401(k) and 403(b) plan litigation: recent cases
TRANSCRIPT
401(k) and 403(b) Plan Litigation: Recent Cases,
Investment Offerings, Issues for Plan Sponsors
and FiduciariesCauses of Action, Defenses, Dismissals and Settlements, Best Practices for Avoiding and Managing Claims
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WEDNESDAY, APRIL 21, 2021
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Mark E. Bokert, Partner/Co-Chair, Davis & Gilbert, New York
Ada W. Dolph, Partner, Seyfarth Shaw, Chicago
Scott M. Lempert, Of Counsel, Cohen Milstein Sellers & Toll, Washington, D.C.
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FOR LIVE EVENT ONLYProgram Materials
401(k) and 403(b) Plan Litigation: Recent Cases, Investment Offerings, Issues for
Plan Sponsors and Fiduciaries
Scott M. Lempert
Cohen Milstein
Sellers & Toll
Wednesday, April 21, 2021
Causes of Action, Defenses, Dismissals and Settlements, Best Practices for
Avoiding and Managing Claims
Ada W. Dolph
Seyfarth Shaw, LLPMark E. Bokert
Davis & Gilbert
Overview and Agenda
01 Overview/Agenda
02 ERISA Fiduciary Duties
03 Types of Claims
04 401(k) Fee Litigation: The Early Years
05 Fee Litigation Filing Trends
06 Recent Litigation Developments
06 Issues Unique to 403(b) Plans
07 Notable Fee Litigation Settlements
08 Best Practices for Fiduciaries
09 Questions?
6
7
ERISA Fiduciary
Duties
ERISA Fiduciary Duties
• Fiduciary responsibilities include:
▪ Acting solely in the interest of plan participants and beneficiaries with the exclusive purpose of providing benefits to them (duty of undivided loyalty)
▪ Use plan assets for the exclusive purpose of paying plan benefits or defraying reasonable expenses of administering the plan (exclusive benefit rule)
▪ Carrying out duties with care, skill, prudence and diligence (prudent person rule)
- Gather information
- Analyze information
- Consult with advisors
- Make a well-reasoned decision
- Document, document, document
▪ Diversifying plan investments to minimize risk of large losses (diversification rule)
▪ Following plan documents (unless inconsistent with ERISA)
8
ERISA Prohibited Transactions
• Prohibited Transactions include any direct or indirect:
▪ sale or exchange, or leasing, of any property between a plan and a disqualified person
▪ lending of money or other extension of credit between a plan and a disqualified person
▪ furnishing of goods, services, or facilities between a plan and a disqualified person
▪ transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan
▪ act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his
own interest or for his own account
▪ receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from
any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
9
Types of Fees at Issue
• Fees are at the forefront of fiduciary litigation
▪ Different models for record-keeping fees:
- Revenue Sharing
- Per participant on a per capita basis ($50 per year)
- Per participant on a pro rata basis (50 bps per year)
▪ Fees for other service providers:
- Trustee
- Custodian
▪ Investment management fees:
- Expense ratios
▪ Usage fees:
- Plan loans
- Hardship withdrawals
- QDROs
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 10
Types of Claims
11
Types of Claims – Imprudence
Imprudent Record-Keeping Fees
• Revenue Sharing:
▪ Not itself an imprudent practice, but…..
- Must be monitored
- May lead to excessive compensation as plan assets grow
- May lead plan fiduciaries to forego other investments
- Uneven payment of fees among participants
• Per Participant Fees:
▪ Per participant fee excessive compared to peers
• Plan sponsors who fail to send their plan “out for bid”
12
Types of Claims - Imprudence
• Imprudent Investment Management Fees
▪ Expense ratios excessive compared to peers
▪ Lower cost share classes
▪ Commingled trusts and separate accounts
13
Types of Claims – Prohibited Transaction
• Another variation on an imprudent fee claim, and typically made alongside
that claim.
• Typically, the plaintiff alleges that the defendants engaged in prohibited
transactions by causing the Plan to use investments that generated
revenue for the recordkeeper.
• As discussed, recordkeepers in revenue sharing fee arrangements deduct
fees and expenses from plan assets.
• The plaintiff argues that the compensation is not “reasonable.”
• Therefore, the revenue sharing temporary transfer to the service provider
allegedly constituted the direct or indirect lending of money to the benefit
of party in interest.
