401(k) litigation: sorting it all out - iscebs · 2016. 8. 31. · erisa fiduciary includes a...

401(k) Litigation: Sorting it All Out

Sarah Roe SisePartnerArmstrong TeasdaleSt. Louis, Missouri

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© 2016 Armstrong Teasdale LLP

Today’s Outline

The Basics of ERISA’s Fiduciary Structure

Major Litigation in the 401(k) Fiduciary Space

What’s a Fiduciary to do?

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Brief Overview of ERISA

ERISA – Employee Retirement Income Security Act of 1974

• Sets minimum standards for employer‐sponsored pension, 401(k) and health plans

• Requires employers to provide plan information to participants

• Imposes fiduciary responsibilities on those who manage and control plan assets

• Requires plans to establish a robust claims procedure for participants

• Affords participants and beneficiaries the right to sue for benefits and breaches of fiduciary duty

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ERISA Fiduciary Status

ERISA Fiduciary includes a person who:

• Exercises discretion with respect to management or administration of the plan and disposition of plan assets

Department of Labor (DOL) and the Courts apply a functional test focused on actual control and authority

• New theories under recent cases focus on this functional test to hold more parties accountable

Fiduciary actions include:

• Appointing other fiduciaries

• Selecting and monitoring investment options and service providers

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Fiduciary Duties

A plan fiduciary has the following affirmative duties:

• Duty to act prudently (the “prudent‐man rule”)

• Duty to diversify plan assets to minimize the risk of large losses

• Duty to comply with the provisions of the plan to the extent consistent with ERISA

• Duty of loyalty – to act solely in the interest of participants and beneficiaries and with the exclusive purpose of providing benefits to them

• Duty to pay only reasonable plan expenses

A plan fiduciary is prohibited from:

• Engaging in “prohibited transactions”

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Duty to Act Prudently (“Prudent‐Man Rule”)

Standard: discharge duties with the care, skill, prudence and diligence that a prudent person acting in a like capacity would use in like circumstances

“Pure heart and an empty head” are not an acceptable substitute for proper analysis

• Donovan v. Cunningham, 716 F.2d 1445 (5th Cir. 1987)

Process trumps outcome

• Courts emphasize fiduciary’s conduct, investigative diligence, and acting consistently with the purpose of the plan over the results

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Duty of Loyalty Act solely in the interest of participants and beneficiaries with the exclusive purpose of providing benefits to participants and beneficiaries

• Avoid self‐dealing or preferring interests of third‐parties over participants and/or beneficiaries

• Don’t mislead participants and/or beneficiaries

• Vigorously pursue rights of participants and/or beneficiaries

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Duty to Pay Only Reasonable Plan Expenses

Plan assets may be used for two purposes:

• To pay benefits

• To pay reasonable expenses of administering the plan− Settlor vs. proper plan expenses – only plan expenses may be paid from the plan trusts

− Prudent‐man rule requires that fiduciaries identify fees charged by plan service providers and ensure they are “reasonable”

ERISA Section 408(b)(2) requires most service providers to ERISA‐covered retirement plans to disclose fees to responsible plan fiduciaries

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Common Fee Litigation Theories

Fiduciaries failed to understand, consider, monitor or disclose revenue sharing payments by fund managers to service providers

Revenue sharing fees and fees in general paid to service providers such as recordkeepers are excessive

Fiduciaries have selected more expensive funds when substantially similar or identical lower costs funds were available

Fiduciaries failed to negotiate better fees by leveraging the size of the plan’s assets

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Tibble v. Edison International, U.S. Supreme Court, 2015

Plan beneficiaries filed suit in 2007 to recover damages for plan losses, claiming:

• Breach of fiduciary duty by adding retail class funds to the plan in 1999 and 2002 when substantially identical institutional class funds were available

• ERISA statute of limitations (6 years) for breaches of fiduciary duty did not apply because there is an ongoing duty to monitor investments

• Supreme Court agreed, holding that fiduciaries have an ongoing duty “of some kind” to monitor investments and remove imprudent ones− Expect more litigation over the extent of this duty

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ABB, Inc. v. Tussey, 8th Circuit, 2014

