ERISA’s language can be difficult to understand, which has led to complex litigation over the interpretation of the act’s terms. Often, claimants ask the court to decide whether a specific person is owed benefits. For example, a deceased participant’s former spouse might still be named as a beneficiary for a 401(k) account even though the couple was divorced by the time of the participant’s death. Is the former spouse still entitled to access those funds? Or, perhaps a claimant married the participant after he retired and started receiving pension benefits. Is the spouse entitled to receive survivor benefits when the participant dies? The outcomes in these cases depend on the facts and circumstances.
Some claims, however, are asserted as class actions and the outcomes may affect hundreds or thousands of participants. Questions about fiduciary duties, the scope of the church-plan exemption and mismanagement of retirement plan funds have been in the spotlight over the last few years. Here are some recent cases and issues that garnered significant attention in the sphere of ERISA litigation.
Continuing Fiduciary Duty
A benefit plan fiduciary’s main responsibility is to act prudently.[1] Decisions must be made solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying reasonable expenses for plan administration.[2] The extent of a fiduciary’s responsibilities under a benefit plan has been a source of ERISA litigation. It is clear that a fiduciary for a retirement benefit plan must make prudent investment decisions, but what responsibility does a fiduciary have when it comes to monitoring those investments, deciding whether to sell plan assets or making other changes to the plan’s portfolio?
In Tibble v. Edison International,[3] a central question presented to the Supreme Court was whether the fiduciaries of a retirement plan had a continuing duty of prudence after investments were made. The plan participants argued that, even if the investments were prudent when they were first made, fiduciaries must periodically monitor investments and remove imprudent ones.[4] Specifically, the participants argued that the fiduciaries violated their duty to act prudently by offering higher-priced mutual funds as plan investments when nearly identical lower-priced funds were available.[5]
Some of the plan’s investments were made more than six years before the complaint was filed, so the fiduciaries claimed that the lawsuit was untimely for those funds, because there is a six-year statute of limitations on ERISA fiduciary breach claims.[6] The participants argued that the fiduciaries had a continuing duty to monitor investments, which carried into the limitations period. The Supreme Court agreed.
The Court said that fiduciaries must consider investments at regular intervals, not just when a change in circumstances prompts a review.[7] The court referred to ERISA’s language stating that fiduciaries must discharge their responsibilities “with the care, skill, prudence, and diligence” that a prudent person “acting in a like capacity and familiar with such matters” would use.[8]
“Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones,” Justice Stephen Breyer wrote for the court.[9] “This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”[10]
Fiduciary Duties for Employee Stock Ownership Plans
Fiduciary issues for employee stock ownership plans have also been highly litigated in recent years. An employee stock ownership plan is a type of retirement plan through which an employer contributes its own stock to the plan—or contributes cash to buy its stock.[11] Each employee has an individual account and the shares of the company vest over time. When employees retire or otherwise leave the company, they can sell their vested shares on the market or back to the company.
What happens if the employer’s stock drops in value or becomes excessively risky? In so called ERISA stock-drop cases, participants contend that fiduciaries with information about the diminishing value of company stock failed to act prudently.
In Fifth Third Bancorp v. Dudenhoeffer,[12] participants in an employee stock ownership plan alleged that their employer and its officers who were plan fiduciaries breached their duty of prudence under ERISA by continuing to offer company stock after it had become imprudent to do so. The participants claimed that the plan fiduciaries should have known—based on publicly available information and inside information—that the company’s stock was overpriced. The company had “switched from being a conservative lender to a subprime lender,” and had “either failed to disclose the resulting damage to the company and its stock or provided misleading disclosures,” according to the participants’ complaint.[13]
The district court dismissed the case, finding that the plan fiduciaries were entitled to a presumption of prudence with regard to decisions made about investing in employer stock.[14] The court said that the employees failed to show that the fiduciaries abused their discretion, and therefore, the complaint didn’t overcome the presumption of prudence.