14
Types of Claims: Disloyalty
• As noted, plan fiduciaries must discharge their duties with “an eye single to the interests of the participants and beneficiaries.” Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir. 1982).
• Plaintiffs often include disloyalty claims as a type of catch-all, similar toprohibited transactions.
• Typically, unless there are separate allegations of personal enrichment of a Plan fiduciary, will be dismissed.
• Most courts require separate allegations regarding a loyalty breach for these claims to proceed. See Romero v. Nokia, Inc., Case No. C 12-6260 PJH, 2013 WL 5692324, at *5 (N.D. Cal. Oct. 15, 2013); see also Loomis v. Exelon, 658 F.3d 667, 671 (7th Cir. 2011) (“no reason to think” that the defendant chose particular investment options “to enrich itself at participants’ expense”); In re McKesson HBOC Inc. ERISA Litig., 391 F. Supp. 2d 812, 834-35 (N.D. Cal. 2005) (noting that the “duty of loyalty requires fiduciaries to refrain from actual disloyal conduct, not simply the risk that such behavior will occur,” and dismissing disloyalty claim premised on such a risk).
15
Types of Claims – Inadequate Disclosure Claims
• The plaintiff typically alleges that the defendants breached their fiduciary
duties to ensure that plan participants are aware of their rights and
responsibilities regarding plan assets, fees, and expenses.
• Allege that the defendants failed to adequately disclose the nature of fees
and expenses, misrepresented the costs of administrative services, and
failed to adequately disclose the total compensation to the recordkeeper.
• Can put information contained in these disclosures at issue:
– Plan documents
– Financial quarterly and annual statements to participants
– 404a-5 fee disclosures
– If a change in fee structure, disclosures regarding that change
– Revenue sharing disclosures
16
Types of Claims – Participant Data
• Recent trend of ERISA (Employee Retirement Income Security Act) class
action lawsuits allege fiduciary breaches involving cross-selling
confidential participant personal data.
• Emerging ERISA litigation includes allegations of increased use of
confidential participant plan data by record keepers for cross-marketing
without participants’ knowledge or approval (i.e. plan participants contact
information, financial information, investment preferences, age, date of
retirement, etc.).
17
Types of Claims – Duty to Monitor
• Typically, a type of catch-all claim, found at the end of the Complaint.
• The plaintiff typically alleges that the Plan fiduciaries breached their
fiduciaries by not monitoring its appointees who:
– failed to remove underperforming and/or expensive investment options;
– failed to remove a service provider which received excessive fees.
18
19
ERISA Fee Litigation:
The Early Years
401(k) Fee Litigation: The Early Years 2006-2016
• 2006 – Initial wave of excessive fee cases filed
– Brought against very large companies with very large 401(k) plans
▪ Most over $1 billion in plan assets
– Plaintiffs claimed that plan fiduciaries:
- Offered retail class investment options instead of cheaper institutional versions of the same
funds, leading to excessive fees.
- Permitted administrative fees (including recordkeeping fees) that were too high (they were
often uncapped), to be collected through revenue sharing.
- Selected and held imprudent, poorly performing investment options for the plans
- These plan offerings were alleged to be retained by the fiduciaries long after it was prudent to do so.
20
401(k) Fee Litigation: The Early Years 2006-2016
• Focus on the number and types of plan investment options
• Defendants had early successes
– Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009)
▪ Deere’s plan: 23 Fidelity mutual funds, 2 investment funds managed by Fidelity Trust,
a fund of Deere stock and a brokerage window.
▪ Complaint alleged Fidelity Research, which advised the Fidelity mutual funds,
charged unreasonable and excessive fees and that Deere and Fidelity breached their
fiduciary duties by selecting the investment options with unreasonably high fees.
- District Court reviewed the Plan as a whole and found that all the funds offered could not
have had excessive expense ratios.
▪ 7th Cir agreed: the Plan “offered a sufficient mix of investments for their participants”
21
401(k) Fee Litigation: The Early Years 2006-2016
• Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009)
▪ Decision includes one the most often-quoted statements in this area: “The fact that it
is possible that some other funds might have had even lower ratios is beside the
point; nothing in ERISA requires every fiduciary to scour the market to find and offer
the cheapest possible fund”
22
401(k) Fee Litigation: The Early Years 2006-2016
• Braden v. Wal-Mart, 588 F.3d 585 (8th Cir. 2009)
– Lowered the bar for bringing 401(k) excessive fee cases – reversing dismissal.
