On July 16, 2021, the District Court for the Western District of Wisconsin dismissed without prejudice four ERISA claims brought by a former employee alleging mismanagement of Infinity’s defined-contribution 401(k) plan. Plaintiff’s two Fair Labor Standards Act claims were not at issue and remain pending.

Plaintiff alleged that plan fiduciaries violated their fiduciary duties by offering allegedly imprudent, actively managed investment options, and by paying excessive administrative and recordkeeping fees. The court found that plaintiff lacked standing to assert her ERISA claims for two main reasons.

First, plaintiff included a list of the allegedly imprudent funds in her complaint, but Infinity provided evidence that all of her retirement assets were invested in a fund that was not included on the list. Because standing is a question of subject-matter jurisdiction, the court permitted evidence outside the complaint. The court went on to hold that because Infinity’s evidence regarding plaintiff’s investments called her standing into question, the burden shifted to plaintiff to adduce competent proof that standing existed. The court then held that plaintiff failed to meet that burden because she offered no proof that she was injured.

Second, with respect to plaintiff’s excessive fee argument, Infinity provided evidence that the one fund in which plaintiff invested did not pay any recordkeeping fees. The court noted that to survive a motion to dismiss her fee claims, plaintiff needed to provide competent proof that she paid recordkeeping fees. Plaintiff failed to satisfy this burden with mere speculation and reliance on the allegations in her complaint.

The case is Lange v. Infinity Healthcare Physicians, S.C., 20-cv-737-jdp (W.D. Wis. July 16, 2021).

The Supreme Court recently granted the writ of certiorari requested by Northwestern University retirement plan participants, following the Solicitor General’s plea for the Court to hear the case.  Hughes v. Northwestern Univ., No. 19-1401, 2021 U.S. LEXIS 3583 (July 2, 2021). The certiorari petition phrased the question presented as: “[w]hether allegations that a defined-contribution retirement plan paid or charged its participants fees that substantially exceeded fees for alternative available investment products or services are sufficient to state a claim against plan fiduciaries for breach of the duty of prudence under ERISA.”

In Hughes, the plan participant-plaintiffs alleged that Northwestern breached the duty of prudence by (1) paying excessive recordkeeping fees (by using multiple recordkeepers and allowing recordkeeping fees to be paid through revenue sharing) and (2) offering mutual funds with excessive investment management fees.

The district court granted defendants’ motion to dismiss, and the Seventh Circuit affirmed. Finding no ERISA violation with respect to Northwestern’s recordkeeping arrangement, the Seventh Circuit noted that ERISA does not require a sole recordkeeper, and there is “nothing wrong – for ERISA purposes – with plan participants paying recordkeeper costs through expense ratios” under a revenue sharing agreement.

As for the excessive investment management fee claim, the Seventh Circuit concluded that the types of funds plaintiffs wanted (low-cost index funds) were and are available to them, thus “eliminating any claim that plan participants were forced to stomach an unappetizing menu.” The Seventh Circuit emphasized that Northwestern had provided the plans “with a wide range of investment options” and offered “prudent explanations for the challenged fiduciary decisions.”

The Solicitor General argued that the Seventh Circuit’s decision is incorrect and that its decision conflicts with decisions in the Third and Eighth Circuits. Northwestern argued no circuit conflict exists; instead the circuits “simply reached different results on different complaints.”

The Supreme Court’s order granting the writ of certiorari noted that Justice Barrett took no part in the consideration of this petition. Justice Barrett did not participate because she was a judge on the Seventh Circuit at the time the Seventh Circuit issued its decision. Regardless how the Supreme Court ultimately rules in this case, it is certain to have a significant impact on the more than 127 retirement plan fee class actions that have been filed since January 2020.

In Bellon v. PPG Emp. Life & Other Benefits Plan, PPG Industries, Inc. & the PPG Plan Administrator, the Northern District of West Virginia recently addressed whether a predecessor company may be held liable for a decision made by its corporate successor to terminate retiree life insurance coverage and related benefits following spin-off.

