Expect More Varied ERISA Litigation in 2017

Aside from traditional allegations of excessive fees and mismanagement of company stock, ERISA litigation in 2016 included challenges to fund types, fiduciary processes and provider arrangements; expect more to come.

Right out of the gate in 2016, a number of Employee Retirement Income Security Act (ERISA) lawsuits were filed. The pace of litigation gained more momentum throughout 2016.

Aside from the typical excessive fee cases and company stock litigation of the past, Charles G. Humphrey, Employee Benefits and ERISA counsel at Fiduciary Plan Governance LLC, who is based in Buffalo, New York, says, “I think if you look at Bell v. Anthem, White v. Chevron, Ellis v. Fidelity and Johnson v. Fujitsu, I see something I haven’t seen in great volume before—a probing at quality of fiduciary process.”

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Stephen Rosenberg, Esq., partner at The Wagner Law Group, who is based in Boston, adds, “The year 2016 saw an expanding panoply of theories for attacking investment options and other aspects of the administration of 401(k) plans, and more of the same can be expected going forward.” Humphrey notes, for example, in Bell v. Anthem, Anthem offered a Vanguard fund charging 4 bps and was called out for not using its bargaining power to get a similar 2 bps investment. In the Chevron and Fidelity cases stable value fund use as opposed to money market fund use was questioned; a case against Intel filed last year included an allegation of too many nontraditional assets in its target-date fund (TDF) offerings; and the Johnson case challenged the use of custom TDFs.

Nancy Ross, partner and head of ERISA litigation practice at Mayer Brown LLP in Chicago, adds that cases filed in 2016 have also targeted fee disclosures and arrangements between plans and service providers.   

Ross says her firm is seeing a lot of sponsors who make changes being targeted with lawsuits claiming it must have been wrong before. “These are not remedial measures, but plan sponsors genuinely trying to improve their plans. They are improving on a perfectly acceptable arrangement,” she states. An example of this is the recent lawsuit filed against Starwood Hotels. In it, plaintiffs note that Starwood did reduce its fees, but for five years prior to that, participants paid excessive fees.

Targets of litigation have also changed. Ross notes that in 2016, not only corporate plan sponsors, but university and college retirement plan sponsors were hit with excessive fee suits. And, while not new to 2016, church plans have faced lawsuits challenging their non-ERISA status. A split in the circuits has led to cases being taken up by the U.S. Supreme Court.

“The Supreme Court’s decision to grant certiorari with respect to the definition of church plan under ERISA and the Code could produce a significant increase in litigation against these church-affiliated organizations if the Supreme Court agrees with the three Circuit Courts of Appeals that have addressed this issue and concluded that the long-standing view of the Internal Revenue Service (IRS) was incorrect and defined benefit plans of these church-affiliated organizations are not church plans,” says Barry Salkin, of counsel at The Wagner Law Group, who is based in Boston.

NEXT: Drivers of new litigation trends and surge in cases

Ross believes one thing driving new allegations in ERISA fee suits is the Supreme Court decision in Tibble v. Edison, in which it said plan fiduciaries have an ongoing duty to monitor investments. “Plaintiffs are tacking on claims of failure to monitor investments over the years,” she says.

Humphrey says this is “low hanging fruit” if there is an absentee fiduciary with no record of selection and monitoring of service providers and investments.

According to Rosenberg, in 2016, litigation continued apace over dramatic declines in company stock prices and their impact on the value of retirement accounts. The highest profile court decision in 2016 in this area was likely Whitley v. BP, PLC, in which the court held that there was no viable defensive action the fiduciaries could have taken to protect the value of the company stock holdings in the plan that would not have simply inflamed the collapse in the stock price, and that this precluded liability for breach of fiduciary duty due to the loss of value in the holdings of company stock.

Whitley was revived by an appellate court after the U.S. Supreme Court’s decision in Fifth Third v. Dudenhoeffer, which rejected the notion of plan fiduciaries having a presumption of prudence and set a new standard for pleadings in stop-drop cases: namely, Rosenberg notes, the need for plan participants to prove, for their stock drop claims to proceed, that plan fiduciaries could have taken an action during, or before, the collapse in value of company stock that would have made the situation better, and not worse.

While the challenges portend to be targeted toward protecting the interest of plan participants, Ross says there are dollars here for the plaintiffs’ bar, and settlements are fueling the fire. “Attorneys want in on the action. In addition, the plaintiffs’ bar has more outreach—they are not just putting ads in local newspapers, they are trolling for business on Facebook,” she says.