– Plan provided > 10 retail mutual funds, one collective trust, a Wal-Mart fund,
and a stable value fund
▪ Alleged that Wal-Mart could have used the plan’s size to negotiate for identical funds
with lower fees (institutional funds).
▪ Alleged that payment of some of expense ratio (“revenue sharing”) to plan trustees
(presumably to defray recordkeeping and other expenses) violated ERISA’s
prohibited transaction provisions.
23
401(k) Fee Litigation: The Early Years 2006-2016
• Braden v. Wal-Mart, 588 F.3d 585 (8th Cir. 2009)
– 8th Cir.: plaintiffs had sufficiently pled that the Wal-Mart plan “includes a
relatively limited menu of funds which were selected by Wal-Mart executives
despite the ready availability of better options.”
– The court also found that allegations of revenue sharing paid to the trustee
sufficient to support a prohibited transaction claim. Discovery would have to be
undertaken to determine whether the payments were allowed under the PT
rules as “reasonable compensation”.
24
401(k) Fee Litigation: The Early Years 2006-2016
• Renfro v. Unisys Corp., 671 F.3d 314 (3d Cir. 2011)
– Plan offered 73 investment options: 67 Fidelity mutual funds, stable value fund, a
Unisys stock fund, and four commingled funds.
– Allegations: Plaintiffs challenged the general use of retail mutual funds and that the
mutual fund fees were excessive in relation to the value of services rendered
compared to other mutual funds and other available types of investment vehicles.
▪ Challenge to fees determined as percentage of total assets in the fund, claiming that
services necessary to service a mutual fund do not vary with the amount of assets under
management, so fees should have been calculated on a per-participant basis.
– Third Circuit agreed with Hecker and Braden analysis
▪ Upheld District Court dismissal due to the “reasonable mix and range of investment options
in the Unisys Plan, plaintiff’s factual allegations about Unisys’s conduct do not plausibly
support their claims.”
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 25
401(k) Fee Litigation: The Early Years 2006-2016
• Tibble v. Edison Int’l, 843 F.3d 1187 (9th Cir. 2016)
– Early case – first filed 2007
– Like other cases, alleged a failure to offer institutional share class options instead of
retail class funds.
▪ Plaintiffs alleged that Edison had sufficient plan assets to qualify for cheaper institutional
funds, and that these share classes should have been offered.
– Focused on the fiduciary duty to monitor investments in the Plan.
▪ Ultimately concluding that “regardless of when an investment was initially selected, a
fiduciary’s allegedly imprudent retention of an investment is an event that triggers a new
statute of limitations period.”
- Therefore liability for failure to adequately monitor and a retain an imprudent fund will attach during
ERISA’s limitation period regardless of when a targeted investment option is first selected.
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 26
401(k) Fee Litigation: Conflicts of Interest
▪ Tussey v. ABB, 850 F.3d 951 (8th Cir. 2017)
- Early case, first filed in 2006, that worked its way to a bench trial
- Fiduciaries’ decision to replace existing plan fund with Fidelity funds was a breach of the duty of
loyalty because it was “motivated in large part to benefit Fidelity Trust and ABB, not the Plan
participants.”
- Lesson: Where fiduciary’s loyalty is at issue, there is “no place for deference”.
- Fiduciary breach for failure to “diligently investigate Fidelity and monitor Plan recordkeeping fees”.
- Evaluated fiduciary conduct with respect to terms of Investment Policy Statement (IPS).
- Damages: 8th Cir. expressed support for “Bierwirth” damages analysis.
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 27
401(k) Fee Litigation: Conflicts of Interest
▪ Wildman v. American Century, 362 F. Supp. 3d 685 (W.D. 2019)
- 11 Day Bench Trial
- Plan limited to proprietary funds – just American Century funds.
- Plaintiffs alleged that Committee members, as employees of the company, were conflicted.
- Court found that mere fact that Committee members had competing duties insufficient evidence to show that
decisions were motivated by a desire to place the company’s interest over Plan participants.
- Not disloyal as a matter of law to offer only proprietary funds.
