze the issues that have led to the many lawsuits in the retirement plan space in recent years, and provide guidance for plan sponsors on what steps they can take to be proactive and potentially mitigate their litigation risk. Past episodes have covered specific cases such as Anderson v. Intel, discussed in Episode 3, which addressed the prudence and potential exposure of offering alternative investments in a plan line-up. We also discussed Hughes v. Northwestern University in Episode 6, which is an excessive fee lawsuit and will be heard by the U.S. Supreme Court. In today’s episode, we’ll take a step back and provide a broader overview of some of the recent claims we have seen and offer some key takeaways for fiduciaries and plan sponsors.
Dan, there’s been a wave of ERISA litigation over the last few years, and it seems like there’s no signs of that trend slowing down. To this end, can you provide an overview of just how prevalent ERISA litigation has been in recent years, especially with respect to the excessive fee lawsuits?
Dan Ward: Yes, sure thing. In the last five years, we’ve seen over 200 complaints alleging breach of fiduciary duties brought against plan sponsors and service providers regarding excessive fees and other claims of misconduct. Some of these lawsuits were dismissed quickly or procedurally combined with other claims, so we don’t have the complete picture, but we do know the following stats:
- Of these cases, 130 reached a motion to dismiss after an average of 237 days of litigation in the case.
- Thirty-three of the cases reached a decision on class certification after an average of 724 days (that’s nearly two years).
- Twenty-seven of the cases reached summary judgment after an average of 986 days pending.
- Eight cases have reached trial, generally after several years of litigation.
Jack Eckart: I think it’s fair to say that if litigation is brought against a plan sponsor or other fiduciary, it will end up requiring the fiduciary to allocate a lot of time, money and resources to respond to those claims. Josh, can you elaborate on what are the most common claims plaintiffs have been making in these lawsuits?
Josh Lichtenstein: Of course, Jack. Like Dan was just saying, there are a lot of these cases. Based on our review of the cases, the claims typically revolve around the following four key trends:
- First, there are allegations that the plan sponsors selected and retained overpriced and underperforming investments. In other words, the crux of the claim is that the fiduciary failed to adequately monitor the investment options. ERISA requires a fiduciary to continually monitor the performance and the price of the funds in a retirement plan’s investment lineup, and many fiduciaries will rely on consultants or other advisors to help them discharge that responsibility. If the fiduciary determines that the funds are underperforming or are overpriced compared to benchmarks, then that fiduciary should really consider replacing those funds, or they should have a clear documented rationale for why they decided to retain them.
- Second, we see claims with respect to the plan lineup, where fiduciaries need to make sure that they are offering an appropriate range of investment alternatives so that participants can make selections. There’s a safe harbor under the regulations under ERISA, and that requires the majority of plans to include at least three investment options for participants, each of which is diversified and has materially different risk and return characteristics from the others. That said, a lot of plan sponsors have broader menus, and we’ve also seen claims based on there being too many options for the participants to choose from. These claims suggest that fiduciaries should be considering that the majority of their retirement plan participants may not necessarily be investment experts or that conversant with a lot of financial concepts, and so they should ensure that the plan’s investment lineup and the investment goals of the funds are going to be understandable and appropriate for the specific participant population of a plan sponsor.
- Another bucket of claims that we’ve seen are allegations that there were excessive recordkeeping and administrative fees being charged. The retirement recordkeeping market is continually evolving, and pricing is really quite competitive and fluid right now. Fiduciaries should be keeping their pulse on recordkeeping fees, and they should frequently be benchmarking those fees against what their current fees are. The easiest way to do this is probably to periodically issue RFPs for your recordkeeping services.
- We’ve also seen claims pertaining to the use of multiple recordkeepers. This is more typical in cases against universities and hospitals that maintain 403(b) plans, which we have discussed on some prior podcasts. This is due to the inherited history of there being multiple recordkeepers in many of these plans historically. The basis for these claims is usually that a single recordkeeper would be cheaper and more cost-effective than using multiple recordkeepers, and, therefore, a plan fiduciary of a 403(b) plan should be looking to consolidate plan assets and plan accounts under one recordkeeper to the extent possible.