Breach of fiduciary duty claims:

• ABB breached its fiduciary duty by failing to monitor and control recordkeeping fees paid to Fidelity and by removing the Wellington Investment Fund and mapping participant assets to the Fidelity Freedom Fund (to provide additional revenue sharing payments to Fidelity)

• ABB failed to adequately document why changes were being made

Judgement:

• $13.4 million judgment for paying excessive recordkeeping fees (failure to calculate the fees, failure to analyze whether the fees were reasonable or to negotiate lower fees)

• $21.8 million judgment for removing Wellington Investment Fund in favor of Fidelity Freedom Funds (ultimately reversed on a burden of proof technicality)

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Bell v. Anthem, Inc., Pension Committee of ATH Holding Company, LLC, et al. Filed December 29, 2015

As of 12/31/14, the plan offered 11 Vanguard mutual funds, the Vanguard collective trust target date funds, 2 non‐Vanguard mutual funds and an Anthem common stock fund

Claim 1 – the fiduciaries caused the plan to pay excessive investment fees

• Failed to use lower cost share classes for the same Vanguard mutual fund investments

• The 2 non‐Vanguard mutual funds had excessive fees (120 and 103 bps as compared to a range of 9 to 43 bps for comparable Vanguard funds)

• Fiduciaries did not investigate use of separate accounts and collective trusts

• Prior to 7/2013, the target date funds used non‐collective trust shares

Claim 2 – Vanguard was paid excessive recordkeeping fees

• Vanguard received $80‐94 per participant, when a fee of $30 is reasonable based on plan size

• From 12/31/2010 to 12/31/2014, plan assets increased from $3.3 billion to $5.1 billion, so Vanguard’s fees increased substantially because there was no cap on the fees, even though the services they were providing did not change

Claim 3 – Retention of money market fund imprudent

• Return over 5 year period less than 1%

• If amounts had been invested in a stable value fund, plan participants would have made more than an additional $65 million in returns

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Jacobs v. Verizon Communications, Inc., Verizon Investment Management Corp., et al.

Filed February 11, 2016

Verizon Investment Management Corp. (VIMCO) created to manage more than $66 billion in assets in qualified plans maintained by Verizon

Main claim – investment structure was overly complex, risky and expensive; not understandable by average Verizon employee

All funds were custom, actively‐managed fund‐of‐funds

Target date funds were custom funds which used the other underlying custom funds plus 4 alternative funds (commodities, global equity, global infrastructure and global high yield bond)

VIMCO created custom benchmarks

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Jacobs v. Verizon (continued)

Claim 1 – retention of target date funds was imprudent• The custom funds under‐performed the benchmarks by more than 2% over a number of years• The fees were not properly disclosed to participants in accordance with ERISA Section 404(a)(5)

Claim 2 – retention of the Global Opportunity Fund was imprudent• Over a 10‐year period, the fund underperformed its benchmark by almost 8%, returning 1.74% compared to 10.37%; used in most of the target date funds

• Highest expense ratio in the plan• VIMCO changed the benchmark to lessen the underperformance but did not replace the two managers

Claim 3 – failure to provide adequate disclosure of TDFs violated disclosure obligations and resulted in a loss of 404(c) protection

Claim 4 ‐ Fidelity was a fiduciary with respect to fee disclosures and breached its duties by providing insufficient disclosure to participants

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Barchock v. CVS Health Corporation, et al.


The plan offered 16 investment options including a stable value fund

Disclosures indicated the fund seeks to generate returns higher than a money market fund

Over half the amount in the fund was allocated to a short‐term cash management account which returned less than 0.30% per year, compared to the average stable value fund which returned 5% during the same period

Claim – imprudent investment of stable value fund resulted in lost earnings of over $70 million; plan committee failed to adequately monitor the investment manager

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White v. Chevron Corporation, et al.