- Committee members made careful investigations of investment decisions:
- Received a “Fiduciary Toolkit” at start of committee work, including IPS
- Monitored independent merits of each fund in relation to funds from other asset management companies
- Gave appropriate consideration to adding passive options
- Monitored funds on a watch list
- Committee received comparison of fund performance and fees
- Received advice from 3rd party investment advisor
- Rejected Plaintiffs’ experts on fiduciary process and damages
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401(k) Fee Litigation: Conflicts of Interest
▪ Brotherston v. Putnam Inv., 907 F.3d 17 (1st Cir. 2018), cert. denied, 140 S.Ct. 911 (2020)
- Proprietary fund case – Putnam plan required its own funds in the plan.
- District Court: Committee did not
- Independently investigate Putnam funds before including them as investment options under the plan
- Independently monitor them once in the Plan lineup for underperformance (even when certain funds received a “fail” rating)
- But, District Court found that plaintiffs failed to prove loss
- First Cir: accepted plaintiffs’ expert testimony showing comparison of actual returns to the returns that would have been generated by a portfolio of benchmark funds or indexes that the plan could have offered.
- Loss Causation once plaintiff has proven loss in the wake of an imprudent investment decision, burden shifts to defendants
- First Circuit joins 4th, 5th and 8th Circuits: Once a fiduciary is shown to have breached his fiduciary duty and a loss is established, fiduciary bears the burden of proof on loss causation
- Supreme Court denied cert, preserving this burden shift for defendants to disprove they caused the loss.
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 29
Fee Litigation Filing Trends
30
Trends – Significant Increase in Case Filings
• Over 90 excessive fee lawsuits filed in 2020 (over 200 since 2015)
• Law firms representing plaintiffs have proliferated
• Medium-sized and small plans now targeted (as small as $4.5M)
• Two of three complaints survive motions to dismiss
31
Targeting Smaller Plans
• “Low-Hanging Fruit”
– Smaller plans do not always have dedicated professionals to vet funds and
perform due diligence.
• Common allegations : not using the lowest cost share classes of funds; not
offering enough index funds; offering underperforming funds or funds
affiliated with the plan's record-keeper; paying for record-keeping as a
percentage of assets under management rather than per participant;
and/or not submitting requests for proposal to multiple record-keepers.
32
Targeting Smaller Plans
• Torres v. Greystar Management Services, L.P., No. 19-00510 (W.D. Tex.)
– Less than $250 million in plan assets
– Alleged BOFD by saddling plan with underperforming investments and high fees, causing participants to overpay millions of dollars between 2013 and 2017.
▪ Fiduciary’s process of decision-making, monitoring and soliciting bids from investment funds was deficient – no passively managed fund options offered, leading to high admin fees.
▪ Every year between 2013 and 2017 – admin fees >90% of peer plan fees when calculated as cost per participant and percentage of total assets (for all but one year).
▪ Fees for Plan investment options up to 3x more expensive than available alternatives in same investment style.
– Filed in May 2019, Settled January of 2021.
• Forman v. TriHealth, Inc., No. 19-613 (S.D. Ohio)
– Less than $500 million in plan assets
▪ Similar to Greystar: failing to employ prudent and loyal process by not critically or objectively evaluating the cost and performance of the plan’s investments and fees when compared to other investment options.
▪ Every year between 2013 and 2017 – admin fees >90% of peer plan fees when calculated as cost per participant and percentage of total assets
▪ Fees for Plan investments excessive.
– Filed in July, 2019
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 33
Targeting Smaller Plans
• Other Smaller Plans Recently Subject To These Allegations Include:
– Kennedy v. Aegis Media Americas, No. 20-3624 (S.D.N.Y. Filed May 8, 2020) -- $540 million in plan assets
– Buescher v. Brenntag North America, Inc., No. 20-00147 (E.D. Pa. Filed Jan. 8, 2020) -- $440 million in plan assets
– Glasscock v. Serco, Inc., No. 20-00092 (E.D. Va. Filed Jan. 28, 2020) -- $335 million in plan assets
– Chiappa v. Cumulus Media, Inc., No. 20-847 (N.D. Ga. Filed Feb. 24, 2020) -- $200 million in plan assets
– Hay v. Gucci America, Inc., No. 17-07149 (D.N.J. Filed Sept. 15, 2017) – $95.5 million in plan assets (settled for $800k)
– Diaz v. BTG International, Inc., No. 19-1664 (E.D. Pa. Filed April 17, 2019) – 810 participants, $63 million in plan assets
– Savage v. Sutherland Global Services, Inc., No.19-06840 (W.D.N.Y. Filed Nov. 13, 2019) -- $52 million in plan assets
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 34
Recent Litigation Developments
35
Litigation Developments: Motions to Dismiss
• Different standards by circuit. As noted, two of three complaints are
surviving motions to dismiss.