Humphrey adds that lawsuits have had some success and plaintiffs’ attorneys keep hammering away, especially big plaintiffs’ firms that have resources to pursue these plans. He says these attorneys are trying to make law. “What is nature of fiduciary responsibility? Did you do your job well enough? We’ve never had specifics in ERISA and never had the kind of case law that makes law,” he says. “Now we will get that. It will be more difficult for plan sponsors to deal with and they will have to factor that into plan governance.”

Humphrey adds, “Hold on to your seats at this point, and hope courts will take a reasonable approach with their opinions.”

NEXT: What’s ahead for 2017?

Ross says in 2017, ERISA litigation will not just question fees, but prudent administration, investment selection and types of investments. It will be much more of the same, she notes. She adds that the plaintiffs’ bar will be looking at new areas to attack. “We will see a continuation of the examination of relationships plans have with service providers,” she says. “My advice to plan sponsors is complete disclosure.”

Humphrey agrees there will be more of the same—fee cases will continue to roll in. And he believes more cases will focus on the quality of decisionmaking, as he says, “those bringing them are kind of experimenting.” Humphrey also doesn’t see stock-drop cases going away, as “Dudenhoeffer really provided a solid defense.”

Salkin says, “We can expect to see more litigation with respect to Code Section 403(b) plans alleging various breaches of fiduciary duty. This is a clear example of low-hanging fruit which is ripe for copycat litigation. While 403(b) plans have become closer to 401(k) platforms since the Pension Protection Act of 2006, there were significant differences prior to that date, so it remains to be seen whether those fiduciary breach claims will stand up.”

He also predicts the various defined benefit plans that engaged in derisking activities such as temporary lump-sum windows are a potential target of litigation, although these may be difficult cases for plaintiffs to prevail. “The allegation will be that there was a breach of fiduciary duty in disclosing to plan participants the advantages and disadvantages of selecting a lump sum,” Salkin says. “While in all cases some disclosure would have been made, the allegations will be that because the plan sponsor had the objective of maximizing the number of participants who would elect lump-sum distributions, the disclosure to plan participants was one-sided to some degree.”

Salkin adds that there will also be more cases exploring the contours of Article III standing, addressed earlier this year by the Supreme Court in Spokeo v. Robins, in which it held that Article III standing requires a concrete violation even in the context of a statutory violation. Salkin notes that two appellate court decisions have already addressed the application of Spokeo: the 8th Circuit in Braitberg v. Charter Communications, Inc. and the 5th Circuit in Lee v. Verizon. “Since plaintiffs will no longer be able to allege that a violation of ERISA automatically constitutes an injury in fact for purposes of Article III standing, there will likely be more motions to dismiss because of lack of Article III standing,” he says.

“The DOL [Department of Labor] fiduciary rule is a bit of a wild card because there is no assurance that it will continue, or at least continue in exactly the same form, under the Trump Administration as is scheduled to take place on April 10, 2017,” Salkin says. “It was intended to allow IRAs and non-ERISA plans to maintain civil actions; those actions will be forthcoming. Additionally, by increasing the number of entities that will be treated as fiduciaries, the likelihood is that there will also be an increased number of lawsuits in which a party is joined by a defendant alleging co-fiduciary liability.”

Investment Products and Service Launches

Prudential Launches New TDF Suite; Natixis Releases ESG TDFs; and Vanguard Reports Reduced Expense Ratios.

Prudential Launches New TDF Suite

Prudential Investments has released its new Day One Mutual Funds, a series of 12 target-date funds (TDFs), which will be available through retirement plans and financial intermediaries.

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Choosing the right target-date fund may be one of a fiduciary’s most important decisions,” says Stuart Parker, president of Prudential Investments. “The Day One Mutual Funds are a solution to consider with a glide path constructed to mitigate risk at each stage of retirement with a competitive expense ratio.”

Prudential says the series is designed to mitigate risk for younger participants by accumulating higher equity exposure before preserving lower equity exposure for older investors to hedge against the risk of significant market losses.

“Studies show that Millennials early on tend to be underweight in equities despite having time on their side,” says Tony Fiore, senior vice president and national sales manager of retirement investment solutions at Prudential Investments. “So we have a higher equity exposure than most in the industry because we feel that accumulation is really the most important thing you can do early on … You eventually get to what we call the retirement red zone about 10 years before retirement. That’s when we try to take risk off the table as much as we can.”

