An impending market downturn could force plan sponsors toreevaluate 401(k) menus, as actively managed funds, often at thecenter of ERISA suits, may prove not to be the pariah claimed.(Photo: Shutterstock)

A recent decision in the U.S. Court of Appeals for the NinthCircuit upholding the dismissal of a 401(k) excessive fee lawsuitagainst Chevron Corp. was a welcomed ruling for employer sponsorsof retirement plans, but it alone will not slow the pace of claims,according to one prominent ERISA attorney.

“The Ninth Circuit was right in this case,” said Jamie Fleckner,Chair, ERISA Litigation at Goodwin. “But I don't think it will endup being a game changer.”

At issue before the Ninth Circuit was the question of whatevidence plaintiffs need in support of claims of fiduciary breachto survive a plan sponsor's motion to dismiss the case.

In 2017, the District Court for the Northern District ofCalifornia dismissed the lawsuit against Chevron, which allegedplan fiduciaries failed their obligations under ERISA by includinga low-yielding money market fund as a capital preservationinvestment option, and that retail shares of mutual funds were usedwhen cheaper institutional shares were available. The case wasthrown out on the grounds that the plaintiffs failed to state aclaim.

“Directionally, this was a very helpful ruling,” said Fleckner.“The court said it's not enough to just say there are cheaperproducts out there or funds that performed better with the benefitof hindsight.”

“Live dispute” continues as to how much evidence isneeded

But despite the clarity in the Ninth Circuit's ruling, a “livedispute” continues in courts around the country as to how muchevidence is needed to move plaintiffs' claims to the discoveryphase of litigation, added Fleckner.

“I think some courts won't take much from the Ninth Circuit'sruling, and determine they can make their own conclusion as towhether there are sufficient facts to litigate claims,” hesaid.

The wide discretion district court judges have is a prevailingreality that will continue to drive plaintiffs claims in 2019,thinks Fleckner.

“I don't see the rate of claims slowing,” he said, despite thetorrid pace seen over the past several years.

Uncertainty around the pleading standard for claims against401(k) sponsors, continued settlements reached in other cases, andthe lack of guidance from the Labor Department, Congress, andappellate courts will drive litigation. “That's the unfortunatereality for defendants.”

Several relatively low-dollar amount settlements have beenreached in the past six months in claims against the 401(k) planssponsored by financial services companies.

Other large settlements—Branch Banking and Trust Co. recentlysettled a claim for $24 million, and Deutsche Bank settled a claimfor $21.9 million last summer—are expected to keep sponsors of401(k) plans in the crosshairs of “entrepreneurial” plaintiffsattorneys, said Fleckner.

“You will see this trend stopped when bringing disputes becomeseconomically disadvantageous for plaintiffs lawyers,” he said.

Beyond that, regulators, Congress, and the courts—perhaps thehighest court—would be needed to turn the tide on the volume ofERISA claims.

“I would welcome the Supreme Court getting involved and hope itwould happen sooner rather than later, but right now there isnothing they have agreed to hear,” said Fleckner.

Regulatory changes, looming market downturn will color2019

In general, the financial services industry is holding out hopethat the Securities and Exchange Commission will take a “balancedapproach” as it promulgates a new rule that intends to raisebroker-dealers' standards of conduct when advising or selling toretail clients, said Fleckner. A rule is expected to be finalizedby September 2019.

But that hope is tempered by regulated entities' experience withthe Labor Department's fiduciary rule, which was ultimatelyscuttled by the Fifth Circuit Court of Appeals last spring.

“Massive sums of money and resources were spent to get intocompliance with a rule that is no longer the law,” noted Fleckner.“Because the SEC is the principal regulator of financial markets, Ithink a lot of people have higher hopes they will take a morebalanced approach. But that's tempered with weariness from theexperience with the DOL.”

An impending market downturn could force plan sponsors toreevaluate 401(k) menus, as much-maligned actively managedinvestment funds, which have been at the center of the ERISAclaims, may ultimately prove not to be the pariah that passivemanagement evangelists have claimed them to be.

“It's been easy for lawyers to make the passive argument duringthe bull market, but bull markets don't last forever. That argumentwill lose a lot of appeal when there is a correction. Activemanagement has historically shown real benefits in down markets,”said Fleckner.

Market uncertainty will bring new context to how plan sponsorsdetermine the long-term best interests of 401(k) participants,thinks Fleckner.

“If you're a plan sponsor, I think you have an obligation tolook deeper than the superficial argument on costs,” he said.

“When I look at the most sophisticated investors in the country,they are not putting all of their money in index funds—they arebuying active management, and willing to incur the cost because itprovides them with returns. It's hard for me to believe there is noplace for active management in a retirement portfolio,” addedFleckner.