Compliance September 12, 2019

ERISA Litigation as Cottage Industry

“The plaintiffs’ lawyer playbook is the same,” says Brian Netter of Mayer Brown. “First, survive a motion to dismiss, and then subject the defendant to a very expensive discovery process. It creates incentive to enter into a sizable settlement.”

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During a conference call with retirement industry analysts and reporters, Mayer Brown attorneys Nancy Ross and Brian Netter dove into the labyrinth of Employee Retirement Income Security Act (ERISA) lawsuits.

Netter is a partner in the Washington, D.C., office of Mayer Brown’s litigation and dispute resolution practice and co-chair of the ERISA Litigation practice. Ross is a partner in Mayer Brown’s Chicago office and also co-chair of the ERISA Litigation practice.

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According to the pair, there is an ongoing proliferation of lawsuits that continue to be filed under ERISA—about fees being too high, about inappropriate investment options being offered by plans, and about conflicts of interests alleged to exist between plans and their service providers. Plaintiffs in the cases have named as defendants both individuals and different types of institutional entities—from employers to recordkeepers to mutual fund companies.

“To date, there has actually been little direction or guidance published in these cases by the courts,” Ross suggests. “This is because the majority of these cases have settled, while others are dismissed very early on for pleading deficiencies. That’s the general pattern we have seen. Those cases which are not dismissed go into an expensive discovery process, which often means settlement talks begin in earnest.”

In Ross’ estimate, one negative outcome of all the litigation is that plan sponsors feel they cannot embrace innovative plan designs or investment options without fear of litigation. One positive consequence, she says, is that fiduciaries running these plans have come to better understand their risks and responsibilities.

“A recent development in this long-running litigation trend is the proliferation of plaintiffs’ lawyers pursuing these types of claims,” Netter says. “When these lawsuits first became popular, it was only a few law firms active in the space. Today, more and more firms are trying to get in on the action, attracted by the large settlements. Their playbook is the same: survive a motion to dismiss and subject the defendant to a very expensive discovery process. It creates incentive to enter into a large settlement.”

Ross and Netter suggest that, for ERISA litigation defendants, the dismissal stage is very significant, yet it is very unpredictable. This is because courts across the U.S. differ in their willingness to dismiss cases outright. Judges for the most part are also wary of seeing their dismissals appealed and overturned, so they more often allow repleading or even full discovery on claims that, in the opinion of defense attorneys, are wholly meritless.

Netter says judges appear particularly adverse to dismissing ERISA cases that allege not just imprudence by plan fiduciaries but actual disloyalty and/or self-dealing.

Looking away from the defined contribution plan side of the marketplace, Netter adds, there are numerous pension-focused lawsuits as well. “Most companies have frozen their legacy pension plans, but there is still a lot of money in those plans waiting to be distributed,” he explains. “For the most part, the issues raised in these cases have to do with the actuarial assumptions associated with disbursement.”

In simple terms, when an individual in a pension plan approaches retirement, he will have some choices in terms of taking the money. Those might be a lump sum, a single life annuity that will pay monthly for life, or a joint/surviver annuity that will make payments until the last spouse dies. Under ERISA, there are rules for converting amounts among these options, with the goal of ensuring the different payment options are “actuarially equivalent.” The two primary assumptions going into this analysis are, first, the interest rates today and projected into the future, and second, the mortality assumptions in terms of how long the payments are expected to last.

“In the last 50 years, the mortality tables have gotten longer, and so these lawsuits allege that the plan sponsors of pensions are purposefully and improperly using outdated mortality tables that improperly assume the participants will receive fewer annuity payments in the course of doing one of these conversions,” Netter explains. “If the plaintiffs begin to see some success in these sorts of lawsuits, the same sorts of theories can be directed against dozens or hundreds of pension plan sponsors.”

Compliance September 11, 2019

MIT Response to Epstein Donations Suggested as New Evidence in Lawsuit

The plaintiffs in the ERISA lawsuit say they intend to seek injunctive relief preventing MIT from hiring vendors for its retirement plan that are donors or accepting donations from existing vendors to the plan.

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The plaintiffs in an Employee Retirement Income Security Act (ERISA) lawsuit alleging mismanagement and disloyalty on the part of Massachusetts Institute of Technology (MIT) defined contribution retirement plan fiduciaries have requested leave to file new evidence of MIT President Rafael Reif’s unique knowledge related to the case.

The plaintiffs say that new evidence came to light after they filed an opposition to the defendants’ Motion in Limine 2 seeking to prevent the testimony of Reif and former chairman John Reed.

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According to the court document, in response to revelations that improper donations were received by MIT from the now-deceased financier Jeffrey Epstein, who was involved in a criminal investigation, Reif addressed what MIT’s policy for improper donations would be in the future. He also “asked MIT’s General Counsel to engage a prominent law firm to design and conduct [a thorough and independent investigation].”

The plaintiffs also noted that in an earlier letter to the MIT Community, Reif said “decisions about gifts are always subject to longstanding Institute processes and principles” and “despite following the processes that have served MIT well for many years, . . . we made a mistake of judgment.” They contend this new declaration reveals that Reif is uniquely responsible for the oversight of MIT employees and the investigation, compliance and enforcement of conflict of interest policies related to donations.

The plaintiffs are seeking to inquire about whether the policy changes Reif instructed the committee to investigate include donations to MIT from MIT Supplemental 401k Plan vendors paid by employees’ retirement assets. “His failure to initiate the same type of investigation related to Fidelity’s gifts and donations to MIT, both today and in the past, is something to which only Reif can testify,” the plaintiffs state.

They also note that two of Reif’s subordinates received gifts from Fidelity and instructed their subordinates to stop all actions related to the plan’s payment of fees to Fidelity. The plaintiffs point out that one of Reif’s subordinates did not disagree with an email stating that MIT expected large donations after retaining Fidelity as the plan’s service provider.

“These and other disturbing engagements with the Plan’s primary service provider, Fidelity, went uninvestigated and unchecked,” the plaintiffs state. They add that they intend to seek injunctive relief preventing MIT from hiring vendors for the plan that are donors (or foundations controlled by common ownership with the vendor) or accepting donations from existing vendors to the plan.

U.S. District Judge Nathaniel M. Gorton of the U.S. District Court for the District of Massachusetts last week moved forward most claims in the lawsuit, but granted summary judgment to the defendants for a claim alleging a prohibited transaction between MIT and Fidelity Investments.

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