• The Eighth Circuit (and certain other courts following it), have adopted a
less demanding standard, only requiring allegations that a large plan might
have been able to secure cheaper services based on its size.
• Compare Hecker v. Deere, 556 F.3d 575 (7th Cir. 2009) (No fiduciary
breach for excessive investment fees where plan offered twenty primary
funds with expense ratios between .07% and 1% and offered 2500 others
via a brokerage window) with Braden v. Wal-Mart Stores, Inc., 588 F.3d
585, 595–96 (8th Cir. 2009) (holding the plaintiff adequately stated a claim
for breach of fiduciary duty by alleging that the plan offered only retail
class shares, while it was large enough to offer less expensive share
classes).
36
Litigation Developments: Motions to Dismiss
• Divane v. Northwestern 953 F.3d 980 (7th Cir. 2020)
▪ Affirming dismissal of claims of excessive recordkeeping and investment fees.
▪ Plaintiffs (participants in two retirement plans – one with employer matching and one without) sued claiming that their plans charged excessive fees and offered investments that were too expensive.
▪ The plans offered:
- Target-date funds that automatically rebalance their portfolios to become more conservative as the funds reach their target dates;
- Five index funds with a pre-selected set of stocks that eliminate trading and selection costs;
- 26 actively managed funds
- A self-directed brokerage window through which the participant invests his or her plan assets.
▪ The Court held that recordkeeping fees ($54-$87 or $153-$213 annually depending on plan) were not excessive, that the plans were not required to search for a $35 per year recordkeeper and that use of multiple recordkeepers was acceptable
▪ Court rejected arguments that the Plan was required to offer or not offer certain types of investments.
37
Litigation Developments: Motions to Dismiss
• Another example of a more relaxed motion to dismiss standard found in the Third Circuit.
• Sweda v. University of Pennsylvania, 923 F.3d 320 (3d Cir. 2017)
▪ Reversing dismissal of claims of breach of fiduciary duty.
▪ Participants in the university’s 403(b) plan alleged that the plan breached its duties by:
- Paying excessive administrative fees, including:
- Paying increasing asset-based fees despite no increase in services
- Paying $3 million-$4 million more than similar plans for similar services
- Failing to solicit bids from service providers
- Failing to leverage plan size for lower fees
- Retaining high-cost investments with a history of underperformance
- Using retail shares when the same investment also offered lower cost institutional shares
- Offering duplicative investment options
▪ The Court held that the allegations were sufficient in light of the detailed comparisons between what the plan offered and alternative available options.
- The Court noted that the plaintiff “offered specific comparisons between returns on Plan investment options and readily available alternatives, as well as practices of similarly situated fiduciaries.” It also noted that while these were not direct allegations of mismanagement, they were sufficient to allow a reasonable inference of breach.
▪ Courts are more likely to permit claims to proceed with detailed, specific allegations.
▪ The case recently settled for approximately $13 million.
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Litigation Developments: Battle of Experts
• Cases continue to require extensive expert discovery, as each side retains
an expert to evaluate the reasonableness of the fees at issue.
• Typically involves motions to exclude experts as well, in that the bases for
the opinions provided are not always clear.
• Increasingly, allegedly comparable fees are included in the complaint in an
effort to defeat motions to dismiss.
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 39
Litigation Developments: Article III Standing
• Thole v. U.S. Bank N.A., 140 S. Ct. 1615 (2020)
• The U.S. Supreme Court affirmed dismissal of ERISA claims brought on behalf of participants in a defined benefit pension plan. The participants alleged financial mismanagement, but suffered no financial loss.
• The issue before the Court was: may the participants sue in federal court for monetary relief because of the alleged mismanagement? The relief demanded by the participants in their complaint was substantial — $750 million and $31 million in lawyer’s fees.
