The U.S. Court of Appeals for the Eighth Circuit recently affirmed a District Court’s finding that Principal Life Insurance Company (“Principal”) did not breach its fiduciary duties regarding its stable value contract for 401(k) plans.  Rozo v. Principal Life Ins. Co., No. 21-2026, 2022 U.S. App. LEXIS 24803 (8th Cir. Sept. 2, 2022).

In Rozo, the plaintiff, on behalf of retirement plan participants who invested in Principal’s Principal Fixed Income Option (“PFIO”), sued under ERISA asserting that Principal breached its fiduciary duty of loyalty by setting low interest rates for participants, and engaged in a prohibited transaction by using the PFIO contract to make money for itself.  The PFIO is an annuity that Principal offers and manages.  In managing the PFIO, Principal sets a guaranteed interest rate, which it calculates by subtracting “deducts” from the return it expects to earn on the assets.  Principal is only compensated for the positive spread between the amount it promises to participants and what its investments actually yield. 

Breach of Fiduciary Duty Claim

To prevail on its breach of fiduciary duty claim, the plaintiff needed to show that the Principal acted as a fiduciary, breached its fiduciary duties, and caused a loss to the plan. To make such a showing, plaintiff asserted that Principal acted at least in part to advance its own interests by increasing profits, thereby breaching its fiduciary duty.  In evaluating this argument, the Eighth Circuit acknowledged that it had yet to set forth factors for determining whether plan administrators acted “solely in participants’ interests” and noted the importance of identifying each of the parties’ interests when making conflict of interest determinations. 

To do that, the court adopted the First Circuit’s analysis in Ellis v. Fid. Mgmt. Tr. Co., 883 F.3d 1, 9 (1st Cir. 2018) and agreed with the District Court that a “tension” existed between the parties’ interests; the higher the deducts, the lower the rate paid to participants, and the higher Principal’s revenue from the PFIO.

Due to the inherent conflict, the court scrutinized Principal’s actions more closely, but nevertheless found the district court did not err in finding (1) Principal set the deducts in the participant’s interest and (2) the “deducts were reasonable and set by Principal in the participant’s interest of paying a reasonable amount for the PFIO’s administration.”  In reaching these conclusions, the court highlighted that tension does not inevitably result in the type of conflict of interest that establishes a breach of the duty of loyalty and “ERISA does not create an exclusive duty to maximize pecuniary interests.”

Prohibited-Transaction Claim

The court likewise affirmed the dismissal of the prohibited transaction claim because Principal proved that its compensation was reasonable, and therefore it is exempted from liability.

Takeaways

This decision solidifies that companies like Principal, who offer fixed-income investment products, can create fiduciary responsibilities when they deduct from investment returns and set participant rates. Accordingly, companies who offer such investment products must analyze the appropriate factors to ensure compensation is reasonable and the fund is not operated with a profit objective for the company. 

Since the Supreme Court’s January ruling in Hughes v. Northwestern University, circuit courts throughout the country have issued varying rulings regarding 401(k) fee litigation cases. These include the Ninth Circuit in Trader Joe’s Co. and Salesforce.com, Inc., and the Sixth Circuit in CommonSpirit Health, Inc. and TriHealth, Inc.  Most recently, the Seventh Circuit has weighed in, affirming the dismissal of a 401(k) fee litigation in Albert v. Oshkosh Corporation, No. 21-2789 (7th Cir. 2022).

In Hughes, the Supreme Court held that offering some inexpensive investment funds does not prevent claims of breach of fiduciary duties when that plan also offers expensive funds.  Further, the Court reiterated that ERISA requires plan fiduciaries to monitor all plan investments and remove any imprudent ones.

In Albert, the Seventh Circuit ruled in favor of Defendant Oshkosh Corporation, affirming the dismissal of Plaintiff’s claims challenging the fees charged under Oshkosh’s 401(k) plan, and, in doing so, clarified and cabined the impact of Hughes on Seventh Circuit precedent.  There, Plaintiff Andrew Albert, on behalf of himself and a putative class, alleged Oshkosh violated ERISA by (1) mismanaging its retirement plan by breaching fiduciary duties in authorizing the plan to pay unreasonably high fees for recordkeeping and administration; (2) failing to adequately review the plan’s investment portfolio to ensure that each investment option was prudent; and (3) unreasonably maintaining investment advisors and consultants for the plan despite availability of similar service providers with lower costs or better performance histories.

