ERISA Litigation, Regulation Landscape Set for 2019

According to Jamie Fleckner, partner with Goodwin Procter, and Jodi Epstein, partner with Ivins Phillips & Barker, there is unlikely to be anything like a slowdown in the pace of Employee Retirement Income Security Act (ERISA) lawsuits filed against retirement plan sponsors and providers.

The pair of ERISA attorneys spoke during the “Best of PSNC 2018” event in Boston. While both agreed there has been a lot of important progress made in ERISA lawsuits this year, they pushed back on the sentiment that the litigation landscape is at an “inflection point.”

“Unfortunately, I don’t think we’re at an inflection point yet, because we are still right in the middle of this trend of expanding litigation,” Fleckner said. “There continues to be more and more litigation, and the signs are that this will continue to be the case, certainly through 2019 and likely beyond.”

Fleckner pointed out that it has only been about a year and a half since large U.S. universities became the target of ERISA lawsuits, making for a fresh crop of claims and defense strategies. As Fleckner pointed out, these cases are generally filed against 403(b) plans, but given the focus on ERISA, the lessons learned are applicable for 401(k)s and other defined contribution plans.

“At the same time, more plaintiffs’ lawyers are joining in,” Fleckner said. “It’s no longer just a small handful of high-powered litigation firms that are driving these lawsuits. A whole ecosystem of different types of litigators, claims and defendants has developed.”

According to Fleckner and Epstein, much of the litigation rush can be tied to the fact that ERISA’s key concepts of “prudence” and “loyalty” are not set in stone.

“The law is designed to give plan sponsors discretion, but by the same token, this also gives plaintiffs’ attorneys more latitude to file claims,” Fleckner said. “Ultimately, it’s left to judges to decide. Frankly, as a general matter, judges tend to know little about retirement plans or ERISA. These judges have diverse backgrounds, and that has led to diverse decisions.”

Turning to some specific cases, Fleckner said the recent appellate court decision in a lawsuit alleging self-dealing Wells Fargo should be instructive for plan sponsors and consultants. In that case, the 8th U.S. Circuit Court of Appeals confirmed a lower court’s dismissal of claims alleging Wells Fargo engaged in self-dealing and imprudent investing of its own 401(k) plan’s assets by offering its own proprietary target-date funds (TDFs) to participants. In short, the appellate court agreed that allegations that the bank breached its fiduciary duty simply by continuing to invest in its own TDFs when potentially better-performing funds were available at a lower cost are insufficient to plausibly allege a breach of fiduciary duty. Specifically, the 8th U.S. Circuit Court of Appeals said the plaintiff did not plead facts showing that the Wells Fargo TDFs were underperforming funds.

“This case shows the importance of motions to dismiss, from my perspective as a defense attorney,” Fleckner said. “It’s an important tool that plan sponsor defendants have to try and get a meritless case thrown out before going through an expensive discovery process. Unfortunately, because of judges’ lack of familiarity with these types of cases, most motions to dismiss in this area have been unsuccessful. Judges frequently decide that they can’t tell up front whether the fiduciary process was good or not without the discovery.”

Still, Fleckner said it is important that a circuit court has now affirmed a motion to dismiss of this type, as it sets a precedent for all the trial courts in that circuit.

“The trial judge said just showing that there was a cheaper alternative in hindsight is not enough to force discovery, and the circuit court agreed,” Fleckner said. “This is an important step, because district courts are bound to what the appellate court establishes. And disagreements among appellate courts could lead to the Supreme Court weighing in.”

Fleckner noted that the 9th Circuit has also recently affirmed dismissal in a similar case involving Chevron.

“These are hopeful signs, but we’re not necessarily at an inflection point yet,” Fleckner said. “What I can say is that judges are slowly getting a little more subtle in their understanding of ERISA issues, which may lead to fewer direct attacks on the use of proprietary funds and use of revenue sharing arrangements.”

One area where judges have had less sympathy, Fleckner said, is where plan sponsors are offering more expensive share classes of a given fund when cheaper share classes of the same fund are available. If the plan sponsor cannot point to added value being derived from the extra fee—say, defrayal of recordkeeping fees via revenue sharing—this is a real issue from the perspective of the courts.  

Another case plan sponsors and consultants can learn from is the recent litigation involving the University of Southern California (USC).

“USC’s first defense was to argue that arbitration agreements should be enforced in this case, rather than allowing for a full ERISA class action trial,” Fleckner said. “This argument went up to 9th Circuit and was dismissed, with the court saying these agreements cannot preclude ERISA litigation. A Supreme Court review may be possible here, in my estimation. Important to note, the problem USC had in the 9th Circuit was more about the terms of the arbitration agreement, rather than about the general merits of this defense approach. Here, the agreement did not seem to cover the fact that participants would sue on behalf of the plan for a harm to the plan. The arbitration agreements at USC only covered individual claims. So, plan sponsors may reconsider these agreements and consider having an arbitration agreement created by the plan itself, in plan documents. Of course, there are pros and cons to arbitration. There is no appellate review and it’s not always cheaper or less risky.”

Turning to the regulation front, Epstein encouraged plan sponsors and advisers to review recent actions having to do with automatic portability. She said regulators are “coming to realize that small-balance auto-rollover individual retirement accounts are languishing once they leave ERISA plans.” As such, providers are creating solutions to help connect participants with assets that may have been left behind.

“These solutions are just coming online, and they present opportunities and challenges for plan sponsors and their consultants,” Epstein said.

Next, Epstein urged attendees to review recently proposed IRS regulations pertaining to hardship withdrawal restrictions and requirements. As she explained, both the 2017 tax cuts and the 2018 Bipartisan Budget Act made changes to this area of the law, some of them potentially confusing for plan sponsors to address from a plan design perspective.

Finally, Epstein encouraged attendees to review a recent favorable IRS determination letter issued to an employer that directs an employer contribution into its 401(k) plan to recognize employees’ repaying of student loan debt.