The case ultimately made its way to the Supreme Court for review, and the justices found that when employees challenge decisions that fiduciaries make about employee stock ownership plans, the fiduciaries are not entitled to a special presumption of prudence. They are subject to the same duty of prudence that applies generally to ERISA fiduciaries for other types of plans, except that they do not need to diversify the fund’s assets. Employee stock ownership plan fiduciaries—unlike ERISA fiduciaries generally—are not liable for losses that result from a failure to diversify, the justices held. “But aside from that distinction … [they] are subject to the duty of prudence just as other ERISA fiduciaries are.”[15]
After the ruling in Fifth Third, the Supreme Court issued a short opinion in another stock-drop case that highlighted certain aspects of the standards for such claims. In Amgen Inc. v. Harris,[16] the plan participants filed a claim for breach of fiduciary duties, including the duty of prudence, after the value of company stock fell significantly. They argued that the fiduciaries knew the stock price was inflated and failed to take any action to protect the plan. The district court had dismissed the case, but the Ninth Circuit Court of Appeals reversed the lower court’s ruling.
In Amgen, the Supreme Court noted that while there is no presumption of prudence for fiduciaries of employee stock ownership plans, the Fifth Third ruling also directed lower courts to consider “whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases or publicly disclosing negative information would do more harm than good to the fund.”[17] The concern with publicly traded stock is that investors in the market might take a fiduciary’s decision to stop purchasing stock as a sign that insider fiduciaries think the employer’s stock is a bad investment.[18] This action could cause more harm to the plan than continuing to invest in company stock.
Therefore, “[t]o state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”[19]
The Supreme Court noted that breach of the duty of prudence is generally a violation of securities law. Therefore, fiduciaries for an employee stock ownership plan face a difficult challenge when there are allegations that they failed to act prudently based on inside information that they had about stock value.\
The Church Plan Exemption
ERISA applies to most private-employer pension plans, but it does not cover plans that are “established and maintained” by a church or association of churches for its employees.[20] So plans that fall under the church-plan exemption do not have to comply with ERISA’s fiduciary, funding, notification, reporting and other requirements.
In 1980, ERISA was amended to expand the types of plans that fall under the church-plan exemption. Specifically, under the new rules, a plan could be “established” by a church but “maintained” by an organization that is controlled by a church. This primarily allowed churches to establish plans and delegate maintenance activities to church pension boards.
The extent of ERISA’s church-plan exemption has been a contentious issue in recent years, because the act isn’t clear about whether plans can still meet the exemption if they are initially “established” by church-affiliated organizations—such as religious hospitals and schools—rather than by churches themselves.
In a trio of consolidated cases, including Advocate Health Care Network v. Stapleton,[21] the Supreme Court was asked to decide whether the exemption applied to pension plans that were established and maintained by church-affiliated hospitals. The plan participants argued that the hospitals improperly claimed the exemption because the plans were not first established by churches.[22] The participants said that their pension plans were severely underfunded and should be subject to the minimum-funding requirements under ERISA.[23]
The hospitals argued that the three agencies responsible for administering ERISA—the Department of Labor, the IRS and the Pension Benefit Guaranty Corporation—have all supported their position that plans can be both established and maintained by religiously affiliated organizations.[24] For example, the IRS issued private letter rulings (which are written statements that the IRS issues to taxpayers interpreting and applying tax laws to specific sets of facts) to the hospitals finding that their plans qualify for the exemption.[25] The IRS had previously also issued favorable letters in reference to plans established by church-affiliated entities.[26]
The Supreme Court ruled in favor of the hospitals, finding that plans that are established and maintained by church-affiliated entities can qualify for the exemption.[27] “The question presented here is whether a church must have originally established such a plan for it to so qualify,” Justice Elena Kagan wrote for the court. “ERISA, we hold, does not impose that requirement.”[28]
However, there are lingering questions about the exemption that are still unanswered, and attorneys expect that there will be more litigation on the issue.[29] The biggest question involves so called “principal purpose organizations”. ERISA states that a church plan includes “a plan maintained by an organization … the principal purpose … of which is the administration or funding of a plan … for the employees of a church … if such organization is controlled by or associated with a church.”[30] The question remains as to whether the hospitals’ internal benefit committees that manage the plans qualify as principal purpose organizations.
