ERISA Litigation

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With more and more retirement plan services moving online, a recent case arising in  the U.S. District Court for the Southern District of New York, Giannini v. Transamerica Retirement Solutions, LLC (“Giannini”),[1] highlights the importance of cybersecurity and anti-fraud considerations for plan fiduciaries and service providers alike. 

In Giannini, the plaintiff was a retirement plan participant who filed suit in a proposed class action against Transamerica Retirement Solutions, a third party administrator/recordkeeper, after the company notified him of a data breach exposing the plaintiff’s personally identifiable information (“PII”). The plaintiff alleged that the breach occurred because unauthorized parties were able to access PII due to a Transamerica system configuration change, which left sensitive information such as social security numbers and retirement fund contribution amounts exposed. The plaintiff also alleged this data breach affected over 11,000 retirement plan beneficiaries and caused spam emails, spam calls, fraudulent credit card and bank account inquiries, and fraudulent purchases made in his name. Continue Reading A Cautionary Tale for Plan Fiduciaries and Service Providers: Cybertheft, Fraud, and Potential Liability

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On January 21, 2021, the United States District Court for the Northern District of California granted a motion by the Intel Corporation Investment Policy Committee to dismiss all ERISA claims brought against it by two plan participants representing a class of participants. The plaintiffs alleged, among other things, that the Committee acted imprudently by including private equity, hedge funds and commodities in a custom target date investment option in Intel’s 401(k) plan. The case was Anderson v. Intel Corp. Inv. Policy Comm., Case No. 19-CV-04618-LHK.
Continue Reading Court Rejects Plaintiffs’ Claims that Private Equity is Imprudent for 401(k) Plan

Plan sponsors and fiduciaries may have spent 2020 scrambling to amend their plans and operating procedures to accommodate breaking COVID-19 guidance, but the Department of Labor’s (“DOL”) and federal courts’ wheels continued to turn, churning out decisions and guidance on a variety of ERISA issues—and plan sponsors and fiduciaries should take note. Included in recent DOL guidance are rules for reviewing and selecting retirement plan investments, voting proxies, and distributing retirement plan notices. Meanwhile, various federal appellate court decisions should lead fiduciaries to review summary plan descriptions (“SPDs”) and the inclusion of single-stock fund investment options in defined contribution plan lineups. The following checklist sets out 2020 developments for plan sponsors and fiduciaries to consider in the new year.
Continue Reading 2021 Plan Sponsor/Fiduciary Compliance Checklist

Ed. Note: On September 22, 2020, the Fourth Circuit denied Gannett’s petition for rehearing en banc.  On October 8, 2020, the Fifth Circuit denied Schweitzer’s petition for rehearing en banc.  We expect the defendants (in Gannett) and the plaintiffs (in Schweitzer) will petition the Supreme Court for certiorari within the coming weeks, and will update this post as new developments arise in the case.

The Fourth Circuit’s recent split decision in Quatrone v. Gannett Co., Inc., No. 19-1212 (4th Cir. Aug. 11, 2020) is sure to raise the blood pressure of sponsors and administrators of retirement plans with single stock funds.  Together with a recent Fifth Circuit decision in Schweitzer v. Inv. Comm. of Phillips 66 Sav. Plan, No. 18-cv-20379, 2020 WL 2611542 (5th Cir. May 22, 2020), the Gannett case highlights the dilemma of retirement plan sponsors and fiduciaries, who, as a result of a corporate transaction, inherit a plan investment fund consisting of a single class of stock that does not constitute an employer security for purposes of ERISA (i.e., a “single stock fund”).  Plan fiduciaries in these circumstances have been targeted in class actions brought by an aggressive plaintiffs’ bar both for liquidating a single stock fund too soon and for not liquidating a single stock fund soon enough.  While courts are still evaluating how to handle these single stock fund cases, a plan fiduciary’s potential exposure for continuing to maintain such a fund seems to turn, at least in part, on the manner in which ERISA’s duties of prudence and diversification apply to the single stock fund as a plan investment option.Continue Reading Appellate Court Split in Recent Single Stock Fund Litigation

The Tenth Circuit’s recent split decision in M. v. Premera Blue Cross, No. 18-4098 (July 24, 2020), poses a significant threat to the deferential standard of review typically applied to benefit plan claim determinations, and imposes a new burden on plan administrators.

More than 30 years ago, the Supreme Court held in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), that benefit denials are “reviewed under a de novo standard unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan.” Applying the Firestone doctrine, lower courts have consistently applied the substantially more deferential “arbitrary and capricious” or “abuse of discretion” standard of review to benefit denials when the plan at issue granted the plan administrator (or relevant fiduciary) discretionary authority consistent with the Firestone case.

The Tenth Circuit, in Premera, changes that standard.Continue Reading Tenth Circuit Decision Puts New Emphasis on Including Discretionary Authority Language in Summary Plan Descriptions

When an employee separates from employment with a severance payment, the employee will frequently agree to a broad release of claims against the employer. Special concerns arise when applying a general release to potential claims that arise under the Employee Retirement Income Security Act of 1974 (ERISA). Although participants cannot be forced to forfeit their vested pension benefits or the assets in their individual retirement plan accounts, there have been a spate of class action lawsuits in recent years alleging that retirement plan fiduciaries breached their duties under ERISA § 502(a)(2). When faced with a prior release agreement, ERISA plaintiffs often argue that participants cannot individually waive fiduciary breach claims because they are bringing them on behalf of the plan. The Seventh Circuit rejected that argument in Howell v. Motorola, Inc., 633 F.3d 552 (7th Cir. 2011), dismissing the plaintiff’s fiduciary breach claim in a stock drop action because he had knowingly and voluntarily executed a general release. Other courts, however, have held that individual releases do not bar ERISA fiduciary breach claims brought on behalf of the plan. See, e.g., In re Schering Plough Corp. ERISA Litig., 589 F.3d 585, 594 (3d Cir. 2009). While neither the D.C. Circuit nor the district court had to directly address this issue—the argument was not properly raised by the plaintiff—they both concluded in a victory for plan sponsors that the plaintiff’s prior release agreement barred her fiduciary duty claims under ERISA § 502(a)(2).
Continue Reading D.C. Circuit Holds That a Participant Who Signed a Release Could Not Assert ERISA Fiduciary Breach Claims on Behalf of Her Retirement Plan

Background:  On August 20, 2019, a Ninth Circuit panel in Dorman v. Schwab, No. 18-15281, reversed the district court’s denial of Schwab’s motion

to compel arbitration and held that Schwab could force the plaintiff to individually arbitrate his fiduciary duty claims challenging the administration of Schwab’s 401(k) plan.  In 2017, plaintiff Michael Dorman filed a putative class action in federal court alleging that Schwab had breached its fiduciary duties under ERISA by adding allegedly poorly performing in-house investment funds to its 401(k) plan investment lineup.  In 2015 – two years before the lawsuit was filed – Schwab had amended its 401(k) plan document to include an arbitration clause stating that “[a]ny claim, dispute, or breach arising out of or in any way related to the Plan” had to be resolved by individual, rather than class or collective, arbitration.  Based on this 2015 plan amendment, Schwab filed a motion in the district court to compel individual arbitration.  The district court denied the motion because it concluded that the plan’s arbitration provision was unenforceable with respect to the plaintiff’s fiduciary duty claims.Continue Reading Mandatory Arbitration: The Next Frontier for ERISA Retirement Plans?

In a case of first impression, a federal district court in the Southern District of Texas has ruled that a former parent company’s stock was not an “employer security” under section 407(d)(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).[1] As a result, the ERISA exemption from the duty to diversify and the duty of prudence (to the extent the latter requires diversification) were not available where a plan held former parent company stock in a legacy single-stock fund. Although in this case plaintiff participants’ claims were ultimately dismissed, the decision should be on the radar of fiduciaries of plans holding significant amounts of former employer securities.

