"Fee litigation," which challenges the fees and expenses borne by 401(k) plans, is making a run at becoming the next major wave of ERISA fiduciary litigation. For example, as discussed in the "News Items of Interest" section below, a financial provider, New York Life, has recently agreed to pay $14 million on ERISA fee claims related to its mutual funds. Moreover, in several recent rulings, many courts have permitted fee claims to go forward, at least through the preliminary stage of the case. An illustrative case is Charters v. John Hancock Life Ins. Co., 2007 WL 487407 (D. Mass. Dec. 21, 2007), which addressed what are known as "gatekeeper" claims brought against financial providers and their affiliates. These are claims based on the notion that financial providers or their affiliates are fiduciaries because they act as "gatekeepers" in screening the funds offered to the plan. Charters followed the current majority view in refusing to dismiss these claims at the motion to dismiss stage, reasoning that the provider’s reservation of authority to substitute mutual funds for those selected by the plan fiduciary was sufficient to establish fiduciary status for purposes of a motion to dismiss. Charters also held that the plan fiduciary had standing to aggregate claims on behalf of the trustees of other plans, although the court noted that it was not deciding whether plaintiffs will ultimately meet the class action requirements of Fed. R. Civ. P. 23.
Two recent rulings in Tussey v. ABB, Inc. also supported gatekeeper claims, and claims against plan fiduciaries. In the class ruling, Tussey v. ABB, Inc., 2007 WL 4289684 (W.D. Mo. Dec. 3, 2007), the court certified a class over a plethora of defense objections. One objection was that plaintiff had no constitutional standing, i.e., suffered no "injury in fact," for fees charged on funds in which plaintiff never invested. The court rejected this argument, substituting "the plan" for plaintiff to conclude the plan suffered an injury in fact if an investment option charged unreasonable fees. The court also rejected the notion that divergent interests among class members may defeat class certification, concluding that shared interests outweighed any divergence. Finally, the court read any affirmative defenses and reliance, causation and materiality elements out of the class certification analysis, reasoning that class typicality is determined based on defendant’s actions, not on the basis of individualized defenses and issues raised against particular class members.
In the merits ruling, Tussey v. ABB, Inc., 2008 WL 379666 (W.D. Mo. Feb. 11, 2008), the court let plaintiffs’ prudence claims go forward against both the financial provider, Fidelity, and the plan sponsor. Tussey stands in sharp contrast to Hecker v. Deere, 496 F. Supp. 2d 967 (W.D. Wis. 2007), which dismissed similar claims. Both Tussey and Hecker agreed that revenue sharing payments are not required to be disclosed to participants, reasoning that general notions of ERISA fiduciary duties should not be construed to require such disclosures when the current regulations and statute do not. From this point forward, however, the rulings diverged. Hecker concluded that the ERISA § 404(c), 29 U.S.C. § 1104(c), defense barred these claims based on the notion the participants knew the total fees charged for each investment option, and thus could adjust their investment strategy in relation to fees charged. Hecker also noted that the funds had to set their fees to attract investors in the general marketplace; thus, it was implausible to assume they were all excessive. In contrast, Tussey rejected applying the Section 404(c) defense at the motion to dismiss stage, questioning whether participants were the "cause" of any loss from excessive fees. On the merits, Tussey concluded plaintiffs had set forth sufficient facts suggesting that the fees were in excess of those charged similar plans. Hecker, on the other hand, concluded that the fees charged were at market rates, and thus had to be set low enough to attract investors. Finally, Tussey concluded that the recordkeeper may have been a fiduciary by playing a gatekeeping role in screening investment options offered to the plan fiduciary for its consideration. In contrast, Hecker concluded the same recordkeeper was not a fiduciary because the plan fiduciary selected the investments to be offered by the plan.