The retiree plaintiffs asserted that company-provided life insurance coverage was wrongly terminated after their former employer, defendant PPG, spun off its commodity chemicals division (to which they once belonged) into a separate public entity called Axiall Corp. Axiall assumed responsibility for certain benefits of PPG’s retirees and later terminated those benefits.

Rejecting that argument, the court granted summary judgment for defendant employer, PPG, its plan, and the plan administrator on all counts, finding plaintiffs’ claims for benefits, discrimination, interference, breach of fiduciary duty, refusal to furnish information, and common law breach of contract failed as a matter of law.

In so holding, the court recognized that taking necessary steps to complete a business transaction—here, predecessor PPG transferring benefits liabilities for its commodity chemicals division to a separate, newly created successor entity, Axiall Corp.—does not trigger PPG’s general fiduciary duties under ERISA, nor create liability for PPG where the terminated benefits were unvested, and where PPG was no longer associated with the plan.

The court also recognized that defendants could not be liable to retiree plaintiffs and their surviving spouses for benefits because defendants were not responsible for the benefits termination decision (the successor Axiall Corp. was) and plaintiffs were not participants in PPG’s plan when their retiree benefits terminated (they were participants in Axiall’s plan).

The court likewise rejected retiree plaintiffs’ arguments that their life insurance benefits vested under predecessor PPG’s plan so they could not be transferred or terminated, reiterating that an employer’s commitment to vest benefits must be stated in clear and express plan language.  Accordingly, the court found that plan language stating only that, “[t]his coverage is provided by the Company” could not establish a promise of lifetime benefits provided by the predecessor.

In denying plaintiffs’ claims, the court also reaffirmed that ERISA does not prohibit an employer from terminating or modifying benefits not vested nor does it prevent an employer from pursuing its business interests as employer when not administering the plan or making investments.

The case is Bellon et al. v. PPG Emp. Life & Other Benefits Plan, PPG Industries, Inc. & the PPG Plan Administrator, No. 5:18-cv-00114 (N.D. W.Va. June 28, 2021).

The District Court for the Southern District of Iowa recently dismissed an ERISA putative class action lawsuit challenging 401(k) performance and fees after plan participants failed to identify appropriate benchmarks in their complaint.

The court reinforced the Eighth Circuit’s standards for stating such claims, requiring that the plaintiffs allege facts establishing “a meaningful benchmark for assessing the performance of the challenged funds.” In particular, the court highlighted the Eighth Circuit’s requirement to identify a comparable fund with a materially similar style, structure, and goal. Without any comparable fund, the court had no way to evaluate the plaintiffs’ allegations and, therefore, the complaint could not satisfy the pleading requirement.

This lawsuit is just one of nearly 100 proposed class actions filed in 2020 challenging 401(k) fees. Jackson Lewis continues to monitor the landscape of these cases and their impacts on plan sponsors and fiduciaries.

The case is Matousek v. MidAmerican Energy Co., No. 4:20-cv-00352 (S.D. Iowa July 2, 2021).

In the clamor that surrounded the current administration’s adoption of the American Rescue Act of 2021 (ARPA), quietly tucked in as Subtitle H is the Butch Lewis Emergency Pension Plan Relief Act of 2021 (Butch Lewis). Butch Lewis has been unsuccessfully bouncing around Congress since 2019. While Butch Lewis is long on rhetoric, at this juncture it is lacking in details or controls.  Pension Benefit Guarantee Corporation (PBGC) regulations will be issued sometime in July. In the interim, it is important for employers to remain vigilant about actions by the PBGC.

As currently structured, Butch Lewis is a “logical” successor to Congress’ previously flawed efforts to “cure” the funding ills of the multi-employer benefit system. Those efforts began in 1980 with Congress’ passage of the Multi-employer Pension Plan Amendments Act of 1980 (MPPAA) and has continued through the passage of the Multiemployer Pension Reform Act of 2014 (MPRA).

