Lessons from Litigation: Process Matters Most

The final day of the 2018 PLANSPONSOR National Conference (PSNC), in Washington, D.C., featured a panel of experienced Employee Retirement Income Security Act (ERISA) attorneys and fiduciary insurance experts—who all warned attendees about the increasing frequency of litigation in all segments of the retirement planning marketplace.   

The speakers included Emily Costin, partner at Alston and Bird; Jamie Fleckner, partner at Goodwin Procter; and new to the PSNC audience, Rhonda Prussack, senior vice president and head of fiduciary and employment practices liability, Berkshire Hathaway Specialty Insurance.

Asked flat out why there has been so much proliferation in retirement plan litigation, the panel agreed the trend has been a long time coming, though steam has clearly picked up in recent years thanks to a highly active plaintiffs’ bar. As Costin put it, the roots of current litigation trends go back to at least 2005 and the start of a new regulatory focus on fee and conflict of interest disclosures.

“Then came the financial crisis of 2008, which ushered in a wave of stock drop litigation,” she explained. “At this stage, those early stock drop cases have largely been litigated or settled and have faded as we get further away from 2008. In addition, the Supreme Court’s influential decision in Fifth-Third Bank vs. Dudenhoeffer has made it a lot more difficult for plaintiffs in stock drop cases to prove standing.”

As Fleckner, Costin and Prussack outlined, with stock drop cases fading to the background, the new hot topic for litigators has become self-dealing by providers and conflicts of interest in recordkeeping and investment management arrangements. All of the cases center on the deceptively simple question of whether a tax-qualified retirement plan is profiting the company (directly or indirectly) to the expense of participants. The attorneys and insurance expert noted that federal court judges have tended to allow more of these self-dealing type cases to move forward compared with the earlier stock drop wave, and plaintiffs have also had some success getting beyond the summary pleading and dismissal stage in cases focused on reasonableness of fees for recordkeepers.

“These cases are still very early on in the process,” Fleckner noted. “But they tend to have success when the fiduciary plan committees cannot answer some straightforward process questions. How often have the fees been negotiated? Who is minding the fees? Have they been pushed down as the plan grows? These are core questions in the current wave of litigation.”

After a question from the audience, the speakers agreed that it can be hard for small and mid-sized retirement plans to negotiate big cuts in their fees without sacrificing service quality. With that in mind, the more important matter for preventing and responding to litigation is to show that plan fiduciaries have done what they can to study, understand and push for lower fees across the board. The worst thing that can happen is for the plan committee to appear that it was either asleep at the wheel or consciously neglecting its duty to ensure plan participants pay only reasonable fees.

With this in mind, Costin pointed to the litigation unfolding against the 403(b) retirement plan of New York University as being particularly illustrative.

“The matter just went to trial so I would encourage plan fiduciaries to read up on that one, because there are crucial lessons to learn,” she explained. “The judge on the bench trial was very active and she seemed to be taken with the question of whether the individual committee members really understood the depth and scope of their responsibilities. Of course, we don’t know at this stage what her decision will be, but in my opinion she was clearly struck by how uninformed many of the top-level committee members seemed to be.”

Turning to the subject of fiduciary liability insurance, Prussack noted that, at the core, such insurance is designed to protect directors, officers and other individual fiduciaries in a broad variety of potential litigation matters.

“Simply put, your policy should cover everything that Emily and Jamie are talking about—most importantly it covers the defense and damages,” Prussack explained. “Assuming you have sufficient coverage is not enough. You must investigate your policies and the potential shortfalls in your coverage. We see many clients that choose to stack coverage from one or multiple providers, to ensure they have enough coverage.”

One counterintuitive tip Prussack shared was to not list individuals on the policy who are to be covered. Instead, having the broadest possible statement of coverage is generally best.

“This is because it is a functional, not nominal, test for determining whether you are a fiduciary,” she said. “In many of the cases we have seen, all the current and former members of plan committees are named as defendants. Also named are the members of the company’s boards of directors who have selected and approved the committee, and potentially many others. The chances that you will miss somebody if you attempt to name everyone in your policy is high.”

A related tip Prussack shared is that fiduciary insurance companies should not require listing of individual plans or trusts that are to be covered, “with certain necessary exceptions in the governmental or the multiemployer pension plan environment.”

“It’s the same idea at work,” she noted. “You want to make sure you’re not missing anything. It’s not just DC, DB and ESOP plans that need coverage. It should also touch on welfare plans, for example. The point is that you don’t want coverage limited to ERISA, either. Your policies should range across employee benefits laws and include coverage for ministerial mistakes as well—covering the day to day information sharing and plan management.”

Prussack said her firm, as the insurer, is asking for more detail than ever from plan fiduciaries in terms of learning about a potential clients’ ongoing management and monitoring process. Is it diligent? Is it documented? Is it robust? And just as important, is it actually being effectuated? Is it a stable and proven process?

Concluding the panel discussion, Fleckner shared an anecdote based on a recent conversation he had with a retired district court judge who now works as a mediator in these cases.

“He told me clearly that, as a mediator with power to help determine liability and settlements in these cases, he is most concerned with what the contemporaneous documents say about what the plan committee did at the time of the actions that are being questioned,” he explained. “The documents carry much more weight than testimony collected today from the committee members, for example. Witness testimony years down the road is interesting, but the deliberation documentation from back when the decisions were made really carries the most weight.”