NATIONWIDE: An Introduction to USA - Nationwide

Overview – ERISA Litigation 

ERISA litigation tends to come in two sizes: small and extra large. The smaller claims involve individual claims for health or retirement benefits. The larger claims involve challenges asserted on a plan-wide or even broader basis, usually using the class action device. These latter claims can pose a significant contingent liability to sponsors of large plans or the service providers or investment managers that serve them.

There are many reasons for the growth in ERISA class actions, but one of the biggest is the old maxim to “follow the dollar.” The Baby Boom generation is reaching retirement age, and the amount of money in American retirement accounts is staggering: $25 trillion in “total retirement assets,” according to the Investment Company Institute. Many of those assets are invested in ERISA plans, and the sheer size of the assets has made retirement plans a regular target of litigation.

The Supreme Court has also been active in hearing ERISA cases. In recent years, the Court has issued landmark opinions concerning church plans, “stock drop” cases, ERISA’s statute of limitations and the ongoing duty to monitor investments, preemption, and the remedies available under ERISA.

The Department of Labor, the agency with authority to enforce ERISA, has likewise taken a deep interest in ERISA litigation. In the last few months of the Obama administration, the Department of Labor promulgated a new rule about which entities qualify as a “fiduciary” under ERISA. That rule seemed poised to alter the litigation landscape, but in March 2018 a federal appeals court invalidated the rule. The rule would have created new obligations for entities that sell and market investments to ERISA plans as well as individual retirement accounts.

While the types of ERISA class actions are limited only by the level of creativity of the plaintiffs’ bar, the following are the most common.

401(k) and 403(b) Fees and Related Claims 

In recent years, this has been the most active subject of litigation. Plaintiffs have filed numerous lawsuits challenging the propriety of fees charged to participants in 401(k) plans. Companies that provide administrative services such as record-keeping may be paid both by the 401(k) plan sponsor and by “revenue sharing” from mutual fund companies in which the plans invest; the latter source of revenue has been the source of extensive litigation. And plaintiffs continue to find new theories to assert against service providers and plan fiduciaries beyond the revenue sharing context. Plaintiffs have asserted claims over separate account fees, the use of proprietary funds as investment options, fees charged for, and the use and performance of, stable value and money market funds, the use of managed account services, and investment options offered through insurance company general accounts. During the past two years, a wave of new lawsuits was filed against university 403(b) plans, alleging that those plans offered investment options with excessive fees and imprudent investments.

Plaintiffs also continue to file class actions against the fiduciaries of large 401(k) and 403(b) plans, and those providing fiduciary advice to those plans. Plaintiffs in these cases generally argue that the fiduciaries responsible for the plan breached duties under ERISA by, among other things, (1) failing to adequately disclose the sources and amounts of fees associated with the plan, (2) offering more expensive “retail” mutual funds instead of less expensive “institutional” funds, (3) entering into agreements that resulted in excessive fees, and (4) failing to evaluate whether the fees paid by plans are reasonable.

“Stock Drop” Cases 

Many publicly traded companies offer company stock as an investment option in their 401(k) plans. When a company files for bankruptcy or the stock price drops significantly, the plan fiduciaries sometimes become targets of class action lawsuits challenging the prudence of the decision to continue offering the stock as an investment option. The landscape for these sort of lawsuits changed in 2014, when the Supreme Court decided Fifth Third Bank v. Dudenhofer and altered the rules by which these cases are judged. Although these cases have had mixed success as courts have interpreted the Supreme Court’s decisions, the general trend has been in favor of defendants, and that trend has continued in 2017. Still, “stock drop” cases continue to be filed.

During the past year, plaintiffs have tried a new angle on stock drop cases, filing several lawsuits asserting that it was inappropriate for post-spin-off companies to retain the stock of their former parent company. These lawsuits allege not only that the stock was imprudent, but also that fiduciaries breached the duty of diversification by allowing the stock of the former parent to become too great a percentage of overall plan assets. District courts in Ohio and Missouri have dismissed these cases, but others remain pending.

Pension Plan Litigation 

Employers have also been targeted in class actions challenging the design and implementation of “defined benefit” pension plans. These claims generally fall into three categories: (1) claims that the design of the plans violates one or more technical ERISA requirements, (2) claims that the plans are not being operated in compliance with their terms, and (3) claims that employers’ disclosures of plan terms or plan amendments are misleading. While the number of design-based claims has decreased in recent years due to appellate decisions and statutory changes, we continue to see operational and disclosure claims.

Health, Welfare and Retiree Benefits 

Companies continue to be targets of class action lawsuits when they modify health and welfare plans. When a company seeks to terminate or change its health insurance or life insurance plans, it may be restricted by prior agreements or terms in plan documents. In addition, when a company tries to reduce or terminate retiree benefits, retirees may claim that the plan or communications issued years earlier entitle them to irrevocable, lifetime benefits. Circumstances like these have led to a steady stream of class actions. Separately, many cases challenge insurers’ policies to refuse coverage for various types of conditions and treatments.

Church Plan Litigation 

Numerous cases have challenged the status of plans offered by entities affiliated with churches. Although “church plans” are exempt from ERISA, these cases claim that some church-affiliated plans do not qualify for the exemption, and have not complied with ERISA. Some of these cases have settled and others remain pending. During 2017, the Supreme Court issued an opinion resolving a key legal issue in this context, holding that a plan does not have to be established by a church to qualify for the church plan exemption. In the remaining cases, though, plaintiffs have tried to circumvent the decision.