For defined contribution plan executives who believe arbitration clauses can reduce or eliminate the risk and expense of ERISA lawsuits, beware of the fine print.
The fine print shows up in different opinions by federal judges in different jurisdictions, leading to a lack of consistent case law regarding how sponsors can use their plans' arbitration clauses to defend against fiduciary breach lawsuits.
The fine print shows up in the arbitration agreements that, if not carefully devised, can lead to unintended consequences, unanticipated expenses and unpleasant rulings against the sponsors. And just because sponsors add arbitration clauses to their plan documents, that doesn't mean they are inoculated from lawsuits.
Sponsors "are not getting a uniform or unified answer" from federal courts, said Joseph J. Torres, a Chicago-based partner at Jenner & Block.
As a result of court rulings and the challenges of creating arbitration clauses that don't run afoul of ERISA or states' laws or legal precedent, the theoretical allure of arbitration to avoid an expensive ERISA court battle may be tempered by unclear reality. Mr. Torres said his clients are cautious not only because of conflicting legal rulings but also because their cost-benefit analyses indicate arbitration might not be worth the time and expense.
"There is a lot of uncertainty," he said. Although some clients have asked about arbitration clauses, Mr. Torres said he hasn't talked to a sponsor actively considering adding one in the last six to eight months. That client decided to wait, Mr. Torres said, adding that, anecdotally, he believes arbitration clauses in DC plans are uncommon.
"In my experience, most DC plans do not have arbitration clauses — but a growing minority do," said Carol I. Buckmann, founding partner of the New York law firm Cohen & Buckmann PC.