Commonly referred to as "excessive fee" litigation, class actions that allege retirement plan investments charge too much and earn too little have increased over the past two decades. Excessive fee cases are difficult to dismiss at an early stage because the reviewing court must accept the plaintiff's allegations as true and may consider documents beyond the pleadings only if incorporated by reference in the complaint. Thus, every employer with an employee benefit plan, regardless of size, is at risk for a lawsuit by a plaintiff merely alleging that better-performing and lower-cost investments are available.

While some circuits have adopted strict pleading standards and require comparisons of funds against "meaningful benchmarks," others have found that benchmarks are a topic for summary judgment, involving discovery, depositions, and costly briefing. Even within more plan-friendly circuits, the district courts are inconsistent, dismissing certain actions while virtually identical cases are permitted to go forward.

As a result, years of case law have failed to clarify the law in this area and instead have exposed all retirement plan sponsors to the possibility of having to defend a class action and incur millions in attorneys' fees and possible settlement costs, no matter how prudently the plan has been operated. To curb these rampant, attorney-fueled actions, a legislative solution appears necessary.

Jurisdiction-dependent outcomes: Should the outcome of excessive fee cases depend on where the case is filed?

As a general rule, employers are not required to be investment advisors. The courts have made clear that the Employee Retirement Income Security Act ("ERISA") does not require plan fiduciaries to scour the market to find the cheapest fund or the highest-performing investment. Instead, the question for the courts is whether the plan fiduciaries followed a prudent process in selecting and maintaining the plan's funds. Courts have nevertheless permitted plaintiffs to infer at the pleadings stage that the process is flawed by alleging facts that show less expensive funds were available or other plans of comparable size paid less for recordkeeping and administrative services. In Seibert v. Nokia of America Corporation, the New Jersey district court collected virtually identical recordkeeping fees cases, with some being dismissed and others surviving dismissal. The court explained "district courts around the country have addressed similar claims regarding excessive recordkeeping and administrative fees differently." The courts are similarly filled with examples of different results addressing virtually identical allegations of investment underperformance. The 10th Circuit is inclined to dismiss cases when no "meaningful benchmarks" are provided. See Matney v. Barrick Gold of North America. District courts in the 1st Circuit, on the other hand, have viewed "meaningful benchmarks" inappropriate at the pleading stage as the review of benchmarks may conflict with the court's obligation to draw all reasonable inferences in favor of the plaintiff. See Brookins v. Northeastern University et. al.. The courts have reached conflicting decisions on virtually every issue in these excessive cases, including:

  • Standing: Must the class plaintiffs invest in every investment fund alleged to be defective to establish sufficient injury?
  • Burden of proof: Must the defendants prove that their conduct did not cause damages, or is the burden on the plaintiff to prove causation between the fiduciary conduct and the alleged damages?
  • Right to a jury trial: Are these suits equitable in nature so that no jury trial is permitted, or is the claim equivalent to a breach of contract claim for damages for which a jury trial is permitted?

With hundreds of cases and multiple conflicting decisions, the case results, at least through the discovery and pleading stages, seem dependent on where the case is filed rather than whether the fiduciaries followed a prudent process. Plaintiff attorneys fish for disgruntled former employees through social media advertisements, with an eye toward a quick and lucrative settlement. Thus, plans with even the most prudent processes in place face the prospect of discovery and a bench trial, costing millions to defend and often leading to settlement of frivolous suits. This flawed system penalizes employers for merely maintaining an ERISA retirement plan and often does little for the average plan participant.

The need for a legislative solution: Can Congress curb these actions by codifying the prudent process?

After two decades of litigation and no clear standards, it is time for Congress to take action and adopt a legislative solution that will codify a prudent fiduciary process and curb frivolous actions. For example, Congress could adopt a presumption of prudence if:

(1) the plan maintains a diversified arrangement of at least four investment funds;

(2) the plan fiduciaries meet at least quarterly to review the performance of such funds;

(3) an independent investment advisor conducts a benchmarking analysis of the performance of the funds at least annually; and

(4) the recordkeeping and administrative fees are benchmarked at least every six years by an independent advisor.

The burden of proof would then shift to the plaintiff to overcome the presumption and to prove by compelling evidence that: (1) the fiduciary process was flawed, and (2) that as a result of that flawed process, the plan participants were damaged.

A codified process would give some certainty to the employer maintaining the plan, while providing additional protection to plan participants by requiring outside independent reviews.

Employer actions: What can employers do while awaiting a legislative solution?

First and foremost, employers should ensure plan fiduciaries are following a prudent process with regular, deliberations and outside review by an independent investment advisor. Employers should also ensure that their deliberations and those of their independent advisors are reflected in minutes that are organized in a matter that can be easily produced in litigation. As detailed in our prior advisory, care should be taken as to who is named as a fiduciary, that such fiduciary duties are outlined in a charter that is consistent with the plan document, and that formal investment guidelines and benchmarks are adopted and adhered to by the fiduciaries.

In addition, plan fiduciaries should ensure the plan sponsor has obtained (and renewed) fiduciary liability insurance to cover the cost of any litigation and settlement. With the cost of insurance rising in the wake of plan class action litigation, employers may wish to consider allocating insurance costs back to the plan and its participants.

Finally, even with insurance, the cost of litigation is often excessively expensive and likely unplanned, unbudgeted, and burdensome for the employer. While perhaps not a popular option, employers who have been hit with a suit may also wish to consider reducing employer nonelective or matching contributions in view of the increased costs of maintaining the plan. Before reducing contributions, employers should give adequate notice to participants and make sure that nothing in the plan document or a union contract would restrict the employer's ability to make such a change. The fact that the plan participants may ultimately end up paying for the litigation suggests that these lawsuits are merely benefiting plaintiffs' attorneys. Legislative relief, however, would ensure that this unpopular option of cutting back employee benefits would not need to be implemented. With legislative relief, employers would be able to continue to provide benefits without fear of a lawsuit and the interests of participants, in both the short and long-term, would be protected by a prudent process with independent review.

Please reach out to the DWT employee benefits practice to discuss your ERISA fiduciary obligations, governance processes, and litigation risks.