At the end of 2018,plaintiffs' counsel began to test the waters with new theories. Ahandful of cases have been filed in recent months against plansponsors that advisors and employers need to be awareof. (Photo: Shutterstock)

Litigation involving supposed “excessive fees” paid byparticipants in retirement plans shows no signs of slowing down in2019. These cases generally involve claims that fiduciaries of401(k) or 403(b) plans caused the participants to payhigh administrative and/or recordkeeping fees or selectedinappropriate investment options for the plan that underperformedor were more expensive than comparable funds.

These cases have met with mixed success in recent years. Somecourts have held that bare allegations of “high” or “excessive”fees are insufficient to state a claim at the outset and thatplaintiffs must plead a more meaningful benchmark for the court toevaluate the allegations.

Other courts have been far less strict, instead finding thatplaintiffs should be permitted discovery to make their case.

Heading into 2019, it is likely the plaintiffs bar will continueto press for less stringent pleading standards on these types ofexcessive-fee cases.

Cases involving employer stock (often referred to as “stockdrop” cases) have slowed a bit in recent years. In 2014, theSupreme Court rejected the judicially drafted “presumption ofprudence” generally afforded to fiduciaries who chose to offeremployer stock in a company retirement plan and replaced it with anew pleading standard for evaluating such claims.

Specifically, in situations where a plan fiduciary has nonpublic(i.e., inside) information that could affect the value of thecompany stock available in the plan, plaintiffs may be able tostate a claim for breach of fiduciary duty under ERISA if they canallege that there was an action that the fiduciary could have takenthat: (1) would have been consistent with the securities laws and(2) a prudent fiduciary in the same circumstances would not haveviewed as more likely to harm the fund than to help it.

For the past few years, courts have grappled with interpretingthe Supreme Court's language, most often finding that this newpleading standard has not been met.  But in December 2018,the Second Circuit overturned the dismissal of one of these “stockdrop” lawsuits filed against IBM, finding that the participantssufficiently pled a claim even under the most restrictive readingof the new standard.

In that case, the plaintiffs claimed that the plan's fiduciariesknew that a division of the company was overvalued but failed todisclose that fact, and this failure artificially inflated IBM'sstock price, harming the participants.

The Second Circuit held that the participants plausiblyestablished that a prudent fiduciary in the defendants' positioncould not have concluded that a corrective disclosure would do moreharm than good.

Most significant to the court's decision was the fact thatdisclosure of the truth was “inevitable,” because IBM was likely tosell the business and would be unable to hide its overvaluationfrom the public at that point. The IBM case could certainly serveto revive these types of stock drop lawsuits, particularly thosetrying to mimic factually similar “inevitable disclosure”circumstances.

At the end of 2018, plaintiffs' counsel began to test the waterswith new theories. A handful of cases have been filed in recentmonths against plan sponsors challenging their use of old andallegedly “outdated” mortality tables as unreasonable whenperforming actuarial assumptions for conversion of life annuitiesto other annuity forms.

The theory is that mortality has improved (that is, gone down)and life expectancy increased since the 1960s. Because more recenttables have lower mortality (that is, longer life expectancy), theywould generally produce larger factors for certain annuityconversions.

There is scant case law on whether assumptions need to beperiodically updated, which makes these cases interesting to watch.These cases are still in the beginning stages and it remains to beseen whether they will have any success with the many legal andactuarial considerations at issue.

Notably, there have not been many ERISA decisions from theSupreme Court recently, but there are at least two important ERISAcases that may be considered in the upcoming term. In Brotherstonv. Putnam Investments LLC, the First Circuit joined the Fourth,Fifth and Eighth Circuits in holding that, once an ERISA plaintiffhas shown a breach of fiduciary duty and loss to the plan, theburden shifts to the fiduciary to prove that the loss was notcaused by its breach—that is, to prove that the resultinginvestment decision was objectively prudent.

The Tenth, Sixth, Ninth and Eleventh Circuits have held theopposite—the burden falls on the plaintiff to prove losses to theplan arising from the breach.

Putnam has petitioned the Supreme Court to review this decision.Given this circuit split, it is arguably ripe for Supreme Courtreview, and could be a key factor in framing the ultimate viabilityof fiduciary breach claims in the future.

Also, potentially at issue before the Supreme Court is thearbitrability of ERISA breach of fiduciary duty claims. In Munro v.University of Southern California, the Ninth Circuit rejected USC'sattempt to compel plan participants to arbitrate their ERISA breachof fiduciary duty claims based on arbitration provisions in theiremployment agreements.

The Ninth Circuit held that because the employee-participantsonly consented to arbitrate claims brought on their own behalf, andbecause the claims are brought “on behalf of” the plans, the claimswere outside the scope of the arbitration agreements.

USC has petitioned the Supreme Court to review thisdecision.

This case is significant as arbitration provisions continue tobe a hot topic for ERISA plans—with more and more plan sponsors andfiduciaries weighing the pros and cons of arbitrating ERISAclaims.

Emily Costin is a partner in Alston& Bird's Washington, D.C. office, where she focuses herpractice primarily on the defense of employee benefits disputes andcounseling employers, plan sponsors, and fiduciaries on litigationavoidance strategies. She represents plan sponsors, insurers, andfiduciaries in individual, mass action, and class action litigationover claims for benefits and breach of fiduciary duty underERISA.

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