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Settlements offer lessons in breach suits

Lawyers using ERISA cases as 'free look' for wary 401(k) plan execs

Thomas Clark
Attorney Thomas E. Clark Jr. calls these cases life lessons for plan execs.

As sponsors and service providers continue settling ERISA fiduciary breach lawsuits, the rest of the defined contribution industry is taking careful notes.

“You tell clients that this is a free look,” said Thomas E. Clark Jr., of counsel to The Wagner Law Group, who uses examples of settlements when he talks to clients. “These are free life lessons from someone else's misery. Sometimes they listen; sometimes they don't.”

Some of the largest corporations — including International Paper Co., General Dynamics Corp., Kraft Foods, Cigna Corp., Wal-Mart Stores Inc. and Caterpillar Inc. — have settled Employee Retirement Income Security Act lawsuits in recent years.

So, too, have providers such as Nationwide Financial Services Inc. and ING U.S., now known as Voya Financial Inc. Fidelity Investments settled a case last year involving its own 401(k) plan.

Among various settlements, key issues have included fees, revenue sharing, retail vs. institutional shares, record keepers' proprietary investment options, and DC plan practices for searching and monitoring record keepers and investments.

ERISA attorneys say dollar awards usually are only part of the story, although December's $140 million settlement in Haddock et al vs. Nationwide Life Insurance Co. and Nationwide Financial Services is a definite attention-getter. In the settlement, awaiting a final OK from a federal district court judge, Nationwide has agreed, among other things, to disclose more information about new annuity products and mutual fund fees.

Most recently, Lockheed Martin Corp., Bethesda, Md., agreed on Feb. 20 to pay $62 million to participants in two 401(k) plans, who had alleged the company had charged excessive plan fees and imprudently managed a stable value fund, among other things.

Lockheed, which has $27.7 billion in defined contribution assets, agreed to use competitive bidding for record keepers. It also agreed to provide to the court fee information for its stable value and stock funds, as well as data on the use of money market instruments in the stable value fund and cash equivalents in its stock fund.

The settlement of Abbott et al vs. Lockheed Martin et al still requires approval by a federal district court judge.

Similar policies

Although defendants don't admit wrongdoing in settlements, ERISA attorneys say these agreements help peers see if their policies are similar to those cited in the settlements and how plaintiffs' lawyers prepare strategies.

Mr. Clark, who is based in St. Louis, said he discusses settlements as part of the context of the ERISA litigation environment. The greatest value to the rest of the industry, he added, lies in settlements' illustrating the procedural process that led to the lawsuits and their resolution.

“I tell them: Look at the cost. Look at the relief,” said Mr. Clark. “Here is the way they settled.”

Although high-profile and high-award cases capture more headlines, attorneys say settlements involving the Department of Labor can be the most instructive. “These agreements give you an idea of what's on the department's radar screen,” said Jennifer E. Eller, a principal in Groom Law Group, Washington.

As an example, she cited the February 2013 settlement with ING Life Insurance and Annuity Co., a unit of ING U.S. (now Voya Financial). The DOL had accused the company of failing to make timely disclosures and corrections of processing errors involving about 1,400 DC plans. The settlement called for the company to provide a more thorough explanation to clients about its policy and practice of disclosing transaction-processing errors; pay $5.25 million to participants due to its previous practices; and pay a civil penalty of $524,509.

The settlement was notable because “there was no DOL guidance before the settlement,” Ms. Eller said. “This gives you an idea of what the department is thinking.”

Another example is GreatBancTrust Co., Lisle, Ill. The DOL had sued GreatBanc, trustee for the employee stock ownership plan of Sierra Aluminum Co, Riverside, Calif. The DOL alleged that GreatBanc had allowed the ESOP to buy stock from Sierra's top executives and co-founders at above-market value. The June 2014 settlement required GreatBanc and its insurers to pay $4.77 million to the ESOP and $477,273 in civil penalties. It contained 10 pages of guidelines on fiduciary responsibilities regarding ESOPs.

“The settlement provided very substantial provisions on disclosure,” said James P. McElligott Jr., a Richmond, Va.-based partner at McGuireWoods LLP. “Lawyers will look at this to gauge the Department of Labor's approach.”

Sending a message

Like its using informal guidance and filing amicus briefs in ERISA lawsuits, a settlement is another way the DOL can express its views without issuing regulations.

“The department wants to send a message to fiduciaries,” Mr. McElligott said. “It's not a regulation, but it's a pretty potent statement. You can see what the department is looking for.” Watching what DOL says in these cases is a good way for plans and providers to reduce the risk of a lawsuit, he said.

Attorney James O. Fleckner pays “close attention” to settlements involving the DOL because they are “less idiosyncratic” than other ERISA cases. The DOL is “more interested in consistency of rules,” said Mr. Fleckner, a partner at Goodwin Procter LLP, Boston.

Mr. Fleckner discusses settlements with clients “as a part of a larger conversation” about fiduciary responsibilities. “Settlements shed light on litigation strategy,” he said. “You get a sense of how the settlement played out.”

Settlements can contain what ERISA lawyers and DC consultants often advocate as best practices. When he talks to clients, Boston-based attorney Stephen Rosenberg will cite lawsuits and settlement terms within the context of the litigation and regulation. These examples can illustrate how DC plan executives didn't act or didn't know what they needed to do.

“You have to get rid of "golf course' RFPs,” said Mr. Rosenberg, also of counsel to The Wagner Law Group, chiding plan executives for, in effect, choosing a golfing buddy's firm as their record keeper instead of making a detailed search.

The broad theme for learning from someone else's settlement is “the need to be more informed,” he said. “The issue is the procedure and process and how it gave rise to a settlement.” n

This article originally appeared in the February 23, 2015 print issue as, "Settlements offer lessons in breach suits".