Podcast: ERISA 401(k)/403(b) Fiduciary Developments: The Grab Bag Episode
In this latest 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, David Kirchner and Jack Eckart, both in the firm’s benefits consulting group, are joined by Jon Reinstein, an ERISA and benefits associate, to discuss some of the various developments the team has been tracking in the ERISA fiduciary space. This episode includes a roundup of post-Northwestern fee litigation, the impact that these lawsuits are having on the fiducry liability insurance market, the SECURE 2.0 legislation currently pending in Congress and the emerging debate over cryptocurrency investments in ERISA retirement plans.
Jack Eckart: Thanks for joining us today for this Ropes & Gray podcast. I’m Jack Eckart, a consultant in our benefits consulting group from our New York office. I’m here with David Kirchner, a principal in our benefits consulting group who’s based in Boston and San Francisco. I’m also joined by Jon Reinstein, an ERISA and benefits associate also in our New York office. Welcome David and Jon. It’s great to have you on another podcast episode.
2022 is shaping up to be another busy year for 401(k) and 403(b) plan fiduciaries. We are continuing to see a flurry of activity on the excessive fee litigation front, there’s also important new retirement plan legislation on the horizon with SECURE 2.0, and some new guidance from the U.S. Department of Labor (DOL) pertaining to one of the hottest and, arguably, most controversial topics in the investment world today: cryptocurrency. And let’s not forget, we’re still waiting for the DOL’s final rule on ESG as well as new proposed rules on being an investment advice fiduciary.
For this episode, we thought we would take a grab bag approach and briefly cover a number of recent topics. We want to make sure our listeners are up to speed. Of course, if anything we discuss piques your interest and you would like to discuss further, we encourage you to contact us or any of our colleagues here at Ropes & Gray.
With that introduction, let’s jump right into the conversation. Jon, of course, this series has focused on the persistent wave of excessive fee lawsuits that have targeted ERISA retirement plans over the last few years. When we did a roundup of the recent cases for our seventh episode back in September 2021, we thought maybe the tide would finally start to turn—we anticipated what would happen in the Supreme Court in Hughes v. Northwestern. What does the landscape look like now with the Supreme Court decision in the rearview mirror?
Jon Reinstein: Well, Jack, the state of play remains largely the same. New lawsuits are continuing to be filed every week, which include many of the same types of claims we have been seeing for a long time now: (i) Allegations of excessive recordkeeping and administrative fees being charged to plan participant accounts; (ii) Plaintiffs questioning the prudence of using multiple recordkeepers to administer 403(b) plans; and (iii) The selection and retention of allegedly overpriced and underperforming investments—especially, the use of higher-cost retail share class mutual funds instead of what are generally lower-cost institutional share classes of the same investments.
By my count, at least 23 new lawsuits have been filed as of this recording, that have accused sponsors and fiduciaries of plan mismanagement and breaches of their ERISA duties of prudence and loyalty since the Northwestern opinion came out at the end of January. Furthermore, according to some recent data published by Bloomberg Law, there are proposed class actions currently pending in more than half of the U.S. federal district courts, and of the more than 170 cases filed since 2020, far more than 50 have at least partially survived a motion to dismiss, leaving only about a dozen that have been dismissed.
Jack Eckart: So, it sounds like when we previously described Northwestern as a missed opportunity for the Court—would you say it’s played out that way?
Jon Reinstein: I think that is right, Jack. The Court’s decision to avoid articulating stricter pleading standards for these types of complaints, or more broadly, to avoid providing greater clarity around this important procedural issue of ERISA litigation, has really preserved the status quo.
Jon Reinstein: Thank you for raising that, David. As we record this now—almost four and a half months after Northwestern came out—a number of district courts have denied motions to dismiss where the cases were put on hold temporarily, finding questions of fact or sufficient allegations to advance to discovery. In doing so, the courts have often referred to the context-specific inquiry language that we saw cited in the Northwestern opinion.
For example, back in April, a Connecticut district court judge rejected a motion submitted by Xerox and its plan fiduciaries to dismiss a complaint alleging plan mismanagement, and in the opinion, the judge mentioned that context-specific inquiry standard. The opinion also mentioned how a “[court ought to be] cognizant that ERISA plaintiffs generally lack the inside information necessary to make out their claims in detail unless and until discovery commences.”
