What’s Been Learned From ERISA Case Proceedings

During the 2022 PLANSPONSOR National Conference in Orlando, a panel of compliance experts offered a detailed analysis of the Employee Retirement Income Security Act litigation landscape.

The speakers included Daniel Aronowitz, managing principal of Euclid Fiduciary; Will Delany, principal at Groom Law Group; and Benjamin Grosz, partner at Ivins, Phillips & Barker. As the panel explained, ERISA excessive fee lawsuits keep coming—with no indication that the pace of cases will slow. So far, the pace of filings in 2022 has been extremely rapid, with some 25 to 30 cases filed in the first four months of the year.

Aronowitz said he expects to see anywhere from 75 to 100 cases filed by the end of 2022, with the exact number of cases depending on the specific type of action one defines as an ERISA excessive fee case. For Aronowitz, this category includes class actions that target investment underperformance of a defined contribution investment option, even if the case does not technically allege excess fees as one of its primary claims.

According to the panel, the Supreme Court’s recent ruling in Hughes v. Northwestern University has the potential to accelerate the filing of cases even further, though they also said the pace of litigation is already more or less maxed out. As Delany summarized, the Supreme Court ruling declares that a retirement plan fiduciary cannot simply put a large number of investments on its menu, some of which may or may not be prudent in terms of cost and/or performance, and thereby assume that the large set of choices insulates the plan sponsor from the duty to monitor and remove bad investments.

Technically, the Hughes case has been remanded to the 7th U.S. Circuit Court of Appeals, which could in turn either remand the case again to the district court or choose to rule another time without further input from the trial court. Settlement is also a possible outcome, according to the panel.

“My personal point of view is that the 7th Circuit is likely to kick this back down to the district court,” Delany said. “I would say it is an important ruling, for sure, but it is important to remember that it was a narrowly constructed decision. The Supreme Court only focused on the ‘inoculation theory,’ and decided plan sponsors could not be protected from allegations of imprudent investments simply because they offer a lot of choices.”

The panel noted that plaintiffs filing and arguing new ERISA cases are already frequently pointing to Hughes—but with only mixed success. For example, as Delany recalled, one set of plaintiffs arguing a case before the 6th U.S. Circuit Court of Appeals was rebuffed by a judge for suggesting the Hughes ruling created a fundamentally different environment for the leveling of ERISA excessive fee claims.

“My view is that, if you just had a fund that turned out to have poor performance, for example because its managers over-invested in a particular stock that then had an issue, I think Hughes won’t have a major impact on such claims and whether they can clear the motion to dismiss stage,” Grosz said. “However, there could be a stronger impact regarding pure excessive fee claims, such as those alleging the inappropriate use of more expensive retail share classes by highly scaled institutional investors. Even before Hughes, I would have found it hard to imagine how a committee responsible for, say, $1 billion in plan assets could prudently be offering retail share classes, when all they would have to do is ask their managers for institutional prices.”

Aronowitz said the case shows it is important for retirement plan fiduciaries to understand the outsize role motions to dismiss have played in ERISA cases. Simply put, Aronowitz suggested, too many motions to dismiss are being filed. He believes many plaintiffs would fare better in the litigation process if they actually allowed discovery to happen and for a fuller record to be established—especially in cases where a solid fiduciary process is, in fact, in place. Of course, if a plan fiduciary feels a fuller record may in fact put them in greater jeopardy, motions to dismiss may make more sense as a legal strategy.

“Rather than exhausting their resources with multiple motions to dismiss, which are likely to be viewed by the courts with skepticism anyway, it is better to let that full record be established,” he proposed.

Delany and Grosz said they have noticed an increasing frustration amongst employers and defense attorneys regarding the seemingly indiscriminate nature of ERISA lawsuits, and more plan sponsors appear willing to actually fight the litigation at the summary judgement or trial phase.

“In terms of making sure you have a good process and the best funds in place, advocate toward transparency the most that you can,” Delany said. “If you have revenue sharing in the plan, for example, get that fact into your meeting minutes and consider what you can do from a disclosure perspective to make it clear why this arrangement makes sense for your plan.”

Arnowitz said he appreciates that point, but his perspective is that revenue sharing should be eliminated entirely. 

“From the fiduciary insurance perspective, our view is that revenue sharing needs to be eliminated,” he said. “In a fair world, revenue sharing can make total sense in some cases, but we don’t live in a fair world when it comes to ERISA litigation, unfortunately. Anyone can be dragged into this litigation. That’s the problem. Any plan with more than $200 million in assets and which has revenue sharing or active management is in the crosshairs of the plaintiffs’ bar.”

The panel concluded by noting the importance of carefully fielding and tracking ERISA 104(b) requests, which allow plan participants to demand access to certain plan documents and information.

“Remember, your participants have the right to ask for plan documents, and they will do so occasionally,” Grosz said. “However, if you get one of these requests and it’s written on the letterhead of a prominent ERISA plaintiffs’ firm, you know what is coming. Sometimes there are situations where these requests don’t get escalated to the right people, and that causes additional problems. If you get one of these requests, you absolutely want to go to your counsel for help, because there are specific responses and strategies to utilize. For example, if you have a great process and documentation in place, you may in fact want to overshare information on purpose. The plaintiffs’ litigators may decide not to pursue—and invest their time and money into—a less promising case where there is strong evidence of a good fiduciary process. I’ve also heard of at least one instance where a complaint in a copycat, sloppy case, included information about the regular RFPs that a fiduciary had run for certain vendors—information that was contrary to allegations in the complaint that the fiduciary had failed to have a robust process and run RFPs. This is a situation in which deciding to share more could help let the complaint defeat itself.”