The ERISA Litigation Newsletter - January 2017

Editor's Overview

In 2016, we saw a considerable uptick in the number and variety of excessive fee lawsuits commenced against plan fiduciaries of defined contribution plans. We begin the year by taking a look at these filings, many of which have advanced novel theories of imprudence that are not dependent on allegations of self-dealing. The article also identifies affirmative steps that plan fiduciaries may take to prevent these types of claims from succeeding. In the Rulings, Filings, and Settlements of Interest section, we review court decisions on retiree benefits and the EEOC final rules on employee wellness programs.

Fee Litigation Update: Moving Beyond Allegations of Self-Dealing*

By Neil V. Shah

Over the past year, there has been a noticeable increase in the number and variety of excessive fee lawsuits commenced against plan fiduciaries of defined contribution plans. In addition to lawsuits challenging the use of affiliated investment funds, plan participants have advanced several novel theories of imprudence that are not dependent on allegations of self-dealing. First, several lawsuits challenge the prudence of actively managemd funds as investment options and argue that the fees charged by such funds are not justified by performance that is comparable to lower cost passively managed funds. Second, plan participants, in over one dozen lawsuits, filed against colleges and universities, argue that: (i) the availability of too many investment options prevented them from investing in lower-cost funds and share classes; and (ii) plan fiduciaries failed to negotiate waivers of minimum investment requirements with fund providers that would have allowed participants to invest in the same funds for lower fees. Third, several lawsuits challenge the failure of plan fiduciaries to monitor revenue sharing payments by mutual fund providers to plan recordkeepers as a form of excessive compensation.

In this article, we review the alleged bases for these lawsuits and, in particular, the theories by which plan participants seek to satisfy the standards for pleading a viable fiduciary breach claim without the benefit of allegations of self-dealing. We conclude with affirmative steps that plan fiduciaries may take to prevent these types of claims from succeeding.

Background

Since 2009, most courts have used the twin guideposts of Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009) and Braden v. Wal-Mart Stores, 588 F.3d 585 (8th Cir. 2009), to distinguish between claims that are sufficient to infer that plan fiduciaries engaged in an imprudent process in selecting plan investments, and that may therefore proceed to discovery, and those that are not. Several courts have acknowledged that one of the determinative factors is some allegation of self-dealing by plan fiduciaries, such as the use of a fund managed by an affiliated company.

Absent meritorious allegations of self-dealing, existing case law suggests a tough road ahead for claims that allege nothing more than a failure to charge the lowest available fees. In recent years, courts have reiterated that "nothing in ERISA requires [a] fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems." Hecker v. Deere & Co., 556 F.3d 575, 586 (7th Cir. 2009). They have emphasized the importance of "offer[ing] participants meaningful choices about how to invest their retirement savings," which includes evaluating "the range of investment options and the characteristics of those included options - including the risk profiles, investment strategies, and associated fees." Renfro v. Unisys Corp., 671 F.3d 314, 327 (3d Cir. 2011).

By contrast, excessive fee claims coupled with allegations of self-dealing have tended to be more successful. For instance, in Cryer v. Franklin Templeton Resources, Inc., No. C-16-4265, slip op. (N.D. Cal. Jan. 17, 2017), the court denied defendants' motion to dismiss and concluded that plaintiffs plausibly alleged that the proprietary index funds offered by the plan, which paid management fees to the plan sponsor's affiliates, charged excessive fees relative to comparable lower-cost alternatives.

Recently filed complaints reflect efforts on the part of the plaintiff's bar to pursue claims for relief...