I’d also like to point out that a significant portion of the lawsuits that we’ve reviewed typically include more than one of the buckets that I just mentioned. For example, we might see plaintiffs that have alleged in one suit that the funds in the investment line-up are overpriced, there are too many funds offered in the investment line-up (so it was confusing for plan participants), and the plan is also paying excessive recordkeeping fees. Therefore, we think it’s advisable for plan sponsors to proceed at all times as if they could be targeted by any of these types of claims.
Jack Eckart: Thanks for that context, Josh. Dan, are there any trends on specific industries that have been targeted or the size of the plans? In other words, are plaintiffs’ firms only targeting specific industries, or only going after bigger plans with more assets and plan participants?
Dan Ward: We’ve seen complaints brought against plan sponsors from all different industries, which cover plans of all sizes. Now, in the first wave of lawsuits, the initial targets were large asset management firms who offered their own proprietary funds to their employees. In these proprietary funds cases, plaintiffs alleged that the inclusion of the proprietary investment products on the plan menu violated ERISA because the plan fiduciaries were promoting the sponsor’s own investment products in the 401(k) plan—rather than selecting cheaper or better-performing options from the market.
As these litigations gained traction, plaintiffs’ firms brought more of the relatively generic excessive fee litigation against businesses in other industries. We’ve also seen the plaintiff firms bringing more suits against non-profit institutions as well, including hospitals and universities that sponsor 403(b) plans.
Jack Eckart: It seems that all plan sponsors are susceptible to having ERISA litigation brought against them, and it’s more a matter of when the suit comes, not if the suit comes. Josh, which plaintiff firms should plan sponsors be on the lookout for, and what might be the first clue that a class action suit may be brought against a fiduciary?
Josh Lichtenstein: I completely agree that based on the current trend that we’re seeing in terms of volume of these cases, it’s really a matter of when, not if a lawsuit is going to come against many plan sponsors.
So, when we think about the leading plaintiffs’ firms, we’ve definitely seen that there are some that are bringing most of these cases. The majority of the ERISA class action lawsuits of these types that we’ve been seeing have been brought by Capozzi Adler, Schlichter Bogard & Denton, Shepard Finkelman Miller & Shah, and Nicholas Kaster. Since most fiduciaries are also going to be plan participants, a fiduciary may actually become aware of potential litigation because they may receive a letter as a participant asking them to join a class action lawsuit, and we could expect that it might be received from one of the firms that I listed above as these are all quite active in this space.
Jack Eckart: Josh, how have you been advising clients’ general counsel, committees, and/or boards to prepare them for potential ERISA litigation?
Josh Lichtenstein: That’s a great question, Jack. My main goal in counseling clients in this area has been to give them a refresher on what their core ERISA fiduciary duties are and what their best practices under ERISA are, since these best practices are going to be the most important defense against a potential lawsuit and more likely to support a favorable outcome in court if they’re well-documented and have been practiced consistently over time. I’ll go through some ERISA fiduciary best practices in a moment, but it’s important to note that adopting these best practices will not prevent a plan sponsor from being a named defendant—all is not lost, however, because it will increase the chances for a positive result for the plan sponsor if he gets sued. In other words, being sued may be inevitable, but if you follow best practices consistently, you can be more confident about potential positive results in court.
The starting point for any ERISA fiduciary is going to be documenting the delegation and assignment of fiduciary decisions to a particular committee or through a charter. Typically, the plan sponsor’s board of directors will vote to delegate (i) ERISA fiduciary responsibility to an investment committee that’s going to be responsible for the plan’s fund and investment line-up; and (ii) they’ll also delegate some of the more plan administrative fiduciary responsibilities to a benefits or human resources committee. These committees should avoid conflicts of interest or any appearance of conflicts of interests, and this can be important for plan sponsors in choosing the members who are going to sit on the committees, and this is especially true at asset managers.
The next step would be for the delegated committees to form written, concise policies for making fiduciary decisions, such as the investment policy statement (IPS). I would recommend that these policies be reviewed by ERISA counsel before being finalized to make sure that they are reflective of current trends and best practices in the market.
Once a good governance structure has been created, it’s primarily about making sure that you’re continuously monitoring the plan’s investment options and ensuring that the plan complies with those adopted formal polices in making investment decisions and in following operational procedures. Some examples of this continuous monitoring would be:
- Meeting with an investment advisor on a quarterly basis and evaluating the performance of each fund.
- Carefully selecting and monitoring service providers, which should also include scrutinizing their cybersecurity protocols in accordance with recent DOL guidance, and this is an evolving area, so continued focus will be necessary.
- Issuing RFPs on a periodic basis in order to benchmark your recordkeeping fees, investment advisor fees, and any other fees that are being paid out of participant account balances. Each client should make sure that their plans’ fees align with the current market. A service provider or investment advisor’s arrangement may have been favorable for the plan five years ago, but it may be too expensive by current market terms.
It’s also important to continuously revisit any formal written policies and to revise them as needed. We can’t stress enough the importance of having up-to-date and well-documented polices in place and adhering to them. If your practices shift over time, but your documents stay the same that can become a road map for plaintiffs firms.
Jack Eckart: Thanks, Josh. Let’s look at some examples of recent cases. Dan, can you run through a couple recent ERISA litigation cases that have caught your eye?
Dan Ward: Yes, I’ll summarize a couple cases that I have followed closely. The first is Cates v. Treasury of Columbia University. The complaint, filed in 2016, alleged that the fiduciaries of the Columbia University retirement plans selected and retained expensive and poor-performing investment options that consistently and historically underperformed their benchmarks, and they loaded the University’s plans with many retail share class options that were more expensive than institutional share class options in the same mutual funds that were otherwise available. Columbia also used two recordkeepers for its plans, TIAA and Vanguard, which allegedly caused participants in the plans to pay duplicative, excessive and unreasonable fees for plan recordkeeping and administrative services.
After five years of litigation, over 350,000 documents produced in discovery, multiple rounds of motion practice, including opposed motions to dismiss, motions for class certification and summary judgment, on April 7, 2021, the parties jointly notified the district court they had reached an agreement to settle the case on a class-wide basis for $13 million, just five days before the April 12 bench trial was set to begin.
Now, I mention this for a couple reasons. First, I think it demonstrates the magnitude of the settlements that the plaintiffs are getting—$13 million is not an insignificant amount of money, not to mention all of the expense leading up to the settlement. It also demonstrates how these suits combine multiple claims. In this example, the plaintiffs alleged the fund options were underperforming and overpriced as compared to benchmarks, and the plaintiffs alleged that by having multiple recordkeepers, participants were paying duplicative fees that caused the overall fees to be excessive.
Another recent lawsuit I want to talk about is Johnson v. Russell Investment Management, LLC. Russell Investments provided investment management services to the Royal Caribbean Cruises’ 401(k) plan from 2015 to 2019. This lawsuit, which was filed in June, is unusual because the named defendant is an investment manager with proprietary funds that was providing services to a third-party plan. Typically, investment managers are named as defendants in ERISA cases only when offering their own proprietary funds to their own retirement plan with their own employees participating.
In here, in short, Russell added its own funds to Royal Caribbean’s 401(k) plan lineup at the outset of their relationship in 2015. The plaintiffs alleged that Russell breached its fiduciary duties by selecting investment options consisting exclusively of its own, poorly performing, proprietary funds. In 2019, after plan participants had allegedly lost millions, Russell was replaced as the investment manager by American Funds. A similar lawsuit was filed against Russell Investments one month earlier in connection with its role as investment manager for the Caesars Entertainment retirement plan.
Now, these cases involving Russell Investments will be interesting to watch because, without opining on the merits, suing an investment manager of a 401(k) as a result of offering its proprietary funds to participants of a third-party plan appears to be a relatively untrodden ground in the ERISA space. A plaintiff-favorable outcome in either case could open the door to potential liability to other investment managers who offer their own funds to plans they service.
Jack Eckart: Thanks, Dan. We’ll definitely have to keep an eye out on the Russell cases. Josh, any cases that have piqued your attention?