Class-Action Settlements
The types of ERISA lawsuits that are brought and resolved each year are shaped by developing case law and Supreme Court interpretations of the Act, so trends regarding the specific ERISA issues that are litigated tend to change as high-profile cases are decided by federal appellate courts and the Supreme Court.
Many cases settle prior to a court ruling, and class-action claims can result in large settlements. In 2017, the highest dollar-value ERISA settlements involved disputes over the church-plan exemption, breach of fiduciary duty, asset mismanagement and underfunded retirement plans.[31]
The ten largest ERISA class-action settlements in 2017 amounted to nearly $928 million, according to data compiled by law firm Seyfarth Shaw.[32] The top four settlements involved disputes about whether hospitals could use the church-plan exemption.[33] These cases settled either just before or shortly after the Supreme Court’s ruling in Advocate Health Care. Another lawsuit, which involved a 401(k) plan, settled for $75 million.[34] In that case, the plaintiffs alleged that fiduciaries breached their duties and mismanaged retirement funds.
ERISA experts expect to see more cases involving 401(k) plans and claims that excessive fees were charged for investment fund management and administrative costs. For example, participants may assert that plan fiduciaries selected higher-priced classes of stock when lower-cost options were available. Claimants also assert that record-keeping and other administrative fees charged by third-party administrators are unreasonably high. It’s important to note that even when a third-party administrator handles day-to-day plan maintenance, the duty to act prudently still lies with the plan sponsor, plan administrator (which is usually the employer) and other plan fiduciaries.[35]
Courts will generally focus their evaluation on whether fiduciaries engaged in a prudent decision-making process and acted in the best interest of participants and beneficiaries.[36]
Conclusion
Thank you for participating in our video-course on ERISA. This is part of our series of courses on employment and employee benefits law and we encourage you to take advantage of our other courses in this area. As always please let us know if you have any questions, comments or feedback.
[1] 29 U.S.C. § 1104(a).
[2] 29 U.S.C. §1104(a)(1)(A).
[3] Tibble v. Edison Int’l, 135 S. Ct. 1823 (2015).
[4] Id. at 1829.
[5] Id. at 1826.
[6] Id. at 1827-28.
[7] Id.
[8] 29 U.S.C. §1104(a)(1)(B).
[9] Tibble, 135 S. Ct. at 1828.
[10] Id.
[11] “Employee Stock Ownership Plans (ESOPs),” U.S. Securities and Exchange Commission, https://www.sec.gov/fast-answers/answersesopshtm.html (last visited Nov. 2, 2018).
[12] Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2464 (2014)
[13] Id.
[14] Id. at 2464.
[15] Id. at 2467.
[16] Amgen Inc. v. Harris, 136 S. Ct. 758 (2016)
[17] Id. at 759.
[18] Id.
[19] Id.
[20] 29 U.S.C. §1002(33)(a).
[21] Advocate HealthCare Network v. Stapleton, 137 S. Ct. 1652 (2017); St. Peter’s Healthcare System v. Kaplan, 137 S. Ct. 546 (2017); Dignity Health v. Rollins, 137 S. Ct. 1248 (2017).
[22] Advocate Health CareNetwork v. Stapleton, 137 S. Ct. 1652, 1656 (2017).
[23] Id.
[24] Id. at 1657.
[25] Id.
[26] Id.
[27] Id. at 1663.
[28] Id. at 1656.
[29] “SCOTUS Sides With Religious Hospitals in Church Plan Dispute,”
[30] 26 U.S.C. §414(e)(3)(A)
[31] “14th Annual Workplace Class Action Litigation Report,” Seyfarth Shaw (2018), https://www.seyfarth.com/dir_docs/publications/2018_WCAR_Chapters_1-2.pdf.
[32] Id.
[33] Id.
[34] Id. (citing In re JPMorgan Stable Value Fund ERISA Litig, No. 1:12-cv-02548-VSB (S.D.N.Y. Nov. 3, 2017)).
[35] George S. Mellman & Geoffrey T. Sanzenbacher, “401(k) Lawsuits: What are the Causes and Consequences?,” Center for Retirement Research a Boston College, (May 2018), http://crr.bc.edu/wp-content/uploads/2018/04/IB_18-8.pdf
[36] Id.