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NATIONWIDE: An Introduction to USA - Nationwide

Joel Feldman
Chris K. Meyer
Anne E Rea
Sidley Austin LLP Logo
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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: $28 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 subject 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. Although a federal appeals court invalidated the Department’s fiduciary rule in March 2018, the Department has continued to appear in some cases by filing amicus briefs, usually in support of plaintiffs.

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

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

This continues to be the most active subject of large-dollar litigation. Plaintiffs have filed numerous lawsuits challenging the propriety of fees charged to participants in 401(k) plans. More recently, 403(b) plans, which are 401(k)-type plans that serve not-for-profit and other organizations, have been added to the mix. Companies that provide administrative services such as record-keeping may be paid both by the 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. 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 three years, roughly 20 lawsuits were filed against university 403(b) plans, alleging that those plans offered investment options with excessive fees and imprudent investments. The first of those cases proceeded to trial in 2018 and resulted in a defense verdict. In three other cases, courts granted motions to dismiss, while three others settled. In the wake of the trial verdict and the motion to dismiss rulings, multiple appeals are pending.

Plaintiffs also continue to file class actions against the fiduciaries of large 401(k) and those providing fiduciary advice to those plans. Plaintiffs in these cases generally argue that the fiduciaries 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. At least two cases allege that large 401(k) plans acted improperly by including hedge fund and private fund investments.

“Stock Drop” Cases 

Many publicly traded companies offer company stock as an investment option in their 401(k) plans. When a company’s stock price drops significantly, the plan fiduciaries sometimes become targets of class actions challenging the prudence of continuing to offer the stock as an investment option. The landscape for these sort of lawsuits changed in 2014, when the Supreme Court decided Fifth Third Bancorp v. Dudenhoeffer and altered the rules by which these cases are judged. Since then, defendants have won most of these cases at the motion-to-dismiss stage, as courts have rigorously applied the new criteria. But in late 2018, the Second Circuit reversed a decision involving an insider information claim, and that decision may breathe new life into this area. A number of stock drop cases have been filed subsequently that seek to copy the key allegations of the Second Circuit case.

Plaintiffs recently 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 that the stock was imprudent and 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. Three district courts have dismissed these cases and one other remains 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 due to appellate decisions and statutory changes, operational and disclosure claims continue. In late 2018, we saw a new development: four cases alleging that plans used outdated mortality tables in determining optional forms of payment. The Fourth Circuit also affirmed a significant trial court win involving a transfer of 401(k) assets to a defined benefit plan.

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 and Governmental 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. In 2017, the Supreme Court resolved a key issue in these cases, holding that a plan does not have to be established by a church to qualify for the church plan exemption. Plaintiffs have tried to circumvent the decision, but many cases have been dismissed or settled. In late 2018, plaintiffs filed a new variation, arguing that a public authority’s plan did not qualify as an exempt governmental plan.