The Checksmart lawsuitgarnered attention because it involved a more modestly sizedretirement plan, with less than 2,000 participants and roughly $25million in assets. (Photo: Shutterstock)

In July 2016, Enrique Bernaola filed a putative class-action lawsuit against his employer,Checksmart Financial, LLC., and others, underthe Employee Retirement Income Security Act (ERISA). Mr. Bernaola,who participated in Checksmart's retirement plan for its employees,sued the defendants, alleging that they violated their fiduciary duties under ERISA by failing toprovide the appropriate amount of passively managed mutual funds asinvestment options under the plan, resulting in excessively highinvestment fees being charged to the plan and its participants.

Related: Quiz: How well do you know ERISArules?

The lawsuit's allegations were similar in kind to those of manyother lawsuits that have been brought over the last few years.Indeed, these lawsuits are renowned for their cookie-cutterallegations, and, have been driven in large part by the successplaintiffs' firms have had in negotiating largemulti-million-dollar settlements from some of the nation's largestcompanies.

Nonetheless, the Checksmart lawsuit garnered attention because,unlike most of those other suits, this one involved a more modestlysized retirement plan, with less than 2,000 participants androughly $25 million in assets. The question on everyone's mind waswhether this lawsuit portended a new trend in ERISA class actionlawsuits against small and mid-size employers? Should the suit meetwith success, there was legitimate fear that the plaintiffs' barwould deem the small and mid-size market as an attractive new poolof potential defendants, and that a slew of similar lawsuits mightfollow.

Against this backdrop, there was a collective sigh of reliefearlier this summer, when the United States District Court for theSouthern District of Ohio dismissed Mr. Bernaola's lawsuit, holdingthat ERISA's statute of limitations barred his claims. The court'sdecision was comforting to employers worried about copy-catlawsuits. However, that relief may be tempered by the fact that theplaintiff has subsequently appealed the court's decision to theSixth Circuit, especially given that parts of the court's holdingare in tension with decisions from other courts.

Assuming the case does not settle, it will likely be monthsbefore the Sixth Circuit rules on the appeal. In the meantime, thedistrict court litigation provides certain lessons for small andmid-sized businesses hoping to protect themselves from being thetarget of an ERISA class action lawsuit.

Lesson 1: Disclose

The first lesson the Checksmart decision yields is theimportance of timely disclosures to plan participants. As notedabove, the district court's ruling was premised on its conclusionthat the plaintiff's claims were time barred under ERISA's statuteof limitations, which in turn flowed from the defendant'sdisclosure practices. Where a plaintiff has “actual knowledge” ofan alleged breach, ERISA imposes a three-year statute oflimitation, based on the earliest date that the plaintiff could bedeemed to have had knowledge of the underlying conduct.

Here, limited discovery showed that the defendants had disclosedto plan participants how much each investment option charged infees in 2012, putting the 2016 lawsuit outside of the three-yearstatute of limitations. By making consistent disclosures ofmaterial facts related to investment fees and expenses, a fiduciarycan, potentially, mitigate the potential liability associated withinvestment decisions by limiting the time-period of the inquiry toa three-year period. This not only potentially limits thefiduciary's liability, but also the litigation's potential value toa plaintiffs' firm, meaning the company is that much lessattractive as a litigation target.

Lesson 2: Review, benchmark and disclose

A second lesson from the Checksmart litigation is theprophylactic value of having a documented process for periodicallyreviewing and benchmarking investment decisions. In Checksmart, theplaintiff argued that ERISA's three-year statute of limitations didnot bar his claims, because, inter alia, his claim reallychallenged defendants' process in evaluating, monitoring, andselecting the investment options offered by the plan, which was notdisclosed, and further that the defendants had an ongoing duty tomonitor a plan's investments and remove imprudent ones.

In support of the first argument, the plaintiff cited theSeventh Circuit's decision in Fish v. Great-Banc Tr. Co., 749 F.3d671, (7th Cir. 2014), and the Supreme Court's decision in Tibble v.Edison Int'l, 135 S. Ct. 1823 (2015) in support of the secondargument. While the district court found both casesdistinguishable, the Sixth Circuit has yet to weigh in. Moreover,these process and monitoring type claims invariably find their wayinto class action lawsuits, and by documenting and disclosing itsprocedures for investment benchmarking (both as a matter of initialselection and as a matter of periodic review) a company potentiallycan diminish further its attractiveness as a litigation target.

Of course, the comments above are not meant to be exhaustive,but rather illustrative. It is always a good idea to periodicallyreview with your ERISA counsel not only your fiduciary practicesand procedures, but also the language in your relevant plandocuments, keeping in mind your individual facts andcircumstances.

Read more:

• Plan sponsors tell all
• Participants' claims on behalf of ERISA plan notcovered by arbitration clause
• Top 10 ERISA class-action settlements in2017

Michael Khalil is vice chair of theemployee benefits department at Miller& Chevalier. His practice focuses on thelitigation of claims arising under the Employee Retirement IncomeSecurity Act (ERISA) and the Patient Protection and Affordable CareAct (ACA) in federal trial and appellate courts.