David Kirchner: Jon, that last sentence strikes me as a pretty forgiving standard for plaintiffs. It seems to suggest that an ERISA claim may withstand a motion to dismiss based on sufficient circumstantial factual allegations to support the claim, even in the absence of direct allegations of misconduct.
Jon Reinstein: I completely agree with you, David. I think this is exactly why many practitioners were hopeful the justices would provide a more concrete and rigorous standard in Northwestern, but at least for now, that’s not what we have. Instead, lower courts are basically left to their own devices to figure out which claims should proceed and which should not.
Jack Eckart: So Jon, on a related note, I was reading about the Ninth Circuit reversing a couple motions to dismiss recently. Can you shed some light on what’s going on in California?
Jon Reinstein: Thanks for mentioning that, Jack. You’re thinking of the Salesforce and Trader Joe’s cases. First, on April 8, the Ninth Circuit revived a proposed class action brought by Salesforce employees alleging the company mismanaged their $2 billion 401(k) plan, holding that the plaintiffs had stated a plausible claim that the defendants imprudently failed to select lower-cost share classes (or CITs) with substantially identical underlying assets, and that the defendants imprudently failed to investigate and timely switch to cheaper alternatives that had the same underlying investments and asset allocations as their mutual fund.
Then, just a week later, a Ninth Circuit panel held that a California Central District Court judge erred in dismissing plaintiffs’ claims for breach of fiduciary duty against Trader Joe’s and its plan fiduciaries, which alleged the defendants imprudently failed to monitor and control the inclusion of certain retail share classes on the plan menu.
For now, those are the only circuit court opinions we have post-Northwestern, but it could generate momentum for more of these types of reversals.
For example, we will have to see what becomes of the plaintiffs’ appeal in the AT&T litigation that was filed in the Ninth Circuit recently, which is seeking to revive a 250,000-member class action that was dismissed last year. The plaintiffs have argued that AT&T failed to obtain required disclosures from service providers and they failed to evaluate the reasonableness of the compensation paid to those service providers in relation to what services they offered to the plan.
David Kirchner: Okay, but Jon, let’s be fair here—it hasn’t been all bad news for plan sponsors and fiduciaries. For instance, earlier this year, United Surgical Partners got a proposed class action suit challenging the 401(k) plan fees dismissed when a judge in the Northern District of Texas ruled that employees failed to explain how their retirement accounts were invested, and therefore, failed to demonstrate standing to challenge specific plan investment options. The judge also said that the plaintiffs failed to state a viable claim for fiduciary breach based on high plan fees because their complaint didn’t include specific details about the services their plan received in exchange for those fees. Now, the judge did give the plaintiffs an opportunity to amend the complaint, which they have since filed, so we’ll have to see if things change, but at the moment, this is a pretty recent example of a plan sponsor’s motions to dismiss being granted.
Jon Reinstein: It’s a fair point, David—and to build on that, there was also the Barrick Gold decision in the last couple of months where a district court judge in Utah had granted Barrick’s motion to dismiss the entirety of the plaintiffs’ complaint with prejudice. The complaint has alleged that the plan fiduciaries had failed to act in the best interests of the plan participants because the plan retained, again, those expensive mutual fund investments, and the defendants had also failed to leverage the size of the plan to negotiate for lower expense ratios for certain investment options or lower recordkeeping fees and the like.
According to the judge, the “plaintiffs focus on a handful of funds and just a small window of time.” Moreover, “they relied on comparisons of dissimilar investment options…and a number of their allegations contained incorrect information that, when corrected, show that many of the Plan’s investment management fees are lower than the ones the Plaintiffs actually cited as examples.” The judge basically concluded by saying, “plaintiffs have pled circumstantial facts that are ‘merely consistent’ with liability.”
Interestingly, since then, the plaintiffs have filed a motion for reconsideration in reliance on Northwestern as well as the Ninth Circuit’s orders to revive the cases in Trader Joe’s and Salesforce. The plaintiffs also filed a motion of appeal to the Tenth Circuit, although that appeal has been stayed until resolution of the motion for reconsideration. All of this is to say, we may end up with a new circuit split in the aftermath of Northwestern, so stay tuned.
