401(k) and 403(b) Plan Litigation: Recent Cases

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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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


• 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


• 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


• 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


• 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


• 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.”



• 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.


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.



▪ 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



▪ 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.


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


• 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



• 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


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


• 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


• 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.


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.


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

tel:20-72805

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.


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



• 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)



• 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)



• 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.



▪ 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.


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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▪ 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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▪ 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



• 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.


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Questions?

61

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

Documents

401(k) and 403(b) Plan Litigation: Recent Cases