Trends in ERISA Litigation: Understand and Manage Your Risks Regarding 401(k) and Other Benefit Plans
Employers, plan sponsors and fiduciaries face an increasingly complex landscape when it comes to managing and administering ERISA plans. Litigation in connection with 401(k) and other welfare benefit plans has been, and continues to be, on the rise. A number of factors are likely contributing to this trend, including:
- Stock and bond market losses and fluctuations in 2008 and 2009, which have impacted the value of most ERISA retirement plans;
- Higher overall numbers of ERISA plan participants receiving retirement and health care benefits, which adds to the burden on ERISA plans;
- A weaker economy, which may drive employees to challenge conduct by employers, plan managers, fund managers and investment advisors and to litigate for benefits; and
- Increased complexity of ERISA plan operations due to government regulation.
To combat the recent increase in ERISA plan litigation, it is important to understand the types of claims that are most prevalent and lessons they may offer.
"Excessive Fee" Cases
These cases, filed by employees or classes of employees against employers and plan managers, typically allege that 401(k) plan funds are being placed in investment options that charge excessive fees to the plan, thereby reducing the value of the plan for its beneficiaries.
In a Seventh Circuit case from earlier this year, plan participants claimed excessive fees were charged in connection with mutual funds and other funds available through a brokerage option in the plan. The Seventh Circuit rejected the claim. The Court reasoned that the available plan investment options were also available to investors in the general public such that the expense ratios were set against the backdrop of market competition. Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009). The Court explained that "nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund . . ."
Although employers are currently winning many of these cases, the increased frequency of "excessive fee" cases underscores the additional scrutiny that employees and plaintiffs' attorneys are giving to the actions and inactions of ERISA plan fiduciaries in this area. It is important to remember that the employer maintaining a plan has ultimate responsibility to monitor investments or to hire a conflict free investment advisor to do so. To help deter litigation and bolster defenses in the event litigation cannot be avoided, plan fiduciaries should consider:
- Adopting and maintaining an Investment Policy Statement, which generally lists who selects funds, when, how and by whom the funds are monitored and replaced (when needed), and also generally sets forth the plan's policy regarding how many funds will be offered and fund types;
- Conducting periodic meetings (e.g., quarterly) to review plan administration issues and investment performance in accordance with the Investment Policy Statement;
- Asking all providers to provide a detailed description of all fee revenue, direct or indirect, from plan services and periodically implementing a competitive bid process.
- Reviewing and reconsidering all expenses paid by the plan on an annual or more frequent basis.
"Partial Termination" Cases
In these difficult economic times, many employers are reducing the size of their workforces. If an employer's retirement plan experiences a significant reduction (20% or more) in participants over a short period of time, the plan may be considered to have suffered a "partial termination" under ERISA. If a "partial termination" occurs, the plan benefits of the terminating participants must be 100% vested. In a defined benefit plan, this means additional required funding by the employer. In a defined contribution plan, the employer loses the ability to use forfeitures to offset employer contributions.
If an employer does not voluntarily initiate acceleration of vesting where a partial termination has occurred, participants may initiate class action litigation to force the employer to fully vest them. The IRS may also impose penalties or revoke the tax-favored status of the plan, resulting in taxation of plan earnings, disallowance of deductions for contributions, and current taxation of benefits to participants.
Employers planning workforce reductions should consult with counsel regarding whether the partial termination rules will apply and how to operate in accordance with these rules. Employers who are proactive in addressing these issues may save themselves time and money down the road.
"Benefit Interference" Cases
Plan participants may also claim that their employer has interfered with the vesting of benefits protected by ERISA. For example, retirement plan participants may claim that their employer prevented them from working a sufficient number of years to fully vest in the plan. These types of claims may arise in situations where an individual's employment is terminated, as well as in situations involving group terminations, such as workforce reductions or plant closings.
In one such case involving a plant closing, the Sixth Circuit recently held that the plaintiffs failed to demonstrate, as required, that reducing pension benefits was a motivating factor behind the decision. Crawford v. TRW Automotive U.S. LLC, 560 F.3d 607 (6th Cir. 2009). The Court reasoned that the plaintiffs failed to prove that their employer's stated reason for the plant closing—overcapacity in the plant—was not the real reason for the plant closing. According to the Court, "the facts of these cases will always be myriad and complicated, and plaintiffs must show that the employer, in the midst of all this, in some way targeted certain employee benefits or rights for interference."
While a business decision may be made outside of plan decision-making, fiduciaries should take care to understand how business decisions may affect ERISA plan participants. To help defend against benefit interference claims, plan fiduciaries should document the reasons for any business decisions that may also affect the vesting of ERISA plan participants.
"Stock Drop" Cases
There have been numerous "stock drop" cases filed in recent years in connection with the decline in value of employer stock held by ERISA plans. Plan participants generally claim in such cases that their employer should have removed company stock as an investment option, notified participants of bad news about company performance or prospects, or otherwise taken action to limit participants' losses in a company stock investment. Often the claims include allegations that company management intentionally misled participants with positive statements about the company's prospects for the future.
The Sixth and Seventh Circuits have adopted a presumption that plan fiduciaries act "prudently" and consistent with ERISA. These Circuits have set a high bar for plaintiffs, as the stock drop itself does not overcome that presumption. See, e.g., Kuper v. Iovenko, 66 F.3d 1447, 1458-59 (6th Cir. 1995) (80 percent decline in value was insufficient by itself to establish imprudence); Pugh v. Tribune Co., 521 F.3d 686, 702 (7th Cir. 2008); Nelson v. IPALCO Enters. Inc., 480 F.Supp.2d 1061, 1097 (S.D. Ind. 2007) (90 percent decline was insufficient by itself to establish imprudence), aff'd sub nom. Nelson v. Hodowal, 512 F.3d 347 (7th Cir. 2008). However, to ensure that fiduciary obligations are met in this arena, employers should carefully consider the composition of any committee that oversees plan investments. All plan documents should also be kept current and correct in listing and describing the investment options available in the plan.
The lawyers of Frost Brown Todd are experienced in representing employers, fiduciaries and insurance providers in ERISA litigation matters. If you have any questions about any of these issues or wish to discuss proactive planning steps to avoid litigation, please contact any of the following individuals:
Michael Bindner (IN), firstname.lastname@example.org
Doug Dennis (OH), email@example.com
Katherine Cook Morgan (OH), firstname.lastname@example.org
Alison Stemler (KY), email@example.com
or any other Frost Brown Todd attorneys in our ERISA and Employee Benefits Litigation Practice Group.