Jack Eckart: I think that’s really helpful context for our listeners and plan sponsors. But hearing this, maybe now would be a good time to remind our listeners of some measures plan fiduciaries and sponsors can take—not so much to prevent a lawsuit—but to improve their chances of getting a favorable outcome in court. David, do you mind speaking to that?
David Kirchner: Sure, Jack—I’d be happy to do that. And I’m sure we sound like a broken record here because we’ve continued to stress this in this series, but putting in place and following good fiduciary practices will be one of the most important defenses against a potential lawsuit and more likely to persuade a judge. Having in place a well-documented process that is used consistently and in good faith should provide a strong defense for plan fiduciaries.
This entails a process that ensures (i) the plan’s fiduciaries are regularly monitoring the plan’s investment options, and (ii) that the plan complies with adopted formal written polices in making investment decisions and in following operational procedures.
For instance, some good monitoring and documentation practices should include:
- Retaining and regularly meeting with an investment advisor on a quarterly basis and evaluating the performance of each fund in comparison to its peers;
- Carefully selecting and monitoring service providers, which should also include scrutinizing their cybersecurity protocols in accordance with recent DOL guidance;
- Issuing RFPs on a periodic basis in order to benchmark your recordkeeping fees, investment advisor fees, and any other fees that are being paid from plan participant account balances.
Jack Eckart: David, let me stop you there—your point about issuing periodic RFPs to benchmark fees is well taken since a plan’s fees should align with the current industry trends. While a service provider’s fee structure may have been favorable to the plan five years ago—given all the pressures on lowering fees as a result of the litigation climate and vendor competition and consolidation—it’s quite possible that a plan’s fees from five years ago are now out-of-date and could be re-characterized as “excessive fees” by current market standards.
David Kirchner: Yes, Jack—I just want to go back to those written policies you’re talking about briefly, and emphasize the importance of continuously revisiting those documents and revising them as needed. There are always changes in regulations and things that one needs to be considering, and we really can’t stress enough how crucial it is to have up-to-date polices in place that are being diligently followed. If your practices shift over time but your documents remain the same, that’s a vulnerability for these plaintiffs’ firms, and I’m sure they’ll latch on to it.
On a separate note, let’s also not forget the importance of fiduciary liability insurance. ERISA does not require fiduciaries to purchase such coverage, but it is certainly prudent to have it, as it protects the plan fiduciaries against personal liability imposed upon them by ERISA to restore losses to the plan caused by any breaches. Such policies cover judgments and settlements, and are designed to provide a defense when lawsuits are brought against fiduciaries acting in their capacity as the plan fiduciary.
Jack, what have you seen in terms of the impact that the proliferation of large, class action fee and plan investment litigation has had on the fiduciary insurance market recently?
Jack Eckart: Given the significant number of ERISA class action suits, we’ve started to see the fiduciary insurance carriers bulking up their due diligence process when quoting or renewing fiduciary coverage. As part of this process, the carriers generally issue an “intake” questionnaire asking a bunch of questions about the fiduciary’s policies and practices. However, providers of this insurance they’re well aware of what’s going on in the courts, and we’re beginning to see questions from the carriers that are specifically focused and directed at the potential risk exposure of ERISA litigation. Many of these additional questions we’re seeing revolve around the best practices David and I have just gone through and all of the other topics we’ve been discussing in this podcast series, like fiduciary processes, monitoring investments, benchmarking vendors, and cybersecurity protocols.
As always, we advise any plan sponsors to speak with their ERISA counsel to discuss fiduciary insurance options, specifically given the potential for personal individual liability under ERISA.
Switching gears—Jon, do you want to give an update on the SECURE 2.0 legislation?
Jon Reinstein: Sure—I’d be happy to, Jack. Back on March 29, 2022, the House passed, in overwhelmingly bipartisan fashion, HR 2954: the Securing a Strong Retirement Act of 2022 (which has been nicknamed SECURE 2.0). As its name implies, HR 2954 builds on that major retirement reform legislation that was signed into law at the end of 2019.
