by Timothy Kelly [OPINION] – The ERISA lawsuits landscape is littered with pitfalls and contradictions for fiduciaries; and in particular, Plan Sponsors. Reading through the litigation newsletter from prominent law firm, Proskauer one gets the sense that the aggressive law firms are creating quite minefield of potential liability. That is not to say that all suits are without merit, far from it; but it’s clear that with the “innovation” in legal claims, it’s getting to the point of being “creative litigation.” Short of claiming to be over-run with frivolous lawsuits, the dockets are beginning to show signs of questionable merit allegations.
Proskauer’s Neil V. Shah writes (bold emphasis mine):
In 2016, we saw a considerable uptick in the number and variety of excessive fee lawsuits commenced against plan fiduciaries of defined contribution plans. We begin the year by taking a look at these filings, many of which have advanced novel theories of imprudence that are not dependent on allegations of self-dealing.
For years, aggressive law firms have done most of the enforcement work for the government when it comes to ERISA (and DOL) compliance. In the absence of tort reform, there is no limit to what law firms and participants can allege. 2016 was living proof that allegations could even stretch the limitations of imagination. For plaintiff law firms, the holy grail of ERISA litigation will be to go beyond the issue and burden of proving self-dealing. Breaking down the barrier of proving self-dealing would likely create a tsunami of ERISA litigations. If plaintiffs could somehow avoid the burden of proving self-dealing in the determination of Breach of Fiduciary duty; or more specifically in the areas of: revenue-sharing, fees for actively-managed accounts, and the number of investment choices, the litigation landscape is likely to explode with new cases.
“At one point, courts had observed that self-interest is the lynchpin for nearly every claim charging breach of fiduciary duty in the ERISA context… Time will tell whether courts will allow them to proceed beyond the pleading stage”, says Shah.
There are however, some tips for plan sponsors that can provide an added measure of legal cover. Many legal experts cite that the courts weigh process heavily in determining fiduciary breach. Maintaining a prudent process may aide in defending against fiduciary breach allegations. Proskauer suggests the following:
First, plan fiduciaries should periodically review available alternatives to each of the funds in their investment lineups, and document any factors that support maintaining a fund over lower-costing alternatives. Case law is clear that plan fiduciaries may consider factors other than cost in selecting funds, but this case law is of little use if the plan’s consideration of these other factors is not adequately documented.
Second, plan fiduciaries should periodically evaluate whether there are any steps they can take to offer lower-cost share classes of existing investment options. As suggested in the university fee cases, plan fiduciaries should explore the prospects of negotiating waivers of minimum investment thresholds where their plan offers a variety of funds from the same investment provider (or at least document their attempts to do so). They also should consider whether they can lower their fee structure by removing duplicative funds having the same investment style and thereby concentrating more assets in the remaining alternatives.
Finally, plan fiduciaries should periodically monitor the revenue-sharing arrangement with the plan’s recordkeeper and consider whether a more advantageous revenue-sharing arrangement is available from other recordkeepers. It also is important that plan fiduciaries fully understand the extent to which (if at all) revenue sharing payments are being recaptured by the plan and how the recaptured payments are being used.