Dismissing Plaintiff’s recordkeeping fee claim, the Court cited to, and agreed with, the Sixth Circuit’s reasoning in Smith v. CommonSpirit Health.  The Albert court held that, as in CommonSpirit, “Plaintiff failed to state a duty of prudence claim where the complaint failed to allege that the recordkeeping fees were excessive relative to the services rendered.” (internal quotations and alteration omitted).  The Court then emphasized that Hughes does not require fiduciaries to regularly solicit bids from service providers, maintaining that Seventh Circuit precedent in that regard was “left untouched” by Hughes.

The Court also dismissed Plaintiff’s claims alleging excessive investment management fees.  Plaintiff first advanced a theory that the Plan should have offered higher‐cost share classes of certain mutual funds because the “net expense” of those funds would be lower based on the revenue sharing they offered.  The Court, recognizing that no court decision has credited this theory, held that ERISA imposes no requirement to choose investment options on this basis.  The Court also dismissed the theory that Plans must opt for cheaper, passively managed funds.

Next, the Court dismissed the Plaintiff’s claims that the fees for investment advisors were excessive because Plaintiff did not provide any basis for comparison to determine that such fees were, indeed, excessive.

The Court then dismissed Plaintiff’s duty of loyalty claims, based on the allegation that the Plan’s recordkeeper, Fidelity, encouraged the Plan to use Fidelity’s subsidiary as an investment advisor.  The Court held that no breach of duty of loyalty can be inferred on Oshkosh’s part, nor on Fidelity’s part, because Fidelity is neither a named defendant nor a fiduciary.

Lastly, Plaintiff alleged Oshkosh engaged in prohibited transactions with Fidelity by paying excessive fees for Plan services.  The Court dismissed this claim, holding that it would be “nonsensical” to read ERISA § 406(a)(1) “to prohibit transactions for services that are essential for defined contribution plans, such as recordkeeping and administrative services.”

This decision provides insight into how lower courts and the remaining circuits may handle 401(k) fee cases, post-Hughes.  As always, we’ll monitor and report on how each circuit rules on these cases.

On June 21, 2022, CommonSpirit Health defeated a putative class action brought by former employees who alleged that the company mismanaged their 401(k) plan by offering higher-cost, actively managed investment options when lower-cost index funds with better returns were available. The plaintiffs also alleged that the plan’s recordkeeping and investment management fees were excessive when compared to industry averages.

The plaintiffs argued that CommonSpirit and its retirement plan committee were imprudent for offering actively managed funds instead of cheaper index funds in the plan’s investment lineup, noting that the actively managed funds trailed the three- and five-year returns of purportedly comparable index funds. The 3-judge panel disagreed and affirmed the district court’s dismissal, reasoning that “[m]erely pointing to another investment that has performed better in a five-year snapshot of the lifespan of a fund that is supposed to grow for fifty years does not suffice to plausibly plead an imprudent decision—largely a process-based inquiry—that breaches a fiduciary duty.” The Court clarified that comparing actively and passively managed funds, without consideration for each fund’s discrete objectives, “will not tell a fiduciary which is the more prudent long-term investment option.”

The Court also affirmed dismissal of the recordkeeping and management fee claims. The plaintiffs alleged that the plan’s recordkeeping fee, ranging between $30 and $34 per participant, was excessive compared to “industry average costs” totaling $35 per person in other plans. But the Court held that the plaintiffs failed to plead that the fees were excessive relative to the services rendered, noting that the plaintiffs failed “to give the kind of context that could move this claim from possibility to plausibility.” And as to the management fees, the Court opined that this claim was merely a recast of the active vs. passive fund claim, iterating that higher investment fees alone are insufficient to state a breach of fiduciary duty claim, a process-based inquiry.