Then, just before Memorial Day, Senators Murray and Burr, the chairwoman and ranking member, respectively, of the Senate Health, Education, Labor and Pensions (or HELP) Committee, released a discussion draft of their legislation entitled the “Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg” Act (it’s abbreviated the RISE & SHINE Act). The RISE & SHINE Act was formally proposed in the Senate HELP Committee on June 7, and that legislation builds off of HR 2954 as well as a couple of other retirement bills that have been released in the Senate over the last year or so, including the Cardin-Portman bill as well as the RISE Act. On June 14th, the HELP Committee approved the RISE & SHINE Act by a unanimous voice vote, and cleared it for consideration by the full Senate, where it is expected to be merged with forthcoming legislation by the Senate Finance Committee.
Now, I just want to walk through some of the provisions of HR 2954 (SECURE 2.0) and we’ll note how it differs a little bit from the Senate bill. HR 2954 contains various provisions seeking to expand plan coverage, increase savings and lifetime income options, and promote efficiencies in plan administration. I think it’s worth highlighting a few now. Note, a number of these provisions are not in the RISE & SHINE Act (now know in the Senate as bill 4353), but it’s possible they’ll make their way back into whatever final legislation we see—later this summer or early fall—once the House and Senate bills are merged into a final bill, which hopefully will pass later this year, probably in a lame-duck session after the November elections. So, just walking through a few of the provisions of SECURE 2.0:
- Automatic enrollment for new plans. One of the signature features of SECURE 2.0 is the requirement that new 401(k), 403(b) and SIMPLE plans automatically enroll participants upon becoming eligible (with opt-out allowed) at a minimum of 3% of pay (and up to 10% of pay) and increasing in 1% increments until reaching 10% of pay. Existing plans on the effective date of the legislation would be grandfathered. Furthermore, employers with 10 or fewer employees would be exempt from this requirement. In other words, new plans going forward after the date of enactment would be subject to the auto-enrollment and auto escalation requirements unless otherwise exempt.
- Treatment of student loan payments as elective deferrals for purposes of matching contributions. This section permits an employer to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to “qualified student loan payments,” which are broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses. Governmental employers will also be permitted to make matching contributions in a 457(b) plan or another plan with respect to such repayments.For purposes of the nondiscrimination test that applies to elective contributions, the legislation permits a plan to test separately the employees who receive matching contributions on student loan repayments.
- Enhancements of 403(b) plans. Several of the bill’s provisions relate specifically to 403(b) plans, which include:
- Permitting 403(b) plans to invest in group trusts/CITs. Under current law, 403(b) plan investments are generally limited to annuity contracts and mutual funds, which prevent 403(b) plan participants from accessing CITs, which are often used by 401(k) plans due to their lower fees.
- Multiple employer 403(b) plans. The original SECURE Act made multiple employer plans (or MEPs) more attractive by eliminating outdated barriers and improving the quality of MEP service providers. This current legislation allows 403(b) plans to participate in MEPs, including PEPs, including relief from the one bad apple rule so that the violations of one employer do not affect the tax treatment of employees of compliant employers.
- 403(b) hardship rules conformed to 401(k) rules. A revenue-raising provision would conform the 403(b) plan hardship rules to the 401(k) hardship rules. Under current law, the distribution rules for 401(k) and 403(b) are different in certain ways that are historical anomalies for varied reasons. For example, for 401(k) plans, all amounts are available for a hardship distribution. For 403(b) plans, in some cases, only employee contributions (without earnings) are available for hardship distributions. HR 2954 would conform the 403(b) rules to the 401(k) rules.
- Revenue-raising provisions. Other provisions in HR 2954 would increase revenues by directing some retirement plans to require age 50 catch-up contributions to tax-qualified plans, 403(b) plans and 457(b) plans to be designated as Roth contributions. Under current law, catch-up contributions to a qualified retirement plan can be made on a pre-tax or Roth basis (if permitted by the plan sponsor). Furthermore, HR 2954 allows defined contribution plans to permit employees to designate their employers’ matching contributions as Roth contributions, whereas under current law, matching contributions to such plans must be on a pre-tax basis only.
Jack Eckart: I think that was a great summary, Jon and David. And given the bipartisan support for the House bill and the general desire to improve and expand the retirement savings of American workers, hopefully this legislation will not get log-jammed in the Senate. We’ll have to see what happens this summer.
Finally, let’s wrap up this episode with a discussion on one of the hottest topics in the news these days: cryptocurrency. In March, the DOL published a compliance assistance release to provide guidance for 401(k) plan fiduciaries who are considering plan investments in cryptocurrencies, and it’s generated a huge response thus far—both positive and negative. David, I’m going to send this one your way.
David Kirchner: Jack, I’d be delighted to take that one. By way of background, in that release, the DOL cautioned fiduciaries to “exercise extreme care” before they consider adding a cryptocurrency option to a 401(k) plan lineup for participants. According to the guidance, the DOL’s concerns stem from the significant risks of fraud, theft and loss that have characterized these assets up to this point.
Since then, the DOL has faced major pushback from industry groups who have asked the agency to actually rescind the guidance claiming that the release’s language about brokerage windows, in particular, amounted to a new standard under ERISA and that, therefore, warranted notice and comment rulemaking procedures and review from the White House’s Office of Information and Regulatory Affairs.
In particular, people are up in arms over the language in the release that says: “EBSA expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments. The plan fiduciaries responsible for overseeing such investment options or allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks described above.” Pretty strong language, I would say, on this one.
There’s nothing in ERISA or the DOL’s regulations that require plan fiduciaries to directly monitor each underlying investment option in a brokerage window. As many listeners may recall, back in 2012, the DOL attempted to require plan fiduciaries to monitor the investments offered through a brokerage window, but it later withdrew the interpretation.
In defending the DOL’s release, Acting EBSA Secretary Khawar stated in media interviews that “[w]e never said Section 404 of ERISA ends where the brokerage window begins, and so we don't view this as the sea change that it's been described as.”
Nonetheless, the language has triggered quite a backlash from industry proponents.
Jon Reinstein: Such a backlash, in fact, that just in the last few weeks, a 401(k) service provider known as ForUsAll, which was the first to announce that it would make cryptocurrency available to 401(k) plan participants through a self-directed window, actually filed a lawsuit against the Department of Labor, alleging that the issuance of its release was arbitrary, capricious, and otherwise not in accordance with the Department’s statutory authority in violation of the Administrative Procedure Act (or APA). Their complaint also claims that the DOL violated the Administrative Procedure Act by issuing the release without going through the notice and comment rulemaking required under the APA. According to the complaint, “[T]he DOL’s release improperly threatens to open investigations of and imposes costs on plans and fiduciaries who are taking lawful action.”
Jack Eckart: ForUsAll is not the only player in the space looking to offer up a crypto platform for retirement plans. Back in April, Fidelity announced the launch of its workplace Digital Assets Account, a product that will enable individuals to have a portion of their retirement plan savings allocated to Bitcoin through their 401(k) plan investment lineup. Since announcing this new initiative, Fidelity has gone back and forth with the DOL as to how the Fidelity program will square up with the DOL’s guidance. Recently, Secretary Khawar mentioned at the Insured Retirement Institute’s annual conference in May how the DOL and Fidelity have had discussions about the consumer safeguards that are included in the Fidelity crypto product, and that while the conversation with Fidelity has been “forthright, fairly cordial and candid,” the DOL still has its misgivings. We’ll have to see if this new ForUsAll lawsuit will only make the DOL more strident in defending its guidance.
Most recently, the DOL has indicated that it is considering whether to issue a rule that would address the appropriateness of cryptocurrency in 401(k) plans. In response to a line of questioning at a House Education and Labor Committee Panel held on June 14th, DOL Secretary Walsh told the Committee that the Department is “looking at potentially going through a rulemaking process on the industry as a whole.” So, we are going to have to continue to watch this and see how this story unfolds.
On that note, that’s all the time we have for today’s episode. Thank you so much to Jon and David for joining me and sharing many valuable insights. And thank you for joining us, as well. 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 Apple, Google and Spotify.