• Article III standing requires: (1) a concrete injury, (2) caused by the defendant, that is (3) redressable by the requested judicial relief.
• In a 5-4 decision, the majority reasoned that the plaintiffs “would still receive the exact same monthly benefit” even if they won in court, and thus had no concrete injury under the Constitution’s Article III that would allow for the lawsuit (and consequent expensive discovery and possible settlement). The majority did say plan participants, in another case, might be able to establish Article III standing if they plausibly allege “that the alleged mismanagement of the plan substantially increased the risk” that benefits would not be paid. The Court also emphasized that the plan at issue provided a defined benefit, and that a defined contribution plan participant alleging the same wrongdoing might attain Article III standing.
• Likely to make it more difficult for participants to bring individual or class actions for mere statutory violations that have not impacted benefits.
• Notably, state courts do not have concurrent jurisdiction over breach of fiduciary duty claims, so plaintiffs bringing fiduciary breach claims will have to meet this threshold to proceed.
40
Litigation Developments: Statute of Limitations
• Intel Corp. Investment Policy Committee v. Sulyma, 140 S. Ct. 768 (2020)
• Supreme Court held that plan participants must read plan disclosures to have the “actual knowledge” required to trigger ERISA’s shorter 3-year limitation period for breach of fiduciary duty claims.
• ERISA’s three-year statute of limitations is triggered when a plaintiff has “actual knowledge” of the alleged breach (29 U.S.C. § 1113(2)); however, without actual knowledge, a 6-year limitations period applies.
• The Court found that plan participants who have access to plan disclosures but do not read them cannot be said to have “actual knowledge ” of their contents.
• This interpretation of “actual knowledge” reduces protections conferred by proper disclosures on diligent fiduciaries, and will raise fact questions in many cases where plaintiffs had access to disclosures that clearly put them on notice of alleged fiduciary breaches.
41
Litigation Developments: Forum Selection Clauses
• In re Becker, No. 20-72805, – F.3d – (9th Cir. April 1, 2021)
• The Ninth Circuit considered whether the district court properly transferred a 401(k) plan lawsuit from the Northern District of California to the District of Minnesota (where the plan sponsor resides and the plan is administered) pursuant to the plan’s forum-selection clause.
• ERISA provides that lawsuits “‘may be brought’ where: (1) the plan is administered; (2) the breach took place; or (3) a defendant resides or may be found.” The Court held that the statute’s use of “may” indicates that any of these options is acceptable. (Indeed, the Court said, even an arbitration forum is permitted). Accordingly, it held that a plan clause mandating where a lawsuit may be commenced is permitted by the statute if the selected forum is one of those listed in the statute.
• The Court noted that a forum selection clause can support the important ERISA goal of uniform plan administration by having the same court interpreting the plan.
• Consistent with other Courts of Appeals to consider the issue.
42
Issues Unique to 403(b) Plans
43
Section 403(b)
• A 403(b) arrangement -- annuity contract purchased for:
– employees of public educational institutions
– employees of 501(c)(3) non-profit orgs
– a minister described in section 414(e)(5)(A) of the Code
• Premiums made to insurance company by employer and/or employee
– Premium payments allocated to employee account. Employee directs balance to
investment options.
– Contract terms allow for payment of benefits in lump sum or annuity.
– Despite contractual nature of 403(b) arrangement, if it is an employee benefit plan
established or maintained by an employer, ERISA fiduciary duties and PT provisions
apply (along with reporting and disclosure requirements).
▪ Governmental and Church Plans are not subject to ERISA, so 403(b) cases are typically filed
against non-profit institutions like private universities.
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 44
Comparing 401(k) and 403(b) Benefit Plans
• 401(k) and 403(b) plans are qualified tax-advantaged retirement plans offered by
employers to their employees.
• 401(k) plans are offered by for-profit companies to eligible employees who contribute pre
or post-tax money through payroll deduction.
• 403(b) plans are offered to employees of non-profit organizations and government.
• 403(b) plans are exempt from nondiscrimination testing, whereas 401(k) plans are not.