The case is Smith v. CommonSpirit Health, et al., No. 21-5964 (6th Cir. 2022)

The U.S. Supreme Court’s opinion in Dobbs v. Jackson Women’s Health Organization, No. 19-1392 (June 24, 2022), overruling Roe v. Wade and Planned Parenthood v. Casey, has far-reaching consequences across many areas. This special report examines the potential impact Dobbs will have on employee benefits litigation.

Click here to read the full article on our website.

The DOL’s cybersecurity investigation into Alight Solutions, LLC, a retirement plan recordkeeper, has queued up court rulings on the reach of the DOL’s subpoena power that may have important implications for ERISA plan sponsors and their respective recordkeepers and service providers moving forward. First, the Seventh Circuit will weigh in on whether the district court erred in compelling Alight to produce certain documents over Alight’s objections that: (1) the DOL lacks the authority to investigate a recordkeeper because its actions are not fiduciary in nature, (2) the requests are overbroad because they are not limited to cybersecurity incidents involving Alight’s clients, and (3) the requests for unredacted documents would violate Alight’s confidentiality agreements with its clients and plan participants.

In addition, while the appeal has been pending in the Seventh Circuit, the parties await another decision from the district court that will speak to the DOL’s power to share confidential documents received in an investigation across other government agencies. Alight seeks to require the DOL to attach the Confidentiality Order to any disclosure it makes to another governmental agency. However, the DOL has argued in response that the retention and sharing of documents by the United States is already highly regulated and to add additional burdens would circumvent Congress’s power.

Final resolution of these issues will be of interest to benefit plan sponsors and service providers, particularly those with ongoing DOL investigations.

The Third Circuit Court of Appeals recently held that as the plan fiduciary of Universal’s defined contribution plan, Universal Health Services Inc. and its plan investment committee (collectively “Universal”) must face a class action claiming its retirement plan included imprudent investment options charging excessive fees to more than 60,000 participants, even though the three named plaintiffs only invested in seven of the 37 plan investment options challenged by their lawsuit.

Universal had appealed a 2021 decision certifying the Employee Retirement Income Security Act lawsuit as a class action covering all of the plan’s 60,000 participants. Universal claimed that the class as certified was overbroad because the three named plaintiffs had only invested in a handful of the challenged funds in the plan and, therefore, their claims were not typical of the class. Universal also argued the plaintiffs only had standing to sue on behalf of others who had invested in the same funds.

A unanimous three-judge panel said that while the named plaintiffs only invested in a fraction of the funds offered by the plan, Universal’s alleged failure to properly evaluate investment fees affected all the funds in the Plan the same way. The appellate court focused on the investment decisions offering the suite of challenged target funds to conclude plaintiffs had a concrete stake in and typical class claims as to those decisions, even though plaintiffs had not invested in all of the funds in that suite. The appellate court applied this same analysis to plaintiffs’ claim Universal failed to follow a prudent process to evaluate investment options offered in the plan. While the appellate court acknowledged that allowing class representatives to bring claims based on funds they didn’t personally hold “may result in some inefficiency at the damages stage” of litigation, the court held that it doesn’t bar class certification under Federal Rule of Civil Procedure 23(b)(1).

This case is Boley v. Universal Health Servs., No. 21-2014, 2022 U.S. App. LEXIS 15001 (3rd Cir. June 1, 2022).

Four former employees of Eversource Energy Company recently obtained partial class certification of their claims. However, the District of Connecticut ruled that because the named plaintiffs are all former participants in the plan, they could not seek prospective relief, and only granted certification with respect to claims for retrospective relief.

Plaintiffs’ Second Amended Complaint sought prospective injunctive relief as well as retrospective relief for damages related to alleged breaches of fiduciary duty for charging excessive recordkeeping fees, investing in a suite of actively managed target date funds known as the Fidelity Freedom Funds instead of the lower cost, passively managed Freedom Index Funds, and imprudently investing in and retaining other specific investment options. Overall, 14 of 19 investment options in the plan were challenged, and all challenged options were invested in by at least one of the four named plaintiffs.

Defendants opposed class certification on the grounds that the named plaintiffs lacked Article III standing to: (1) seek prospective relief as they were not current participants in the plan; and (2) claim losses on behalf of funds in which they did not personally invest. The Court agreed with the defendants on their first argument, but disagreed as to the second.