Josh Lichtenstein: Dan hit most of the cases that I think have been the most interesting recently, but I do want to briefly touch on Baker v. John Hancock Life Insurance Company. The allegations in this case appeared to be pretty standard versus other cases that we’ve seen. John Hancock was offering its proprietary funds to 401(k) plan participants, and allegedly, John Hancock was charging excessive fees for those funds. In addition, the plaintiffs alleged that John Hancock was charging excessive recordkeeping fees. So, the case ultimately settled with John Hancock agreeing to pay $14 million, and so it’s now one of the dozens of employers that have been sued under ERISA for putting their own proprietary mutual funds in their workers’ 401(k) plans, along with the likes of Reliance Trust, SunTrust Bank, Fidelity, Deutsche Bank and others.
What’s interesting about this settlement though, is that in addition to the $14 million in payment, John Hancock is also required under the settlement terms to implement a number of non-monetary remedial actions, such as hiring a third-party investment consultant to provide ongoing monitoring and review of the investment options for at least five years, developing an IPS for the plan, and appointing a consultant to assist with issuing an RFP for recordkeeping services. The settlement terms essentially required John Hancock to comply with the ERISA fiduciary best practices that I was talking about a little bit earlier in the podcast. We’ll have to see if future settlements include these best practices, but similar to the Russell case, this is a development that could have wide-ranging consequences if we start seeing it pop-up more.
Jack Eckart: Yes, that’s certainly interesting that John Hancock walked away from the settlement with a to-do list. Again, we’ll have to keep monitoring the active and pending cases to see if this becomes more of a trend among settlements. Josh, the cases you and Dan walked through highlight some of the newer trends we’ve been seeing. What about the status quo? What are the general takeaways from the majority of suits and settlements?
Josh Lichtenstein: We’ve seen slight variations with courts in different regions, and each case is also dependent on its own unique facts and circumstances, of course. But that said, we think fiduciaries and plan sponsors should make sure that they are consistently following best practices that we’ve discussed—and that these are well-documented and periodically reviewed—when it comes to selecting and reviewing investment alternatives and service providers for 401(k) and 403(b) plans. Whether these practices were in place and whether the fiduciary actually adhered to them, and can show they adhered to them, should be the primary focus in any lawsuit that includes allegations of ERISA fiduciary breaches. And that’s because, as ERISA lawyers always say, ERISA is really focused on process, and so if you follow a prudent process, then fiduciaries who are making decisions according to that process should be found to have discharged their duty appropriately. For example, a fiduciary cannot be absolutely certain that any one fund or investment option will outperform another one, and they aren’t required to have a crystal ball. But, when selecting a fund for the plan’s investment line-up, the fiduciary should have in place a diligent process that they’re following for evaluating that historical performance and fees of that fund relative to its peers before choosing which fund to add to the lineup. Under ERISA, the fiduciary’s going to be scrutinized based on having appropriate process and following the appropriate process—it should not be scrutinized based on a failure to predict future outcomes, if they followed the process.
Jack Eckart: Great—thanks, Josh. So, at this point, some of our listeners may be ready to contact their ERISA counsel and begin to evaluate their current exposure to potential ERISA litigation. And we think that’s great and proactive, but we want to make sure you’re aware of some potential limits on client-attorney privilege, specific to ERISA. Dan, can you elaborate on this fiduciary exception?
Dan Ward: Right, so several circuits have recognized a fiduciary exception to the attorney-client privilege, which says that when an ERISA fiduciary seeks an attorney’s advice on a matter of plan administration and the advice clearly does not implicate the fiduciary in any personal capacity, then the fiduciary cannot invoke the attorney-client privilege. Due to this exception, there may be limited privilege when it comes to legal advice for certain kinds of plan-related matters, including actions or decisions about the investment of plan assets, communications with plan participants about plan administration, and documents describing changes in plan benefits.
Jack Eckart: Thanks, Dan. The fiduciary exception on attorney-client privilege is something our listeners should be aware of and should discuss with their ERISA counsel before seeking substantive legal advice regarding their retirement plans.
On that note, that’s all the time we have for today’s episode. Thank you so much to Dan and Josh for joining me and sharing many valuable insights. For more information on the topics that we have discussed, please visit our website at www.ropesgray.com. And of course, if we can help you navigate any of the topics we discussed today, please don't hesitate to get in touch. You can subscribe and listen to this series wherever you regularly listen to podcasts, including on Apple, Google and Spotify.
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