WHAT IS KNOWN AND WHAT UNIONS WANT

Congress will provide approximately 86 billion dollars to “critical and declining” funds for financial assistance “…to pay all benefits due during the period beginning on the date of payment of the special financial assistance payment…and ending…in 2051.” Payments will be made to more than ninety funds. There is no cap on this payment, no requirements for repayment, and funding predictions will be performed on a “deterministic basis.” The only obligation is that plans must reinstate suspended benefits and invest the Butch Lewis monies in investment-grade bonds or other investments allowed by the PBGC.

The Butch Lewis portion is otherwise a clean canvas to be augmented by PBGC regulations. Organized labor is using this clean canvas to “suggest” regulations that may harm employers.

  1. Lump Sum Payment

The special financial assistance must be paid as a lump sum of all plan obligations until 2051, not at present value. Thus, $100 due in 2051 will be funded at $100, even though $100 paid in 2051 will be worth far less in 2021. Organized labor contends “all benefits due during the period” is defined as future benefit payment cash flows, not merely accrued benefits or unfunded liability. This concept will cost significantly more than 86 billion dollars. Organized labor also proposes funds should retain discretion as to when to pay from the lump sum payment and when to pay from the traditional asset account.

  1. Withdrawal Liability

While Butch Lewis is silent on how special assistance will impact withdrawal liability, labor is urging for PBGC withdrawal liability rules which will work to the detriment of employers.  Employers that withdraw before the last day of the plan year ending in 2051 would not have the special assistance considered as plan assets in calculating withdrawal liability. Moreover, labor is requesting that employers that withdraw before 2051 be subject to treatment under a mass withdrawal scenario. Thus, employers that normally would make interim payments over a period of twenty years would be required to make those interim payments into infinity!

In the absence of the regulations from the PBGC, the only clear point for an employer is despite Congress’ infusion of billions of dollars into more than ninety plans, it appears that withdrawal liability obligations will not be reduced.

On appeal following a bench trial of claims brought by a class of participants and beneficiaries of a 401(k) plan, the Tenth Circuit affirmed the decision of the District of Colorado calculating damages and prejudgment interest, denying injunctive relief, and finding the employer did not engage in a “prohibited transaction” under ERISA Section 406, 29 U.S.C. § 1106. Ramos v. Banner Health, No. 20-1231 (10th Cir. June 11, 2021).

At trial, the district court concluded the failure to monitor recordkeeping fees under an uncapped, revenue-sharing agreement with a service provider for nearly 20 years was a breach of fiduciary duty resulting in overpayment to the service provider and losses to participants.  However, analyzing damages, the district court found the class expert’s testimony of $19.4 million in excessive recordkeeping fees and corresponding losses was unreliable under Fed. R. Evid. 702(c) and Daubert because it was unquantifiable and non-replicable. The class expert relied solely on his individual prior experiences, of which he provided “scant” information, and he left it unclear as to whether the plans were on the same par with the one at issue.

Accordingly, the district court chose to rely on revenue credits the service provider gave to the fiduciary to approximate the extent of excessive recordkeeping fees because it was based on plan characteristics, asset configuration, net cash flow, fund selection and the number of participants, resulting in damages of about $1.6 million. The Tenth Circuit highlighted that calculation of damages is within the discretion of the district court, affirming the calculation. The district court also utilized the IRS underpayment rate as set forth in 26 U.S.C. § 6621 to calculate prejudgment interest finding that it reasonably approximated the lost earning investment opportunity even though it was not the highest rate among other options, including the federal post-judgment rate or Colorado’s statutory rate, which were much higher. However, because prejudgment interest is discretionary, not mandatory, the Tenth Circuit deferred to the district court.

The appellate court also affirmed the denial of the request for injunctive relief to require the fiduciary to issue a request for proposals to test the market for recordkeeping services. The appellate court reasoned that once the fiduciary updated its agreement to a per-participant recordkeeping fee, the breach ended.