First, the Court found that although the plaintiffs satisfied the statutory definition of “participants” in order to bring a cause of action under ERISA, they were still required to show the likelihood that they were subject to future harm when seeking prospective injunctive relief to satisfy Article III standing. Because the plaintiffs were no longer enrolled in the plan, the Court found “the defendant’s future management of the Plan does not pose a ‘real or immediate threat’ to the plaintiffs and they have no Article III standing to seek forward-looking injunctive relief.”

Second, the Court engaged in an extensive analysis of the different approaches to determine the extent of a plaintiff’s Article III standing to seek relief when suing in a derivative capacity under section 502(a)(2). One approach finds that a plaintiff has standing by simply participating in the plan and alleging injury to the entire plan, regardless of individual loss. The second approach requires a plaintiff to show sufficient injury of individual loss and then can only sue for losses for funds in which the plaintiff invested.

Here, the Court did not opine on the correct approach, but concluded the plaintiffs had constitutional standing because their Second Amended Complaint identified individual losses stemming from the defendants’ alleged breaches. Further, the Court found plaintiffs could also bring claims on behalf of putative class members who invested in the non-challenged funds (i.e., funds that none of the named plaintiffs invested in) because the alleged imprudence of defendants’ investment process implicated the “same set of concerns” of all putative class members and the derivative actions under Section 502(a)(2) are brought on behalf of the entire plan. Finally, although the Court denied certification prospectively, it did grant plaintiffs leave to amend to add a current plan participant with standing to seek such relief as a named plaintiff within thirty days.

With nearly 200 similar lawsuits filed in the past few years, this decision provides significant insight into the Article III analysis district courts undertake in the class certification context and highlights an argument all employers should make when former plan participants are seeking prospective relief.

Numerous Fortune 500 companies around the country have recently seen a barrage of cases alleging that notices required under the Consolidated Omnibus Budget Reconciliation Act (COBRA) fail to provide all information required by COBRA. Class action cases filed against high-visibility defendants in Georgia, Michigan, Florida, and elsewhere allege the companies violated federal law when they sent purportedly inaccurate, threatening, or confusing notices of former employees’ rights to elect to continue medical-insurance coverage after their employment ended.

Under COBRA, election notices must contain information including a mailing address for payments, the identity of the plan administrator, an explanation of how to enroll, and a physical form to elect coverage. The U.S. Department of Labor (DOL) provides a model COBRA notice template, updated in 2020, which contains these items. Yet few companies use DOL’s model COBRA notice, for several reasons. First, most companies contract with third-party vendors, who design and provide their own notices to covered persons experiencing a qualifying event, such as job separation. Second, these vendors often omit the plan administrator’s name to avoid confusion, because the payments must be mailed to the third-party vendor. Third, many items specified in the DOL model notice are often unknown (and therefore omitted) at the time notice is given. The resulting litigation is directed at the employer or plan sponsor as the defendant, but not the vendor whose election notice is challenged.

Employers have long had difficulty adhering to COBRA’s technical requirements, which have become even more onerous over the past two years. In addition to revising model COBRA notices in 2020, the DOL and Internal Revenue Service (IRS) also extended many deadlines relating to COBRA; DOL and IRS provided additional guidance following the enactment of the American Rescue Plan Act of 2021.

New COBRA litigation was already surging before these changes went into effect, and the increased complexity added by these new developments have added fuel to the fire. Purely technical violations of COBRA’s notice provisions not resulting in actual harm to the plaintiffs, when brought as a class action, can nevertheless expose defendants to staggering potential damages because of statutory penalties that accrue per person per day, as well as the potential for an award of attorneys’ fees.

In sum, COBRA provides many avenues to sue companies – many of whom do not even issue their own COBRA notices – for technical violations of its quickly multiplying requirements. These cases, filed as class actions, can present the risk of protracted litigation, even where the underlying claims lack merit. Accordingly, many defendant companies opt for class settlements ranging from just over $100,000 to just under $1,000,000, oftentimes at the outset of litigation before any discovery has even been conducted. Even less surprising is that more and more plaintiff-side firms are entering this field, eyeing the potential to take home one-third of a large common fund settlement shortly after filing a complaint.

