Checklist for Strengthening Your Defenses to 401k Plan Class Actions

by Orrick, Herrington & Sutcliffe LLP
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The last ten years have seen a proliferation of high-profile class actions alleging breach of ERISA fiduciary duties of prudence and loyalty against plan fiduciaries.  The claims are usually based upon alleged excessive investment management fees, excessive plan recordkeeping and other administrative expenses, and poor performance of investment options selected by and retained in the plan's investment menu by the plan's fiduciaries.  Many of these cases also include claims based on alleged prohibited transactions between a plan and its fiduciaries or parties in interest under ERISA section 406.

Application of the governing legal standards (adapted from the law of trusts) to these claims – performance of fiduciary duties solely in the interest of the plan's participants and beneficiaries and with the care and diligence "under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims (29 U.S.C. § 1104(a) – is flexible, imprecise and fact-intensive.

These cases usually settle after protracted and expensive litigation, with substantial awards of attorneys' fees to plaintiffs' counsel.  "Plaintiffs Ramp Up 401(k) Lawsuits."  The Wall Street Journal, July 14, 2017.  For example, surviving aspects of both the Tibble and Tussey cases, referenced below, are still being litigated after ten years of motion and appellate practice.  Accordingly, it is in the interest of plan sponsors and plan fiduciaries to take all reasonable steps to head off claims quickly if they are asserted.  The following checklist is offered as a non-exclusive guide for those purposes. 

  • Strengthen Defenses to a Class Action
    • Have legal counsel evaluate the complaint in light of the prevailing case law in your jurisdiction. The following is a summary of seminal cases:                     
      • Tibble v. Edison International, 135 S. Ct. 1823 (2015).
      • The only Supreme Court case in the area held that plan sponsors have a continuing duty to review investments in 401(k) plans, even if the investment was initially selected outside ERISA's six-year statute of limitations period for fiduciary claims.
      • Tatum v. RJR Pension Inv. Comm., 761 F.3d 346 (4th Cir. 2014).
        • The Fourth Circuit affirmed the district court's holding that an employer breached its fiduciary duty under ERISA when it liquidated two employer stock funds held by a 401(k) plan, which resulted in substantial loss to the participants, without conducting a thorough investigation.
      • Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014)
        • "Because the content of the duty of prudence turns on 'the circumstances prevailing at the time the fiduciary acts [under 29 U.S.C. §1104(a(1)(B)] the appropriate inquiry will necessarily be content specific." 
      • Pension Benefit Guar. Corp. ex rel. St. Vincent v. Morgan Stanley Inv. Mgmt. (St. Vincent"), 712 F.3d 705, 716 (2d Cir. 2012)

        • A fiduciary's actions are judged based upon information available to the fiduciary at the time of each investment decision and not from the vantage point of hindsight.  A court is required "to consider the extent to which plan fiduciaries at a given point in time reasonably could have predicted the outcome that followed."
      • Tussey v. ABB, Inc., 746 F.3d 327 (8th Cir. 2014).