The series also focuses on inflation protection to address the risk of eroding purchasing power for more than 30 years in retirement. Its hybrid investment approach combines active and passively managed strategies to reduce costs and generate potential for alpha, Prudential explains.

The Day One Mutual Funds are being offered at an expense ratio of 0.40%.

“Target funds have become the vehicle of choice within defined contribution plans, but not all target-date funds are created equal,” says Jamie Kalamarides, head of Full Service Solutions at Prudential Retirement. “Our approach to the Day One Target Date Funds incorporates nearly a century of experience in fulfilling pension obligations and helping plan participants reach their desired retirement outcome.”

The new Day One suite features 12 target-date mutual funds and is available in five-year increments, ranging from 2010 to 2060, in addition to an income fund. Additional information about Day One Mutual Funds can be found at DayOneFunds.com.

NEXT: Natixis Releases ESG TDFs

Natixis Releases ESG TDFs

Natixis Global Asset Management has filed a registration statement with the Securities and Exchange Commission (SEC) to register what it says is the first series of target-date mutual funds (TDFs) in the U.S. with investments focusing on environmental, social, and governance (ESG) responsibility. The Natixis Sustainable Future Funds will include ten investment vehicles with vintages ranging every five years from 2015 to 2060. They are expected to launch in the first quarter of 2017.

These funds will select securities based on ESG criteria with respect to such issues as fair labor, anti-corruption, human rights, fair business practices and mitigation of environmental impact, the firm announced. These TDFs will seek a diversified portfolio of investments that contribute to a more sustainable future.

Most respondents to the firm’s 2016 Global Survey of Individual Investors stressed the importance of investing in companies that are ethically run (83%), and have a positive social impact (70%) and good environmental records (70%). Some research also suggests that ESG is especially important among Millennials. The Natixis 2016 Retirement Plan Participant Study backed this notion as it found that 71% of Millennials say they would be more willing to contribute to their retirement plan if they knew their investments were doing social good.  

“Our research shows that most people want to invest in companies that are ethically run, have a positive social impact, and have strong environmental track records,” says John Hailer, CEO for the Americas & Asia and head of Global Distribution. “We are excited to bring to market the first target-date mutual funds with a sustainable investing approach that enables individuals to align their investments with those beliefs.”

The proposed funds will be advised by NGAM Advisors, L.P. and sub-advised by Natixis Asset Management U.S., and will incorporate equity and fixed income allocations that leverage the ESG expertise of Mirova, an affiliate of Natixis AM U.S., which has managed responsible investment solutions for almost 30 years. Natixis also has selected Wilshire Associates Incorporated as a sub-adviser to provide glide path design and portfolio allocation services.

The funds' prospectuses are not complete and may be changed. A registration statement relating to these target-date funds has been filed with the SEC, but has not yet become effective. The preliminary version of the Natixis Sustainable Future Funds' registration statement has been filed with the SEC and can be obtained by visiting www.sec.gov.

NEXT: Vanguard Reports Reduced Expense Ratios

Vanguard Reports Reduced Expense Ratios

Vanguard clients saved a total of $13 million as a result of lowered expense ratios for 35 individual mutual fund shares, including 11 exchange-traded fund (ETFs) shares, the company announced.

These mark the first wave of Vanguard funds with a fiscal-year-end date in 2016 to report expense ratio changes (in this instance, funds with a fiscal year that ends in August). Vanguard will announce any additional expense ratio changes as funds update their prospectuses in the coming months. Expense ratios are reported on an annual basis and are based on actual operating expenses for the prior fiscal year.

“While some will portray Vanguard’s expense ratio reductions as another volley fired in the fee war, we view it as business as usual,” says Vanguard CEO Bill McNabb. “We’ve been lowering the cost of investing for four decades and will continue to do so. Importantly, we have announced reductions across our product offerings—mutual fund and ETF, index and active, stock and bond, domestic and international.”

Twenty-four Vanguard bond index fund shares reported lower expense ratios. For example, the $18.7 billion Vanguard Short-Term Corporate Bond Index Fund reported the following reductions: Admiral Shares, 3 basis points to 0.07%; ETF Shares, 3 basis points to 0.07%; and Institutional Shares, 2 basis points to 0.05%.

A full list of reported expense ratio changes can be found here.

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