45
Section 403(b) Cases
• Same fiduciary duties as those imposed on 401(k) fiduciaries
• Generally, these Actions consist of three types of claims:
1. Excessive administrative fees
- More than one recordkeeper
- No competitive bidding
- Asset-based fees and revenue sharing instead of or in addition to
fixed-dollar fees (with some allegations of kick-backs)
- Failure to monitor increase in fees to recordkeepers
2. Excessive management fees and performance losses
- Duplicative investment options for each asset class, which
underperformed and charged higher fees than lower-cost share
classes of certain investments
-Active v. Passive investment options
3. Failure to monitor and evaluate appointees
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 46
Section 403(b) Cases
• Courts typically refuse to dismiss claims commonly alleged in 401(k) cases.
– Recordkeeper fees
– Fees charged by Plan’s investment options
▪ Examples:
- Cassell v. Vanderbilt Univ., 285 F.Supp.3d 1056, 1066 (M.D. Tenn. 2018)
- Short v. Brown Univ., 320 F.Supp.3d 363, 371 (D.R.I. 2018)
- Henderson v. Emory University, 252 F.Supp.3d 1344, 1349 (N.D. Ga. 2017)
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 47
Section 403(b) Cases
• Additional allegations idiosyncratic to 403(b) cases have not faired as well
– Fiduciary breach for offering too many investment options, resulting in participant
confusion.
▪ 403(b) plans may have different vendors that service the plans, leading to dozens of
investment options (often more than available under the typical 401(k) plan).
- Courts have rejected that this by itself constitutes fiduciary breach (but maintained improper share
class and excessive recordkeeping fee allegations):
- Divane v. Northwestern University, 953 F.3d 980 (7th Cir. 2020)
- Short v. Brown Univ., 320 F.Supp.3d 363, 369 (D.R.I. 2018)
- Vellali v. Yale Univ., 308 F.Supp.3d 673, 686-87 (D. Conn. 2018)
- Kelly v. Johns Hopkins Univ., 2017 WL 4310229 (D. Md. 2017)
- Henderson v. Emory Univ., 252 F. Supp. 3d 1344, 1350 (N.D. Ga. 2017)
- Sacerdote v. New York Univ., 2017 WL 3701482, at *11 (S.D.N.Y. Aug. 25, 2017)
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 48
Section 403(b) Cases
• Additional allegations idiosyncratic to 403(b) cases have not faired as well
– Imprudence of “lock in” or “bundling” arrangement.
- Sacerdote v. New York Univ., 2017 WL 3701482, at *7-8 (S.D.N.Y. Aug. 25, 2017)
- Claim dismissed because plan had dozens of options that were not “locked in”.
- Binding contract requiring NYU to use recordkeeping services, without more, is insufficient to withstand a MTD.
- Sweda v. Univ. of Pennsylvania, 2017 WL 4179752, at *7 (E.D. Pa. Sept. 21, 2017)
- “Locking in rates and plans is a common practice used across the business and personal world. Companies often offer better terms to induce customers to ‘lock in’ for a longer period.”
▪ But see
- Vellali v. Yale Univ., 308 F.Supp.3d 673, 684 (D. Conn. 2018)
- If bundling “stymied the defendants’ ability to remove investments and that Yale agreed to lock its employees into funds which Yale did not analyze,” this would be found to violate ERISA’s prudence requirement.
- Henderson v. Emory Univ., 252 F. Supp. 3d 1344, 1350 (N.D. Ga. 2017)
- Requiring defendants to demonstrate why the inclusion of multiple recordkeepers was prudent notwithstanding allegations that doing so increased the administrative costs of the plan.
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 49
Section 403(b) Cases
▪ Sacerdote v. New York Univ., 328 F. Supp. 3d 273 (S.D.N.Y. 2018)
- Eight Day Bench Trial – District Court heard testimony from Committee members and expert
witnesses on issue of procedural imprudence
- Prudent process does not require perfection.
- Despite finding “troubling” the “level of involvement and seriousness with which several Committee members
treated their fiduciary duty,” Court found that the Committee as a whole did not act imprudently.
- If Committee does the things it should to monitor the plan investments, its process will not be found to be
imprudent:
- Receiving and Reviewing investment advisor reports.
- Holding quarterly meetings in which performance is discussed.
- Asking questions of the investment advisor.
- Relying on IPS.
- Creating a “watch list” for poor performing funds.
