A federal appeals court decision allowing The Charles Schwab Corp.'s 401(k) plan executives to compel arbitration in a fiduciary breach dispute will prompt more plan sponsors to examine this strategy to reduce their ERISA liability risks, attorneys and defined benefits consultants say.
"The implication that including arbitration clauses in plan documents may be a way to avoid ERISA claims is important," said George Sepsakos, a Washington-based principal at Groom Law Group. "It definitely got our clients' attention."
Although arbitration clauses in plan documents are rare, "I foresee more of this happening," because of the Schwab ruling, Mr. Sepsakos said.
"This is definitely an area that sponsors will explore," said Jana Steele, a Chicago-based senior vice president, defined contribution, for Callan LLC. "I don't expect them to go run out and add it tomorrow, but I expect they will talk to counsel."
The 9th U.S. Circuit Court of Appeals ruled Aug. 20 that an arbitration provision in the 401(k) plan docu-ment trumped efforts by a former plan participant to pursue his ERISA-based complaints in court.
In the case of Michael F. Dorman et al. vs. The Charles Schwab Corp. et al., Mr. Dorman sued in 2017, alleging plan executives had violated their fiduciary duties. He said the plan favored Schwab investment products that charged higher fees and performed worse than comparable funds from other providers.
A District Court judge ruled for Mr. Dorman in January 2018, rejecting Schwab's argument that its arbitration provision covered this dispute. However, a three-judge appellate panel reversed the decision, sending the case back to the lower court.
"This case will encourage more plan sponsors with the hope that other courts will apply this ruling," said Jordan Mamorsky, a New York-based associate for the Wagner Law Group. He noted that the appellate ruling applies only to the 9th Circuit, which covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington.