Retirement plan sponsors should move carefully before adding mandatory arbitration clauses to their plan documents.
Plan sponsors could be tempted to add such clauses after a federal appeals court decision allowed the Charles Schwab Corp.'s 401(k) plan executives to compel arbitration in a fiduciary breach claim by a plan participant.
Arbitration may look like an attractive way of settling claims of fiduciary breaches and reducing ERISA liability, especially in defined contribution plans, and avoiding the cost and time involved in defending against such claims in court. But it might not be as good as it looks.
First, the appeals court ruling in favor of Schwab applies only in the 9th U.S. Circuit of Appeals, which covers only nine western states. Other district or appeals courts might decide otherwise, so any move to quickly adopt mandatory arbitration clauses might be unwise for companies outside those states.
Second, arbitrators aren't necessarily familiar with ERISA and investing, and might take an easy way out by finding some middle way of settling the issue. And even though they are supposed to be neutral, they also might subconsciously lean toward the plaintiff.
Third, except in rare cases, binding arbitration decisions cannot be appealed if they go against the plan sponsor. In the event of an adverse court decision, it can be appealed to a higher court.
Sponsors and their legal advisers should examine all of the implications of the 9th Circuit ruling and a move to add a binding arbitration clause to plan documents before deciding whether or not to do so.
Plans that move in haste might find themselves lamenting in leisure.