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Notable Fee Litigation Settlements
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Sample of Settlements and Judgements pre-2020
Plan Sponsor Resolution YearABB, Inc. $55 million 2019
MIT $18.1 million 2019
Vanderbilt $14.5 million 2019
Johns Hopkins $14 million 2019
Duke $10.7 million 2019
MFS Investment Management
$6.9 million 2019
Brown University $3.5 million 2019
BB&T $24 million 2018
Citigroup $6.9 million 2018
American Airlines $22 million 2017
Northrop Grumman $16.8 million 2017
Edison $13.1 million (judgement) 2017
Mass Mutual $30.9 million 2016 2016
Nationwide $140 million 2015
Lockheed Martin $62 million 2015
Boeing $57 million 2015
Northern Trust $36 million 2015
Novant Health $32 million 2015
Ameriprise $27.5 million 2015
International Paper $30 million 2014
Cigna $35 million 2013
First Union $26 million 2001
Settlements in 2020 & 2021
Plan Sponsor Resolution
Insperity $39.8 million
McKinsey & Co. $39.5 million
SunTrust $29 million
Fidelity $28.5 million
Emory University $16.75 million
University of Pennsylvania $13 million
Putnam $12.5 million
Northrup Grumman $12.4 million
Huntington Bankshares $10.5 million
National Rural Electric Cooperative Association
$10 million
JP Morgan Chase $9 million
Safeway $8.5 million
Mutual of Omaha $6.7 million
Princeton University $5.8 million
Invesco $3.47 million
Teva Pharmaceuticals USA $2.55 million
Brenntag North America $2.3 million
Cornell $225,000
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Best Practices for
Fiduciaries
Best Practices for Fiduciaries
• Fiduciary Best Practices
▪ Obtain ERISA counsel with experience advising plan fiduciaries
▪ Establish a Plan Investment Committee
▪ Train Committee members
- As fiduciaries, committee members must be adequately trained to understand their fiduciary duties under ERISA. Among other things, training must include:
- Understanding how to execute responsibilities with the care, skill and diligence of a prudent person
- Understanding how to make decisions in the sole interest of participants and beneficiaries
- Understanding “prohibited transactions” under ERISA
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Best Practices for Fiduciaries▪ Select an Investment Advisor
- Selecting an investment advisor must be done with prudence
- Several candidates should be considered before selecting an investment advisor
- Each candidate’s expertise, experience and fees should be evaluated.
- An investment advisor should be independent of the Plan and other service providers.
▪ Create an Investment Policy Statement
- Identifies the Plan fiduciaries and defines their duties and responsibilities
- It also describes the Plan’s objectives and defines how Plan investments are selected, monitored, and evaluated
- The investment policy statement should provide guidance only
- The investment policy statement should be reviewed and updated annually
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Best Practices for Fiduciaries
▪ Create an Agenda. Agenda items may include:
- Market report
- Investment performance of plan funds
- Watch list
- Replace imprudent funds
- Evaluate plan fees
- Monitor expense ratios
- Revisit fee model
- Benchmark service provider fees
- Lower cost share classes
- Commingled trusts; separate accounts
- Put plan “out to bid”
- Legal update
- Your attorney should inform you about any new fiduciary cases that have been filed; understanding
recent allegations and taking action in response to them is best defense
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Best Practices for Fiduciaries
▪ Document Meetings and Actions
- Minutes of committee meetings should be kept by ERISA counsel
- All deliberations and decisions should be documented to establish evidence that Plan fiduciaries
followed prudent procedures
- Keeping adequate documentation is best evidence in a court case
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 58
Best Practices for Fiduciaries
• Fiduciary action steps to protect participant data and safeguard electronic
access:
– Be Educated. Safeguard confidential data. Mitigate risk of data breaches.
– Negotiate Cybersecurity protection in service providers’ contract.
– Monitor Service Providers.
▪ Determine if service provider(s) are cross-marketing participant data.
▪ Limit use of participant(s) data for non-plan products and services.
• Understand internal risks of transmitting data.
©2021 Seyfarth Shaw LLP. All rights reserved. Private and Confidential 59
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Questions?
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thank you
contact information
For more information please contact:
Mark E. BokertEmail: [email protected]: 212-468-4969
Ada W. Dolph
Email: [email protected]
Phone: 312-460-5977
Scott M. LempertEmail: [email protected]
Phone: 202-408-4600