As background, in 2012, Phillips 66 Company, Inc. (“Phillips 66”) spun off from ConocoPhillips Corporation (“ConocoPhillips”) and sponsored a new defined contribution plan with an employee stock ownership plan (“ESOP”) component, as had ConocoPhillips. In addition to newly issued Phillips 66 stock, however, Phillips 66’s new plan also held more than 25% of its assets in a frozen ConocoPhillips stock fund that was transferred from the old plan in connection with the Phillips 66 spinoff.

When the value of ConocoPhillips stock held by the Phillips 66 plan dropped, participants sued the plan’s investment committee and its members, along with the plan’s financial administrator, alleging imprudence and failure to diversify plan assets in violation of ERISA. In reply, defendants argued that ConocoPhillips stock was not subject to the duty to diversify, as those shares were “employer securities” when issued; ConocoPhillips was previously the employer of the participants. Therefore, defendants argued, ConocoPhillips stock remained exempt from the duty to diversify despite Phillips 66’s spin-off from the ConocoPhillips controlled group.

The court rejected this aspect of defendants’ argument, holding that stock does not indefinitely retain its character as “employer securities” for purposes of ERISA’s diversification and prudence requirements. Ultimately ruling in favor of defendants, the court held that ERISA’s diversification and prudence requirements were not violated because the plan’s investment lineup overall was diversified, public information on the risks of ConocoPhillips stock was reflected in its market price, and because the claims about procedural imprudence lacked factual support in the complaint’s allegations. The Schweitzer court also emphasized that participants were free to shift their ConocoPhillips holdings to other investment options under the plan.Continue Reading Court Holds That Shares of Former Parent Company Are No Longer “Employer Securities” After Spinoff

At the table in the kitchen, there were three bowls of porridge.  Goldilocks was hungry.  She tasted the porridge from the first bowl.

“This porridge is too hot!” she exclaimed.

So, she tasted the porridge from the second bowl.

“This porridge is too cold,” she said

So, she tasted the last bowl of porridge.

“Ahhh, this porridge is just right,” she said happily and she ate it all up.

Virtually all companies that offer participant-directed retirement plans permit their participants to elect an income-producing, low risk, liquid fund, such as a money market fund or a stable value fund. A stable value fund, as the name suggests, is a conservative investment option designed to provide stability, as opposed to growth.

Stable value funds have desirable features.  By combining bonds and an investment wrap, participants can achieve bond-like returns without the interest-rate volatility present in bond funds.  But those features do not eliminate the risk of losses, they just delay them. Indeed, a stable value fund with a longer duration is riskier than a fund with a shorter duration.

The stability-enhancing features of a stable value fund mean that, if a stable value fund invests in a bond that defaults, the value of the fund will not take an immediate tumble, but the loss will be amortized over a period of time.  Over the long run, the performance of a stable value fund approaches the performance of the underlying bond portfolio, minus the expenses of maintaining the wrap coverage and administering the fund.

There is, however, no typical stable value fund. According to How to Evaluate Stable Value Funds and Their Managers by Andrew Apostol, “[d]ue to the varying expectations of individual plan sponsors and the range of management techniques used by their stable value managers, there is not a single style or strategy that is common across all stable value funds.” For example, the plans for a Silicon Valley startup or a hedge fund will differ. Even if both aim for stability, the participants likely have different risk targets, which will lead to different markups across stable value funds.

Even though there is no typical stable value fund, there are three typical types of lawsuits filed against fiduciaries offering stable value funds. Fiduciaries have been sued for 1) offering a stable value fund that is too risky and 2) offering a stable value fund that is not risky enough. Only Goldilocks, it seems, could safely offer a stable value fund.

Considering the litigation risks for fiduciaries who do not set the stable value fund just right—a task that always looks easier in the hindsight of a lawsuit—a fiduciary may conclude the best option is not to offer a stable value fund at all. Yet fiduciaries have also been sued for 3) not offering a stable value fund. Let’s take a deeper dive into these three bears of a lawsuit.
Continue Reading Stable Value Funds: A Financial Investment with Risky Litigation Consequences