        • The court found that the fiduciaries breached their duty of loyalty and prudence by failing to:
          • Adequately monitor recordkeeping costs;
          • Determine whether the record keeping costs were competitive; and
          • Adequately leverage the plan's size to reduce fees 
      • Significant facts were that plan fiduciaries were allowing revenue sharing as a kickback for including the record keeper's proprietary funds as plan investment options, had allowed the plan to subsidize non-plan operations of the plan sponsor and record keeper, and had disregarded a consultant's warning that the plan expenses were excessive.
    • Alert the fiduciary insurance carrier to get defense coverage in place.
    • Hire a damage expert to evaluate potential exposure from both plaintiffs' and defendants' best case perspective and help craft a settlement offer.
    • Be attentive to safeguarding the attorney-client privilege and work product doctrine protection in discovery and if the case goes to trial.  Consider obtaining advice and analysis from consultant(s) who will not be a testifying as expert witnesses on summary judgment or at trial.  Keep written consultant reports to the necessary minimum.
    • Hire a law firm with a good track record in winning ERISA fiduciary duty class actions or obtaining reasonable early settlements.
    • Early stage litigation strategy.
      • Attempt to knock out the case on a motion to dismiss, (as successfully done by Chevron in the recent case of White v. Chevron Corp., No. 16-cv-0793-PJH, 2016 U.S. Distr. LEXIS 115875 (N.D. Cal. Aug. 29, 2016).  In the Chevron case, the District Court ruled that a fiduciary's decision should not be reviewed with hindsight but in light of the circumstances when the decision was made. The Court also said that while investment fees are important, they are only one factor to consider when selecting investments.
      • Likewise, in Meiners v. Wells Fargo & Co., No. 0:16-cv-03981-DSD-FLN (D. Minn. May 25, 2017), the court granted a motion to dismiss with prejudice against claims that Wells Fargo's Target Date Funds underperformed comparable Vanguard funds and were more expensive than comparable Vanguard and Fidelity funds. The court held that comparison of performance for different funds was insufficient to imply that the plan's decision making process was flawed, when the comparator funds had a different investment strategy. The mere fact that the plan's funds were more expensive than other funds did not support a breach of fiduciary duty absent facts that the claimed cheaper comparators were reliable, of similar size and offered similar services. In order to show that the fiduciary breached its duties by promoting its own proprietary funds, the court held that the plaintiff must provide additional facts showing that the fiduciary's decision was based on financial interest rather than a legitimate consideration. The Meiners dismissal has been appealed to the Eighth Circuit.
      • By stipulated agreement or, if necessary, motion, obtain a protective order to safeguard confidential information against improper use and disclosure of confidential information and a Federal Rules of Evidence 502(d) order to preserve rights to protect against inadvertent disclosure of confidential electronically stored information.
      • Take advantage of circuit law to the extent available to invoke the three-year statute of limitations of 29 U.S.C. § 1113(2) by demonstrating that the named plaintiffs had timely "actual knowledge" of facts necessary to support their claims.  See, e.g., In re Northrup Grumman Corp. ERISA Litig., 2015 U.S. Dist. LEXIS 176822, **74-100 (C.D. Cal. Nov. 24, 2015) ("Under the standard adopted by the Ninth Circuit, the 'statute of limitations is triggered by knowledge of the transaction that constituted the alleged violation, not by plaintiffs' knowledge of the law, "citing Blanton v. Anzalone, 760 F.2d 989, 992 (9th Cir. 1985).  Also see Sulyma v. Intel Corp. Inv. Policy Comm., No. 15-cv-04977-NC, 2017WL 1217185 (N.D. Cal. Mar. 31, 2017) where the Court ruled that the plaintiffs' claims were time barred under ERISA's three year statute of limitations because Intel sent financial disclosures which conferred "actual knowledge" of the transaction (not necessarily knowledge of the law) more than three years prior to the lawsuit.  The Sulyma case is on appeal to the Ninth Circuit.
      • See also Brotherston v. Putnam Investments, LLC., No. 1:15-cv-13825-WGY (D. Mass. March 30, 2017), where the court, similarly to Sulyma, granted summary judgment for Putnam on certain claims based on the "actual knowledge" standard..  (On June 19, 2017, after the plaintiffs rested, the court entered judgment for Putnam on the remaining claims in Brotherston because the plaintiffs failed to prove loss causation necessary to support damages for breach of fiduciary duty). Brotherston has been appealed to the First Circuit. 
      • Narrow the class with standing arguments (Fuller v. Sun Trust Banks, Inc., 2012 WL 1432306 (N.D. Ga. Mar. 20, 2012) (named plaintiff lacked standing to raise her claims with respect to a fund in which she did not invest) and the time period with statute of limitations arguments (In re Northrop Grumman Corp. ERISA Litig., 2015 U.S. Dist. LEXIS 176822 (C.D.Cal. Nov. 24, 2015)).
      • If possible, try to settle cases before disposition of motions.  Such a strategy will usually require class discovery, certification of a class for settlement purposes, notice to putative class members, a fairness hearing by the court, and a consent t order approving the class settlement and barring further litigation of class claims by class members.
    • Summary judgment strategies,/class action strategies
      • Develop arguments under FRCP Rule 23 to limit class scope and require division into subclasses as appropriate.
      •  Ensure that notice(s) to putative class members are accurate, informative and unbiased.
      •  Prepare for fairness hearing and any opt-out attempts by putative class members.
      • Identify, engage and prepare an expert on plan expense and investment performance who will support the defense by testimony for summary judgment or at trial.
      • Consider Daubert motion(s) challenging qualifications of Plaintiff's expert(s).
      • Preparation of pre-trial order and trial memorandum outlining the defense factual presentation and analyzing and arguing the applicable law.  
      • Identification and preparation of trial exhibits.
      •  Consider of motions for judgment as a matter of law at the appropriate trial points.
  • Conclusion
  • The foregoing checklist will help your company and the plan fiduciaries minimize class action exposure if one is filed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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