No end in sight for business of ERISA litigation

ERISA litigation continues to flourish thanks to veteran plaintiffs' attorneys refining their strategies, newcomers entering the ERISA arena using traditional arguments and lawsuits being filed against smaller plans.

For the veteran plaintiffs' attorneys, their lawsuits "generally are sophisticated and appear to respond to roadblocks from decisions that have gone against plaintiffs," Thomas E. Clark Jr., a St. Louis-based partner and chief operating officer of Wagner Law Group who represents sponsors, wrote in an email. "Additionally, we see some new theories such as going after multiple employer plans or arguing plan participant data is a plan asset."

For the new crop of law firms filing suits, "these complaints appear to generally be cookie cutter and borrow from legal theories from earlier lawsuits," he wrote.

Sponsors' attorney Christopher Boran, a Chicago-based partner at Morgan Lewis & Bockius LLP, added that in some cases "we are seeing complaints that take the kitchen sink approach and typically borrow liberally from complaints filed in other cases to create a sort of Frankenstein complaint."

In contrast to these broad allegations, other complaints are becoming more targeted than "five or certainly 10 years ago," Mr. Boran wrote in an email. Examples include "focusing on fund performance, lower cost investment alternatives or other aspects of the plan's administration," he wrote.

Another source of increased litigation is plaintiffs' attorneys willingness to represent smaller clients. Although early ERISA cases focused on the largest corporate plans, lawsuits against DC plans with less than $750 million or even $500 million in assets are more common. And since 2016, private university 403(b) plans have been sued by participants whose attorneys have used some of the approaches found in 401(k) cases. Regardless of lawyers' experience or strategies, ERISA litigation has been active this year.

Recent defendants include Costco Wholesale Corp., Paychex Inc., KeyCorp, Land O' Lakes Inc., Estee Lauder Inc., Oshkosh Corp., Automatic Data Processing Inc., MedStar Health Inc., Astellas US LLC, Quest Diagnostics Inc., Universal Health Services Inc., Schneider Electric Holdings Inc., CDI Corp., and CommonSpirit Health.

And that's only since Memorial Day.

During the second quarter, Pensions & Investments tracked 43 ERISA actions ranging from new filings and settlements to dismissals and appeals, many of which dealt with fee allegations. There were 31 such legal events during the first quarter.

"The number of fee litigation cases is growing rapidly," Michael Weddell, Southfield, Mich.-based director of retirement for Willis Towers Watson PLC, said.

Fee fights can take many forms, but complaints "typically allege that there are less expensive funds available, there are lower-priced share classes of mutual funds available, and that the fiduciaries should have selected indexed or passive funds instead of active funds," he wrote.

Although fee complaints can be broad in their assertions, some lawsuits can be very narrow.

"We are seeing plenty of cases where the plan offers institutional share class mutual funds, but the complaint alleges that even lower cost institutional shares might have been obtained — even where the fee differential was as low as 1 or 2 basis points and may even have been rebated back to the plan," Mr. Boran wrote.

"We continue to see allegations that CITs or separate accounts should be used rather than mutual funds, but this particular theory has not gained traction because courts recognize the unique distinctions between these investment vehicles," he added.

Even collective investment trusts aren't spared from plaintiffs' complaints of high fees. In a June 23 lawsuit, for example, four former employees of Estee Lauder sued the company and its fiduciaries, alleging a CIT target-date fund in the 401(k) plan was too expensive and that fiduciaries should have looked for a cheaper and better-performing investment CIT option.

Mr. Boran, like others interviewed for this article, declined to comment on specific pending cases. He noted with irony that ERISA complaints arguing sponsors should seek cheaper investment options like CITs instead of mutual funds are now, in some cases, arguing that specific CITs are too expensive. "It creates a sense that no good deed goes unpunished."

Mr. Boran also wrote that lawsuits continue to allege that fiduciaries "must favor" passive investments vs. active. "These allegations are becoming more aggressive — not just targeting plans that offer only active or very few passive options but targeting plans that offer an equal mixture of both," he wrote.

Challenging sponsors' process for selecting passive or active investments "is a legitimate question: Are they getting their money's worth?" said Kai Richter, a partner in the Minneapolis law firm of Nichols Kaster PLLP and veteran attorney for plaintiffs in ERISA cases.

"It's absolutely fair to look at these comparisons," he said. "There is nothing in ERISA that says thou shalt have index funds. ERISA says thou shalt be prudent. If prudent means lower cost, so be it."

For cases that survive sponsors' motions to dismiss, the most common victory for plaintiffs is a settlement since pro-plaintiff verdicts are rare.

Since Memorial Day, settlements include those by Fidelity Investments ($28.5 million); Neuberger Berman Group LLC ($17 million); J.P. Morgan Chase & Co. ($9 million); Emory University ($16.75 million); McKinsey & Co. (amount not disclosed); and Banner Health ($2.3 million). Each was a variation of an excessive fee complaint covering allegations of favoring proprietary products, charging high administrative fees and/or retaining poor-performing investment options.

"Once you get past the dismissal stage and the summary judgment stage, the whole dynamics of ERISA litigation changes," said Andrew L. Oringer, a New York-based partner at Dechert LLP and co-chairman of the firm's ERISA and executive compensation group, which defends employers.

Settlement agreements are filled with comments from both sides noting the uncertainty of winning or the cost of continuing to pursue further litigation. Defense costs will rise due to the discovery process so employers must calculate how much and how long they want to fight. Plaintiffs' lawyers "have to invest time and effort because they don't want to waste time and money," Mr. Oringer said. Plaintiffs lawyers get a percentage of the settlement amounts or verdict amounts, which must be approved by courts.

"Settlements are catching peoples' attention," said Mr. Richter of Nichols Kaster. "It's causing them to engage in more thoughtful behavior whether they are a party or not."

Acknowledging that ERISA cases are "very expensive to litigate," Mr. Richter said cases are settled because "these claims have merit."

Noting that settlement agreements contain comments by defendants denying wrongdoing, Mr. Richter said: "In general, people don't pay money for nothing."

Settlements don't yield legal precedents. Still, sponsors can learn from their peers' settlement terms, but so can plaintiffs' lawyers. Among 403(b) plans, for example, Emory University's May 29 settlement contained an agreement that prohibited cross-selling by its record keepers of products and services outside the scope of its two plans. Emory was the fourth university to agree to such terms in a settlement since April 2019.

This provision "will likely result in plan sponsors scrutinizing the use of record-keeper data for these purposes, though such data was already under sufficient scrutiny at many plan sponsors," Michael A. Webb, a vice president at Cammack Retirement Group Inc., Wellesley, Mass., wrote in an email.

Nancy Ross, a Chicago-based based partner for Mayer Brown LLP, who represents sponsors, said law firms new to the ERISA stage are paying attention to settlements as well as to complaints filed by their peers, using the information to file more lawsuits. "It's like COVID," she said. "It's popping up everywhere."

Valerie Ge of the P&I staff contributed to this story.