* * * * * * * * * *With the notable exception of Hecker, the above cases illustrate the all too common judicial reluctance to dismiss claims at the preliminary stage. Preliminary rulings do not equal judgments on the merits, however. For example, as litigators, we note that class procedural rules cannot subvert the substantive requirements of the law. It is thus questionable whether reliance, causation and Section 404(c) defenses should be read out of the law in cases where defendants establish that the fee disclosures complied with the requirements of Section 404(c), yet participants knowingly bypassed low fee funds to invest in higher fee funds. Participants who have made this selection also may have a real divergence of interest with plaintiffs who are seeking to cut off these higher fee investment options; likewise, participants who choose low fee funds may not want to end the subsidization of administrative expenses often provided by the higher fee funds. Finally, the claim that plan fiduciaries routinely loaded up their participants with nothing but overpriced investment options seems questionable; in addition to not making much sense (just why would they do this to their employees?), it ignores the fact that the market for plan providers and investment products is highly competitive, and any provider that gets out of line on cost or performance is fair game for its competitors.
Unfortunately, however, the judicial caution in dismissing lawsuits at a preliminary stage is begetting further lawsuits, as illustrated by the fact that more experienced ERISA plaintiffs’ counsel are investigating claims in this area and approximately 30 class action lawsuits have been filed to date. The U.S. Department of Labor has also weighed in on the appeal of the Hecker case, taking positions that would make dismissals at the preliminary stage difficult. In this environment, it is reasonable to assume there will be continued litigation, and that the safe practice is thus to work through and document the prudent processes followed in selecting and monitoring the plan providers and fund investment options offered.
* * * * * * * * * *News Items of Interest
n A federal court approved a $14 million settlement in an ERISA suit against New York Life Insurance Co. The suit was brought by employees who accused the company of breaching its fiduciary duties by paying excessive investment management fees and expenses on New York Life funds offered to the plan. The case is Mehling v. New York Life Insurance Co., No. 99 Civ. 5417 (E.D. Pa.)
n The U.S. Department of Labor filed an amicus brief in support of PlaintiffsAppellants in the appeal of Hecker v. Deere, No. 073605 (7th Cir.). The Department of Labor argued that the district court erred in applying the ERISA § 404(c) defense to the selection of investment funds. The Department of Labor also argued that the district court rulings were too broad in holding that: (i) there was no general ERISA fiduciary duty to disclose revenue sharing payments; and (ii) the plan documents excluded fiduciary status for the plan’s recordkeeper.
n The U.S. Supreme Court will consider whether the Fifth Circuit correctly ruled that the plan properly declined to treat a divorce decree as a waiver of the exspouse’s right to the plan funds, because the only exception to ERISA’s antialienation provision is a qualified domestic relations order, and a QDRO was not presented to the plan. The case is Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, No. 07636.
n In Noe v. PolyOne Corp., No. 075068, 2008 WL 723769 (6th Cir. Mar. 19, 2008), the Sixth Circuit held, consistent with its previous case law, that language in collective bargaining and related agreements that tied eligibility for retiree health benefits to eligibility for pension benefits exhibited an intent to vest the health benefits. In so holding, the court rejected the claim that the general durational clauses in the agreement were specific enough to preclude vesting in retiree medical benefits.
n On February 4, 2008, the Internal Revenue Service issued Revenue Ruling 20087, which provides guidance on the application of ERISA’s backloading rules for plans that have converted from a traditional defined benefit plan to a cash balance plan. The Ruling is designed specifically to address the potential backloading issues that can arise when plans use a "better of both" formula, since under such formulas a participant may accrue no incremental benefit for a period of time before the cash balance formula becomes the superior benefit. The Ruling resolves this issue by permitting plans to test for backloading under the new benefit formula without regard to the prior formula.
On March 21, 2008, the Internal Revenue Service published proposed regulations that would provide guidance relating to the application of section 4980F of the Code (ERISA §204(h)) to a plan amendment that is permitted to reduce benefits accrued before the plan amendment's applicable amendment date.
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