In our ongoing series on the Annual Regulatory Update, we’ve already covered updates from the IRS, explored legislative changes and key insights from the Department of Labor. Now, in this blog, we are focused on retirement plan lawsuits.
We continue to monitor trends in retirement plan litigation. The arguments have evolved over the past three to five years from straightforward claims of excessive fees to allegations of specific gaps or failures in the decision-making process of the fiduciary committee. Lawsuits also challenge ancillary services offered to participants, such as managed accounts. Any product or service offered to participants in the plan is a fiduciary decision, and committees must understand their responsibility not only to offer the service but also to monitor the service once it is part of the plan.
Managed Accounts
Recent lawsuits have targeted managed account services offered within the retirement plan. Typically, managed accounts are offered within a plan and then individual participants can elect to use the service. Managed account services include an additional fee paid only by the participants electing to use the service. While utilization may be low, adding the managed account service is a fiduciary decision, and a similar process must be followed for selection and monitoring as other plan services.
Two recent cases provide examples of plaintiffs targeting specific services offered in a plan.
Gosse v. Dover Corporation
The plaintiffs claim that the managed account service offered in the plan charged excessive fees and did not add measurable value to participant’s investment returns. The case suggests that the asset allocation recommendations from the managed account were not materially different from the asset allocations available through the plan’s target-date funds, which did not include an additional fee. The case was initially dismissed with an opportunity for plaintiffs to amend their complaint.
Hanigan v. Bechtel Engineering
This suit alleges that participants were harmed when Bechtel elected to default participants into the managed account service. This decision increased participants' costs without delivering any measurable benefit. Managed account services are typically offered in a plan and participants can elect to use the service and pay the additional fee. In this instance, participants did not opt into the service but, rather, were defaulted into the service. The plaintiffs argue that defaulters are
often the plan's least engaged participants and will not provide the additional data points to customize their portfolio.
If the only data point being utilized is age, the plaintiffs argue that the allocation will not be substantively different from the allocation received from a low-cost target-date fund.
These cases illustrate that plan fiduciaries need to review a proposed managed account service and understand if the recommended allocations provide additional value to participants. In addition, once added, plan fiduciaries must periodically monitor the service to ensure it is providing better outcomes than lower-cost options available in the plan.
Target Date Funds
Last year, 11 lawsuits were brought against companies offering Blackrock’s suite of target date funds. The allegations were the same in all cases, that the plan sponsors used cost as the only factor in selecting the funds. These cases attempted to point to several other funds that had performed better than the BlackRock product. Courts have been fairly consistent in not second-guessing the outcomes of a fiduciary decision but will review the process used to arrive at that decision. Most of these cases have already been dismissed because under performance alone is not sufficient to show a breach of fiduciary duty.
Another target-date focused case, Snyder v. UnitedHealth Group (UHG), follows the trend of providing more specific allegations in the complaint and focusing on the retirement committee decisionmaking process. The plaintiffs claimed that using the Wells Fargo Target Date Funds was a breach of fiduciary duty because the funds charged excessive fees and underperformed the benchmark and peers.
The complaint focuses on the committee's decisionmaking process in selecting and maintaining the Wells Fargo funds. UHG and Wells Fargo had business ties that allegedly were taken into consideration when selecting and monitoring the funds.
The $7 billion in retirement assets held in the target date funds made UHG the largest investor in those funds. In addition, Wells Fargo uses UHG as their health insurance provider. The case will go to trial as the judge found that ‘a reasonable trier of fact could easily find that Plaintiff Kim Snyder caught Defendant UHG with its hand in the cookie jar.”
Personally Identifiable Information (PII)
The case of Sherwood, et al v. Horizon Actuarial Services, LLC serves as a reminder that managing retirement plans involves the movement of a tremendous amount of PII. Retirement plan participants brought this class action suit after their PII was exposed as a result of a data breach. In this case, it was not the plan sponsors' data that was hacked; rather, it was the provider of administrator and actuarial support for retirement plans. HorizonActuarial experienced a data security breach where cybercriminals gained access to their network and file servers, containing plan participant names, addresses, social security numbers, enrollment data, and dates of birth. The defendants ultimately settled the case for $8.733 million.
Use of Forfeiture Lawsuits
A new development in ERISA lawsuits focuses on the use of forfeitures. Companies targeted in these lawsuits include Mattel, Clorox, Intel, Qualcomm, and HP, along with several similar cases. The plaintiffs allege a breach of fiduciary duty where plan forfeitures were used to reduce the company's plan contributions rather than being used to reduce plan expenses. In these plans, the participants pay plan expenses, so plaintiffs argue that a decision to use the funds to
reduce contributions is made in the best interest of the company, not the best interest of the participants. These cases are interesting because the use of forfeitures to offset employer contributions is permitted by IRS rules, so the cases challenge actions that are permissible. It appears the heart of this case will revolve around settlor and fiduciary decisions. The defendants will argue that decisions on how to use forfeitures are settlor decisions and can be made in the interest of the plan sponsor and that participants received all of the benefits and contributions they were entitled to under the plan documents.
The plaintiffs, on the other hand, claim this is a fiduciary decision and must be made in the best interests of plan participants, and reducing fees paid by participants is in their best interest.It will be interesting to see if the outcome of this decision helps clarify what is sometimes a blurry line between settlor and fiduciary functions.
Prohibited Transaction Circuit Split
In April 2024, a brief was submitted to the Supreme Court urging them to review a 2003 9th Circuit decision in AT&T Services, Inc. v. Bugielski. In this case, the appellate court reversed the lower court’s summary judgment decision that dismissed the case in favor of AT&T. This decision is contrary to similar cases in two other circuit courts possibly paving the path to the Supreme Court accepting the case to address inconsistencies in the lower courts. This case is important because if the plaintiffs are successful, it could significantly expand what is considered a prohibited transaction in retirement plans.
The case focuses on fees paid to the plan’s recordkeeper, Fidelity, from brokerage and managed account services that were added to the plan. These services were optional, and the fees were paid by participants using the services.
The plaintiffs alleged that AT&T failed to monitor compensation paid to Fidelity from its proprietary brokerage provider and a third-party advisor Financial Engines Advisors.
The lower court, ruling in favor of AT&T, determined that the plan sponsor had no obligation (and perhaps no way) to consider this arm’s length compensation and, therefore, did not constitute a prohibited transaction.
This determination was consistent with other similar cases. The 9th Circuit Court disagreed, determining that the arrangement served Fidelity’s interests at the expense of plan participants and was, therefore, a prohibited transaction. The determination that there was a prohibited transaction does not mean the plaintiffs will win the case. A prohibited transaction can still be legal if it meets a statutory exemption. To meet this exemption, the arrangement must be reasonable and necessary, and no more than reasonable compensation may be paid for the service. The case was remanded to the lower court to determine whether the arrangements meet that statutory exemption, which may not happen if the Supreme Court agrees to hear the case.
Our final blog in this series featuring this year's Regulatory Update will focus defined benefit retirement plans.
You can download a copy of our complete 2024 Regulatory Update here.
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