A Question of Liability

Alison Douglass: From my experience, plan sponsors have always taken their fiduciary role very seriously, and the folks I’ve worked with have tried to do what’s in the best interest of participants. So I would note that typically sponsors are not being sued because they had a bad process. In fact, participants typically don’t know what the process involved is when they file these complaints, and typically there is little if anything alleged in a complaint about the actual process. So the fact that a case gets filed generally says little about how a sponsor has been running its plan. In my experience working with sponsors, both that have been sued and those that have not been sued, they are generally very diligent and have used very good processes trying to get the best outcomes for their participants.

But the constant threat of litigation in the past 10 to 15 years has put more focus on process for many sponsors. In particular, I see more emphasis on making sure the good processes that sponsors already had been using were being reflected in a solid written record. That’s been a big takeaway for fiduciaries as a result of the litigation.

Douglass: We haven’t seen as much direct correlation between the pandemic and the litigation trends as were anticipated in early 2020. There was concern that pandemic-related market volatility would result in additional litigation focused on investment performance. But, in retrospect, while there were market losses early in the pandemic, the markets were more stable than expected early on, and that, combined with the fact that stock-drop-type litigation is hard to sustain under the legal standards, has meant we haven’t seen the uptick one might have originally expected.

Apart from stock drop cases, however, we continue to see many complaints that make allegations about investment performance that aren’t tied to any particular market conditions. These tend to be the same performance-related allegations we’ve now seen for 12, 13, 14 years. The plaintiff lawyers will focus on the particular investments in a plan, and the allegations tend to cherry-pick a particular period of underperformance for a fund, and/or compare a fund or a suite of funds with supposed alternatives in the market that performed better. But regardless of market conditions, courts have identified some real concerns with those kinds of comparisons, to the extent that they are comparing funds that don’t have the same strategy or the same underlying allocations. There are some real challenges to those types of comparisons.

So while we haven’t seen a lot of allegations unique to pandemic market conditions, we do see a continued trend of complaints that attempt to make comparisons between funds, from a performance perspective, that aren’t always the most apt comparisons. And I do believe we can expect this trend to continue.

Douglass: We’re not seeing litigation currently concerning plan terminations or participant classifications or even the handling of the CARES Act distributions. I’d note that when it comes to more significant class action litigation, the cases are economically viable for the plaintiffs’ bar only if they’re amenable to class treatment. So to the extent that there are issues that relate to only a subset of plan participants, those may not be as attractive to the plaintiffs’ bar to pursue.

Douglass: Advisers and consultants have not been a significant target of litigation, although there have been exceptions. There was a case against Banner Health in the last several years regarding its 401(k) plan. It went to trial last year against the sponsor. The plan’s adviser was also named a defendant in the case. The claims against the adviser survived a motion to dismiss, and at the summary judgment phase there was a split decision with respect to the adviser, where the court essentially held that the case could proceed against the adviser on claims related to certain aspects of the plan as to which the adviser had agreed in its contract to provide fiduciary advice, which included a defined set of investment funds. Claims against the adviser related to aspects of the plan as to which the adviser did not agree to provide fiduciary advice—a mutual fund window offered by the plan and the plan’s recordkeeping fees—were dismissed.

The takeaway for advisers from that case is the importance of clarity in the contract regarding the scope of the engagement. Ultimately, the adviser did settle that case, so we don’t have any lessons coming out of a trial decision, but it is a key lesson for advisers that it’s important to have that clarity in the contract and to act consistently with the contract, because the court did examine both the contract and the adviser’s conduct.

There have been other cases where advisers have been named, and this may be something we see more of. In at least one of the multiple employer plan cases filed this past year—the one against ADP—an adviser is named. This adviser has a motion to dismiss pending that essentially says the complaint provides no detail about the advice the adviser gave or why there’s any issue with the advice. But cases such as these often proceed to discovery on those issues.

Douglass: Some of the cases involving advisers in the past 10 years concerned advisers who provided 3(21) fiduciary advice but who were not the ultimate decisionmakers with respect to plan investments. To the extent that sponsors start to outsource decisionmaking to a 3(38) adviser, there’s really no reason why those folks would not be targeted in litigation just as the sponsors have been. I do think, as we see plans moving to outsourced fiduciary decisionmaking, we can expect to see more such litigation.

Douglass: There has been a concern in the industry that MEPs and newly available PEPs will become the target of litigation if for no other reason than there are some very large, multi-billion-dollar plans. That alone can attract the interest of the plaintiffs’ bar, and that concern has been confirmed in the past couple of years. We’re seeing a handful of cases involving multiple employer plans. Just in the last year, two cases were filed by Schlichter Bogard & Denton LLP, the firm in St. Louis that pioneered much of the 401(k) fee litigation. That firm has filed litigation against Pentegra and ADP concerning multiple employer plans, and I see no reason why that trend will abate given the assets that are at stake.

The nature of the allegations tends not to be terribly dissimilar to the suits we’ve been seeing concerning single employer plans. The complaints allege excessive fees with respect to plan administration or plan investments. Those are garden-variety allegations, so it remains to be seen how the unique features of MEPs may affect the litigation.

Douglass: I don’t think there will be any particularly unique issues for advisers in multiple employer plan cases. Many of the same concerns will be there in terms of what is the nature of the advice being provided, what is the fiduciary role? And there will always be scrutiny on whether there are any conflicts of interest at play in respect to the advice and whether the advice is in participants’ best interests.

Douglass: I’m always hesitant to advise folks to take away any lessons from settlements terms. There are lots of reasons that sponsors decide to settle a case, or decide to agree to certain restrictions in settlement agreements, and they are often unrelated to what the law requires.

I don’t like to look to settlements for lessons as to where the market is going with respect to recordkeeping fees. The lesson that has come out of the litigation is there are a number of different ways to pay for recordkeeping and plan administration, and even the use of asset-based fees remains common and can be an efficient way to fund plan administration.

While some sponsors have agreed to settlement terms that restrict their ability to use asset-based fees to pay for recordkeeping, I don’t think there is any particular fee structure that’s preferred. The practice of paying for recordkeeping through asset-based fees is common and efficient. Historically, there was some concern about transparency and whether sponsors understood their fee arrangements, but the fee disclosure rules in place for many years now have addressed that issue, and providers have developed good tools to help sponsors understand their fee arrangements. So when it comes to fees, what’s important is getting the disclosures and asking questions if you don’t understand. In my experience, providers are looking to make their arrangements transparent to sponsors and sponsors are doing their diligence.

Douglass: You also asked about limitations on data sharing. There have been some settlement provisions that have sought to restrict plan service providers from using participant information to communicate with participants, but these are just voluntary concessions by a handful of sponsors. There’s no legal basis to impose that kind of restriction, and courts to date have not done so outside the settlement context.