PANC 2016: Lessons Learned From Litigation

Recent retirement plan lawsuits about investments, fees, administration and conflicts of interest create a vibrant curriculum of warnings for advisers and their clients to heed, according to experts leading a breakout session on Day 2 of the 2016 PLANADVISER National Conference.

Moderated by L. Rita Fiumara, senior vice president for investments and senior retirement plan consultant with UBS Institutional Retirement Group, the discussion featured two distinguished ERISA [Employee Retirement Income Security Act] attorneys and a consulting group director for a large plan-provider. All three were unanimous in their belief that the scope and intensity of retirement plan-focused litigation will only increase.

“Clearly it’s not welcome news from advisers’ or plan sponsors’ perspective,” noted Christine Cushman, director of the advanced consulting group for Nationwide Retirement Plans, “but, nonetheless, the wave of litigation is almost certain to grow.” Cushmann observed that she used to practice law but has since come to focus on the consulting and delivery side of the business.

Alison Douglas, a partner with Goodwin Procter, outlined the various types of suits she has lately seen emerge in the retirement plan space. There has been a string of suits accusing mutual fund and recordkeeping providers of inappropriate self-dealing, essentially favoring their own services at the expense of plan performance. Plan sponsors’ lack of formal requests for proposals (RFPs) have been cited more and more, as well.

“Other plans are accused of the classic ‘failure to monitor’ claim, still having retail share classes in mutual funds, etc.,” added Doug Hinson, partner with Alston & Bird on the firm’s lead ERISA litigation group. “Others are facing lawsuits over use of custom target-date funds [TDFs] and alternatives within the default portion of the investment menu. What’s the trend here and how can sponsors stay protected?”

The panelists all hammered one common theme: Plans are basically being sued for a failure to leverage size and sophistication to get a great deal. In other words, anything short of a great deal in any part of the retirement plan can apparently get you sued these days. And as Douglas warned, “Even that might not be enough. There is no silver bullet for preventing all potential challenges, especially given the exuberance of plaintiffs’ attorneys eyeing this space. They are attracted to deep pockets, such as those you find operating in the ERISA industry.” 

NEXT: A few lessons learned 

“Getting more specific, these days I am still asked all the time, should plan sponsors just move to an all-passive lineup?” Douglas said. “My answer is ‘no.’ An automatic move to any particular lineup due to potential litigation is not a great idea. The plaintiffs’ bar is making a combined attack on performance and price. The question is, has a court bought the theory that only passive is suitable for tax-qualified retirement plans? Again the answer is no. Courts have been skeptical on this broad claim against active, per se.”

Hinson agreed, noting that elements of active management have been targeted in ERISA suits. “But so have many other practices. It’s clearly not just about having passive funds. And in fact, if you, as a plan fiduciary, decide to do something like that simply out of fear of litigation, you’re already committing a fiduciary breach. That’s not the way you’re supposed to make decisions under ERISA.”

Asked to consider some of the big-ticket examples of litigation being settled in the ERISA industry, the expert panelists observed that the main way big-dollar damages have been decided upon and awarded—at least as far as the excessive fee suits are concerned—relates to the difference in performance between underperforming (and in the plaintiff’s view, inappropriately expensive) funds and funds that a prudent fiduciary should have chosen.

“So in this sense, the plaintiffs’ bar gets to use hindsight when pushing for monetary settlements,” Hinson concluded. “They will demand the plan sponsors reimburse the amount of this performance gap directly to the plan, and we have seen this exact process play out in many of the settlements reported on recently. In terms of non-monetary concessions, they will also ask for the fiduciaries of the plan to limit the per-participant recordkeeping expense. That’s been a big deal with plaintiffs’ attorneys recently. I will say, however, that for the plaintiffs’ bar, it’s really all about the dollars, at the end of the day.”