The Employee Retirement Income Security Act of 1974 (“ERISA”) aims to balance the dual policies of (1) ensuring fair and prompt enforcement of rights under employee benefit plans, and (2) encouraging the creation of such plans. To strike this balance, ERISA pairs comprehensive rules regarding fiduciary responsibility with federal causes of action that allow plan participants and beneficiaries to recover benefits due, enforce ERISA’s mandates, obtain injunctive relief, and, where applicable, obtain attorney’s fees. At the same time, to protect employers and plan sponsors from operating under a patchwork of potentially conflicting state and local regulations, ERISA promotes uniformity in benefits administration by preempting “any and all state laws insofar as they may now or hereafter relate to” any ERISA benefit plan. 29 U.S.C. § 1144(a).

Click here to read more on the Healthcare Workplace Update blog.

On April 15, 2022, participants in the U.A. Plumbers & Steamfitters Local 22 Pension Fund filed a petition for panel and en banc rehearing of the Second Circuit’s ruling in favor of the pension plan’s decision to retroactively require plan participants to choose between either ceasing their post-retirement employment or foregoing early retirement benefits. See Metzgar v. U.A. Plumbers & Steamfitters Local No. 22 Pension Fund, No. 20-3791, 2022 U.S. App. LEXIS 5466 (2d Cir. Mar. 2, 2022), and our previous article on that decision.

In 2013, certain plan participants brought suit against the pension fund itself, the Board of Trustees, and the plan administrator, in her individual capacity, alleging that the plan’s reinterpretation of the conditions of “retirement” breached ERISA fiduciary duties to plan participants and unlawfully denied benefits. The plaintiffs also argued that having to choose between continued employment and receiving their pensions violated ERISA’s anti-cutback provision in that the reinterpretation of the plan subsequently decreased their amount of accrued benefits.

In March 2019, Magistrate Judge Leslie G. Foschio from the Western District of New York recommended granting summary judgment to defendants, focusing on the plan’s discretionary authority provision and finding that the plan’s reinterpretation was based on a reasonable belief that the provision violated IRS rules. Judge John Sinatra adopted that recommendation and granted summary judgment in October 2020. The Second Circuit affirmed.

In their petition for rehearing, plaintiff-petitioners argued that the Second Circuit ruling deviated from established precedent that precluded plan reinterpretations from decreasing previously awarded benefits. In particular, petitioners cited to the U.S. Supreme Court’s 2004 decision in Central Laborers’ Pension Fund v. Heinz, 541 U.S. 739 (2004), where the Supreme Court ruled that a plan could not be amended to “undercut” a plan participant’s reliance on the value of his or her pension rights and promised benefits. Petitioners also highlighted the Second Circuit’s 2006 decision in Frommert v. Conkright, 433 F.3d 254 (2d Cir. 2006) (referred to as “Frommert I”), which considered whether a pension plan violated ERISA’s anti-cutback rule by applying a phantom account formula to calculate the hypothetical growth that rehired employees’ past distributions would have experienced in order to reduce their present benefits, where the phantom account provisions had appeared in previous plan documents but had been omitted from a subsequently restated plan document. Petitioners argued that, in rejecting the plan’s claim that the provisions were always part of the plan as an unreasonable exercise of discretion and an anti-cutback violation, the Second Circuit had focused on the “centrality of ERISA’s object of protecting employees’ justified expectations of receiving the benefits their employers promise them.”

Petitioners also argued that the fund’s reinterpretation of the conditions of retirement for participants applied “discretionary[] [and] subjective” conditions on a participant’s ability to receive benefits, which violated ERISA regulations. Petitioners distinguished that while the fund did have discretion to determine whether participants had satisfied objective conditions required to receive a benefit, it could not subjectively decide what those conditions are.

In contrast, appellees argued that the anti-cutback provision is not even at issue as courts have held that plan participants cannot accrue illegal benefits.

Petitioners’ panel rehearing request is currently pending.