Defined contribution plan executives and their plans' attorneys are monitoring several pending court cases for guidance on two ongoing ERISA issues: fiduciary duties and fees.
Lawyers involved in specific cases and those watching from the sidelines say a mixture of key recent decisions and settlements plus some expected 2011 rulings will influence sponsors and providers on how they offer investment options and will provide more insight into how to avoid losing a court case based on the Employee Retirement Income Security Act.
“While all of the litigation hasn't been conclusive on the reasonableness of fees and expenses, the sponsors and regulators have sharpened their focus for greater transparency on the DC side,” said Marla Kreindler, a partner with Winston & Strawn LLP, Chicago. “Litigation is causing people to rethink best practices.”
Even without the prospect of a precedent-setting case, lawyers say a continuing series of ERISA suits alleging — among other things — breach of fiduciary duty, excessive fees and lack of prudence will have a greater impact on the defined contribution industry as a whole than on any individual plan sponsor.
“The litigation process is as important in changing behavior as the ultimate resolution of the cases,” said Lynn Sarko, managing partner at Keller Rohrback LLP, Seattle, whose firm has represented plaintiffs in ERISA cases against Enron Corp., WorldCom Inc. and Wal-Mart Stores Inc.
“Defendants prefer to settle,” said Marcia Wagner, managing director of The Wagner Law Group, Boston, referring to sponsors and service providers. “Pro-plaintiff case law could have profound effects. The industry doesn't want pensions to be the next tobacco or mesothelioma.”
Recent settlements of class-action suits include the November agreement by General Dynamics Corp. and its investment consultant, Fiduciary Asset Management LLC, to pay $15.5 million to settle charges by participants against both companies relating to two General Dynamics 401(k) plans, which had $7.3 billion in assets as of Dec. 31, 2009.
Participants alleged that General Dynamics breached fiduciary duty by, among other things, “causing and allowing” the plans to pay “excessive fees and expense.” They alleged the consultant, as a “functional” fiduciary to the plans, also breached its fiduciary duty several ways, including allowing the excessive fees.
In August, Caterpillar Inc. agreed to pay $16.5 million to settle the allegations, including charges that company violated its fiduciary duty by offering investment options with “excessive management and other fees” and concealed administration costs for four 401(k) plans with assets of $6.35 billion as of Sept. 30.
In both instances, company executives agreed to institute several changes, including improving communication with participants and expanding fee disclosure. Caterpillar also agreed to exclude “retail mutual funds as core investment options for a period of time,” according to the settlement agreement.