Finally, the Tenth Circuit agreed with the district court’s finding that the services provided by the recordkeeper were not prohibited transactions under ERISA. Plaintiffs contended, “[b]ecause [the recordkeeper] is a service provider and hence a ‘party in interest,’ its ‘furnishing of’ recordkeeping and administrative services to the Plan constituted a prohibited transaction[.]” The Tenth Circuit soundly rejected that notion, noting “[t]he class’s interpretation leads to an absurd result: the initial agreement with a service provider would simultaneously transform that provider into a party in interest and make that same transaction prohibited under § 1106.” Instead, the appellate court clarified that a prior relationship would have to exist between the fiduciary and service provider to make it a party in interest under 29 U.S.C. § 1106 as the goal of ERISA is to prevent such transactions, which raise concerns of impropriety. Because no such evidence was provided by the class, entry of judgment was affirmed.

 

 

The Eastern District of Missouri recently examined whether administrative exhaustion is a prerequisite to an ERISA suit alleging a wrongful denial of employee benefits, where the benefit plan’s language did not include an administrative appeal procedure and the denial letter included only permissive language stating that the claimant “may request a review” of the denial.

Ultimately, the Court focused on the Eighth Circuit’s “sound policy of not wanting courts to review plan administrators’ decisions based on initial, often succinct denial letters in the absence of complete records” and dismissed (without prejudice) the suit for failure to exhaust administrative remedies.

The Court examined and combined two lines of cases. First, as long as the plan offers a “reasonable opportunity” for a “full and fair review” of the denial, and the claimant has notice of the procedure, exhaustion of contractual remedies is required, even if neither the plan, the insurance contract, nor the denial letter explicitly describe the review procedure as a prerequisite to suit. Under the second line of cases, language informing the claimant that an administrative claim may be pursued, as opposed to language stating the administrative claim must be pursued, does not excuse the claimant from administrative exhaustion.

The Court emphasized the practical reasons favoring exhaustion mean that “claimants with notice of an available review procedure should know that they must take advantage of that procedure if they wish to bring wrongful benefit denial claims to court.” Thus, the Plaintiff was required to exhaust the administrative remedy described in permissive terms in the denial letter, even though there was no administrative appeal provision in the plan.

The case is Yates v. Symetra Life Ins Co., No. 19-cv-154 (E.D. Mo. May 26, 2021).

The District Court of Minnesota declined to certify a class of pensioners seeking to challenge their plan’s early retirement calculations. ERISA requires early retirement benefits to be actuarially equivalent to what participants would receive at their normal retirement age. For participants collecting retirement benefits before age 65 (known as the “Early Commencement Factor” or “ECF”), the plan required a reduction of their monthly benefit, expressed as a percentage of the normal benefit that the participant would have received had they retired at age 65.

The plaintiffs contended that the ECF resulted in benefits that were not actuarially equivalent to the retirement benefits they would have received at their normal retirement age. The plaintiffs sought a retroactive amendment to the plan which would provide class members with the greater of either an actuarially equivalent benefit to their age-65 ECF or their current benefit. In support, the plaintiffs proposed that the court adopt their expert’s alternative actuarial models.

The court concluded that the plaintiffs’ alternative actuarial models proved “unworkable” under FRCP 23 because not all putative class members would benefit from any single model. In other words, under some of the plaintiffs’ proposed models, some putative class members would receive higher benefits while other class members would receive less. Moreover, the plaintiffs’ expert also conceded that at least 251 class members currently received actuarially equivalent benefits, which meant they were not injured by the plan and therefore lacked standing.

The court held that these inconsistencies meant that plaintiffs’ claims were not amenable to class-wide resolution. The case is Thorne v. U.S. Bancorp, No. 18-cv-3405 (D. Minn. May 18, 2021).

The Third Circuit will review a Pennsylvania district court’s decision to certify a 60,000+ person class in an ERISA fiduciary breach lawsuit claiming mismanagement of a defined contribution plan’s investments and recordkeeping fees. This appeal queues up guidance on a hotly litigated issue in recent ERISA cases:  can defined contribution plan participants challenge the prudence and loyalty of retaining a plan investment option they never invested in? For example, in Boley, the named plaintiffs collectively invested in only seven of the plan’s investments, but their lawsuit challenges all 37 investment options in the plan’s portfolio at various points in the putative class period.

This issue has been recently litigated in the context of a motion to dismiss for lack of standing. The Supreme Court held in Thole v. U.S. Bank N.A. that defined benefit plan participants do not have standing to pursue a claim that the plan’s fiduciaries mismanaged the plan if they did not suffer a loss. Based on Thole, defendants have argued that defined contribution plan participants similarly lack standing when challenging investments in which they did not invest because they could not have suffered a loss.

The district court in Boley rejected that argument in 2020. The defendants then raised a similar challenge to oppose class certification, arguing that plaintiffs’ claim failed to meet FRCP 23’s typicality standards because the named plaintiffs suffered no injury with respect to the performance or fees of the 30 investment options in which they did not invest. The district court disagreed, finding that plaintiffs’ mismanagement claims challenge uniform conduct across the plan.  Defendants sought immediate review of class certification under FRCP 23(f), and the Third Circuit granted the request.

That the Third Circuit granted the defendants’ request is significant, especially in light of the rash of similar lawsuits pending in the district courts and heading towards motions for class certification. Recent statistics indicate that, in about half of the 23(f) petitions filed by defendants that were granted by the Third Circuit, class certification was reversed. See Bryan Lammon, An Empirical Study of Class-Action Appeals (April 30, 2020) available at SSRN: https://ssrn.com/abstract=3589733. The Jackson Lewis ERISA Complex  Litigation Group  is closely monitoring this appeal.

The referenced decisions are: Boley v. Universal Health Servs., No. 20-2644, 2021 U.S. Dist. LEXIS 42257 (E.D. Pa. Mar. 8, 2021); Boley v. Universal Health Servs., 2020 U.S. Dist. LEXIS 202565, 2020 WL 6381395 (E.D. Pa. Oct. 30, 2020); Boley v. Universal Health Servs., No. 21-8014, Dkt. 12-1 (3rd Cir. May 18, 2021); Thole v. U.S. Bank N.A., 140 S. Ct. 1615 (2020).

Recently, in Davis v. Salesforce.com, a California district court dismissed for the second time claims alleging that the defendant 401(k) plan fiduciaries breached their ERISA fiduciary duties by retaining overpriced and underperforming investment options on the plan’s investment menu. Our previous post on that dismissal is available here.

That decision is one in a deluge of similar, recent rulings setting forth differing and sometimes discordant opinions on what is required to state a plausible ERISA fiduciary breach claim challenging defined contribution plan investment menus and recordkeeping fees.  Some, like Salesforce.com, have declined plaintiffs’ invitation to second-guess ERISA fiduciaries’ decision-making and have dismissed the claims on the grounds that allegations that cheaper or better performing, but dissimilar investments were available on the market does not raise an inference that the fiduciaries breached any fiduciary duty by retaining the plan’s investments.  Other courts have sustained the claims, allowing plaintiffs to seek discovery on the fiduciaries’ processes for selecting investment options and service providers.

Although the majority of Circuit courts that have addressed these issues have affirmed dismissal,  some have reversed dismissal and remanded for further consideration.  Thus, the noticed appeal in Salesforce.com joins the list of anticipated decisions that could provide clarity on this issue. The Second Circuit is queued to address similar issues in Cunningham v. Cornell University, et al. and Sacerdote v. New York University, and the U.S. Supreme Court has requested the views of the Acting Solicitor General on the pending petition for certiorari of the Seventh Circuit’s decision in Hughes v. Northwestern University.  Jackson Lewis’ ERISA Complex Litigation Group is closely monitoring these matters.

The referenced cases are: Davis v. Salesforce.com, Inc., No. 20-cv-01753 (N.D. Cal.); Cunningham v. Cornell University, et al., No. 21-88 (2d Cir.);  Sacerdote v. New York University, No. 18-2707-cv (2d Cir.); and Hughes v. Northwestern University, et al., No. 19-1401 (U.S.).