Claim 1 – Offering money market fund instead of a stable value fund was imprudent

Claim 2 ‐ The fiduciaries caused the plan to pay excessive investment fees

Claim 3 – Vanguard was paid excessive recordkeeping fees

Claim 4 – Retention of Artisan Small Cap Value Fund breached duty of loyalty to plan participants due to the severe underperformance of the fund

Chevron and its board members failed to monitor other fiduciaries

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Smaller Plans are not Immune from Claims

Damberg v. LaMettry’s Collision, Inc. – filed June 2016

• Small, closely‐held employer

• Similar claims – excessive fees paid to service provider; selected imprudent share classes which resulted in excessive investment fees; and selected expensive funds

• Plan administered by Voya (formerly ING)

Bernaola v. Checksmart Financial LLC – filed July 14, 2016

• Plan has $25 million in assets and 1,700 participants

• Similar claims – “grossly excessive” fees under unsuitable actively‐managed fund options

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Higher Education 403(b) Plans are Not Safe Either!

In August 2016, class actions filed against Emory, Columbia, Yale, Duke, MIT, NYU, Vanderbilt, Johns Hopkins, Cornell, Northwestern and USC

Common allegations:

• Too many investment options offered – sometimes hundreds

• Use of multiple recordkeepers resulted in excessive fees

• Multiple actively‐managed funds offered even though passive index funds with lower fees provided comparable returns

• Higher cost share classes used when lower cost options available

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And the List Keeps Growing!

Main v. American Airlines, Inc. – Filed April 25, 2016

Wildman v. American Century Services – Filed June 30, 2016

Johnson v. Fujitsu Technology & Business of America, Inc. – Filed June 30, 2016

Patterson v. Morgan Stanley – Filed August 19, 2016

McDonald v. Edward D. Jones & Co. – Filed August 19, 2016

Lorenz v. Safeway, Inc. – Filed August 25, 2016

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What is a Fiduciary to Do?

#1 ‐ Get your governance house in order• Plan document should be up‐to‐date with required law changes and SPD should be consistent with Plan

• Secure new, updated delegation of authority from the Board or other appropriate person or entity to clearly delegate ERISA fiduciaries duties to a person or committee− Consider amending plans to identify committee or individuals in the document so Board does not have a monitoring duty

• Develop charter for benefits or investment committee that the Board or other appropriate person can approve

• Adopt an IPS with professional investment advisor review

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What is a Fiduciary to Do? (continued)

# 2 – Monitor Plan Investments• Committee should meet and review the performance and fees – someone should be watching the shop quarterly

• Minutes and back‐up materials should demonstrate that IPS parameters are being followed #3 – Conduct a Fee Analysis

• Consider the “all in” fee per participant, including investment management fees for mutual funds and recordkeeper fees, and compare to peer plans

• Document exactly how much each service provider is being paid• Separately review whether recordkeeper fee on a stand‐alone basis is reasonable and that the recordkeeper is not being paid more than the contractually agreed upon amount− Should a cap per participant or in total be negotiated? Should recordkeeping fees be paid differently?

• Negotiate with vendors for lower‐priced investment options – different share classes, separate accounts, collective trusts

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#4 – Analyze Whether the Money Market Fund in Your Plan is Prudent

• If risk with a stable value fund is equal to or less than the money market fund, it may be difficult to justify continued use of the money market fund if a stable value fund is available

• If your plan has a stable value fund, confirm that reviews take into account whether the manager is following the stated investment objectives

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#5 – Review participant fee disclosures for compliance with ERISA Section 404(a)(5)

• Have appropriate benchmarks been identified?

• Have fees for fund‐of‐funds and other complex investments been appropriately described?

#6 – Follow the IPS

• Confirm that current funds are within IPS guidelines

• Document why a fund is retained if it falls outside acceptable ranges

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Limiting Liability Protecting Plan Fiduciaries

First Line of Defense – Fiduciary Liability Insurance

• May cover liability or loss resulting from the fiduciary’s acts or omissions

• Review policies and exclusions to ensure proper coverage

Indemnification Provisions

• The company may indemnify plan fiduciaries acting in the scope of their employment as fiduciaries to the plan

No Exculpatory Provisions

• Plan provisions purporting to relieve fiduciary of liability for violations of its fiduciary responsibility are deemed void as against public policy

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401(k) litigation: sorting it all out - iscebs · 2016. 8. 31. · erisa fiduciary includes a...

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