The ERISA Litigation Newsletter - January 2016

EDITOR'S OVERVIEW

Happy New Year! Because 401(k) plans play an increasingly prominent role as an employee's principal retirement investment vehicle, fiduciaries overseeing those plans face increased pressure to see them perform well. This month we take a look at issues surrounding the surge in ERISA litigation challenging the selection of mutual funds and like investments offered in 401(k) plans, and the fees associated with the recordkeeping and management of those investments.

As always, be sure to review this month's Rulings, Filings, and Settlements of Interest wherein we take a look at: the retroactive application of Windsor, tax relief to pre-data breach identity theft protections, fiduciary status in excessive fee cases, continued fall-out in retiree healthcare litigation after Tackett, and issues pertaining to constitutional standing.

VIEW FROM PROSKAUER: 401(K) FEE LITIGATION: PRACTICES TO MITIGATE FIDUCIARY RISK*

Robert Rachal, Lindsey Chopin, & Robert Sheppard**

Because 401(k) plans play an increasingly prominent role as an employee's principal retirement investment vehicle, fiduciaries overseeing those plans face increased pressure to see them perform well. This same pressure has led to steadily increasing Employee Retirement Income Security Act (ERISA)-based litigation challenging the selection of mutual funds and like investments offered in these plans, and the fees associated with recordkeeping and the management of funds' investments. Because of its dynamics (small individual losses but high litigation costs), most fee litigation is entrepreneurial, and offers the possibility of "incentive awards" to named plaintiffs many times greater than any claimed losses.

Further incentivizing litigation in the ERISA arena, some recent attorneys' fees awards may encourage the plaintiff's bar to take hard looks at plans to determine whether to bring such litigation. For example:

In December 2015, on remand from the Eighth Circuit, the court in Tussey v. ABB, Inc. awarded $11.6 million in attorneys' fees and expenses.1 In November 2015, both Novant Health and Boeing agreed to settle fee-related suits, pending court approval, for $32 million and $57 million respectively.2 In April 2015, in Haddock v. Nationwide Financial Services, Inc., the court approved a $140 million settlement that included attorneys' fees and expenses of more than $50 million.3 In July 2015, the parties in Krueger v. Ameriprise received final approval of a $27.5 million settlement with $9.2 million in attorneys' fees.4 These recent awards and settlements are likely to encourage more lawsuits; however, these cases can also provide valuable insights to employers and fiduciaries on defenses to these claims.

To preview, Tatum v. RJR Pension Investment Committee illustrates the typical fee-litigation risks and the importance of a prudent process, i.e., of procedural prudence. In Tatum, the court found the fiduciaries had not conducted a prudent process in deciding to eliminate Nabisco stock from the plan. As a result, it applied a "would have" standard, which requires a fiduciary to show that the decision made was not merely permissible (all that would be needed with a prudent process), but the best or compelled one.5

In Tibble v. Edison International, the Supreme Court recently made clear that ERISA imposes some duty to periodically monitor plan investments, even if the investment was initially selected outside the fiduciary six-year statute of limitations period.6

And in Tussey v. ABB, Inc.,7 although numerous claims were dismissed, the Eighth Circuit affirmed a determination that ABB violated ERISA by failing to consider the reasonableness of fees charged by its fund recordkeeper, finding that "ABB never calculated the dollar amount of the recordkeeping fees the Plan paid [. . .] via revenue sharing arrangements," even after an outside consulting firm told ABB that it was overpaying for recordkeeping fees. In determining the $13.4 million that the plan overpaid for recordkeeping costs, the district court credited plaintiffs' expert witness, who used fees paid by a similarly sized retirement plan for Texas employees as the comparator, and that this was in line with trends as to what were reasonable revenue-sharing earnings for other plans.8

Potential Practices to Mitigate Risk

The outcomes of these and other cases, and the incentives they create for potential plaintiffs, demonstrate the importance of properly managing and administering plans. By illustrating areas of potential exposure, these cases provide guidance for developing prudent fiduciary practices that can help lessen that exposure. With these decisions in mind, there are some general practices that all plan fiduciaries should consider adopting or strengthening—all with the critical caveat that the fiduciary process leading to, and implementing, these (and other) decisions needs to be well documented.

As cases like Tatum and Tussey teach, having a well-documented, prudent fiduciary process is "rule one" that can control the defense. Further, as part of general practices, the plan fiduciary with responsibility over plan investments should consider developing and following an investment policy statement.

The applicable plan fiduciaries should conduct periodic reviews of investments and...