This article discusses significant cases that relate to Employee Retirement Income Security Act class actions and provides recommendations for proactive steps a plan sponsor should take to mitigate the risk of such litigation.
Defined Contribution Plans
Ninth Circuit Ruling Repaves Intersection of ERISA and Arbitration Law
There has been a slew of cases where retirement plan participants have sued their employers for mismanaging their retirement plan under Section 502(a)(2) of ERISA. These claims generally assert that employers acting as plan administrators engage in self-dealing and/or other practices that violate ERISA’s fiduciary standards, such as imprudently selecting investment options and administrative services or funds that earn high fees for the plan sponsor while performing worse than other competitors.
In combating these claims, employers have attempted to enforce various arbitration clauses or agreements that plan participants have executed. In 2018, the U.S. Court of Appeals for the Ninth Circuit held in Munro v. University of Southern California that claims of retirement plan mismanagement against the university could not be arbitrated because such claims fell outside the scope of arbitration agreements signed by the employees under which they had consented to arbitrate claims brought on their own behalf.
Because breach of fiduciary claims were brought on the plan’s behalf, the arbitration agreements did not extend to such claims, even though the losses pertained to each employee’s individual account. The court further held that the benefits from winning the claim for breach of fiduciary duty would belong to the plan and not the individual participants.
In August 2019, however, a three-judge panel of the Ninth Circuit in Dorman v. The Charles Schwab Corp. ruled that a potential class action breach of fiduciary claim against Charles Schwab could be sent to arbitration. In this case, a former employee alleged that Charles Schwab breached its fiduciary duties by including in the 401(k) plan certain Charles Schwab-affiliated funds that charged higher fees and performed worse than other investments on the market, and not examining whether there were other prudent choices or better options.
Because breach of fiduciary duty claims belonged to the plan and not the individual, the case hinged on whether the plan agreed to arbitrate the claims. The court pointed to the 401(k) plan’s language, which included a provision stating that "[a]ny claim, dispute or breach arising out of or in any way related to the [p]lan shall be settled by binding arbitration” and required that the arbitration be on an individual basis, which in essence prohibited participants from bringing class action proceedings.
The court ruled that, because the breach of fiduciary duty claims are ERISA claims, they arise out of and relate to the plan, so the plan’s arbitration provision controls, and that the employee could only recover losses relating to his own account in arbitration.
With this decision, the court overruled Amaro v. Continental Can Co., a 1984 Ninth Circuit case, which previously held that claims under ERISA could not be arbitrated, stating that Amaro cannot be reconciled with the 2013 U.S. Supreme Court decision in American Express Co. v. Italian Colors Restaurant, which held that federal statutory claims are generally arbitrable.
Plan sponsors who want to individually arbitrate potential ERISA Section 502(a)(2) breach of fiduciary (and other ERISA) claims may want to insert a provision in their 401(k) plan documents requiring arbitration on an individual basis for all or certain types of claims against or on behalf of the plan. When considering what types of claims to arbitrate, plan sponsors should note that individuals may obtain different results in arbitration and that the government would not generally be bound by the arbitrator’s decision.
Defined Benefit Plans
In contrast to fiduciaries of 401(k) plans and other individual account plans, fiduciaries of defined benefit pension plans historically have not had to worry much about participant litigation. But that may be changing.
Participants’ Rights to Bring Action for Investment Losses
When it hears arguments this term in Thole v. U.S. Bank NA the U.S. Supreme Court will consider whether participants have the right to bring an action under ERISA to recover investment losses on behalf of the plan, and whether the plan’s funded status impacts participants ability to do so. The plaintiff participants in that case alleged that imprudent investment decisions resulted in the plan suffering losses of $1.1 billion.
This caused the plan, which was previously overfunded (i.e., the value of the plan’s assets exceeded the present value of the plan’s liabilities), to become underfunded. After the claim was filed, the plan sponsor made a $311 million contribution to the plan which was sufficient to restore the plan’s overfunded status.
The U.S. Court of Appeals for the Eighth Circuit ruled that the participants in Thole did not have standing to sue under ERISA for investment losses because the plan was overfunded. The Eighth Circuit’s position differs from that taken in the Second, Third and Sixth Circuits, which have held that participants need not show individual financial harm before bringing an action for injunctive or equitable relief under ERISA.
Many plan sponsors are concerned that a Supreme Court decision in favor of the Thole participants would greatly encourage class actions against defined benefit plan fiduciaries on a scale similar to that currently faced by fiduciaries of 401(k) plans and other individual account plans.
Actuarial Assumption Class Actions
Beginning in December 2018 and continuing through 2019, at least 10 class action complaints have been filed against defined benefit plan sponsors and fiduciaries challenging the actuarial factors used to calculate certain benefits. Many of the plan sponsors are household names, such as Metropolitan Life Insurance Company, American Airlines Group Inc., PepsiCo Inc. and U.S. Bancorp.
The class actions focus in particular on the mortality assumptions used to convert a participant’s normal retirement benefit — i.e., the benefit payable to the participant as a single life annuity beginning at the plan’s normal retirement age (typically age 65) — into other forms of benefit. Many of the plans use mortality tables that were created in 1984 or 1971, or in one case 1951.
Since mortality rates have generally been improving over the last few decades, the plaintiffs argue that the plans’ use of outdated mortality assumptions understates the amount of annuity payments that would be made over the participant’s lifetime as a single life annuity, and thus understates the benefits that are payable as a joint and survivor annuity or as an early retirement annuity. The plaintiffs allege that the plans are violating ERISA by failing to provide alternative forms of payment that are actuarially equivalent to the participant’s normal retirement benefit, and that the plan fiduciaries are breaching their ERISA fiduciary duties by allowing these violations to occur.
While there is authority for the proposition that joint and survivor annuity benefits and other alternative forms of benefit should be actuarially equivalent to the participant’s normal retirement annuity, it is far from clear what actuarial assumptions need to be used for that purpose. Congress and the IRS, while providing guidance on actuarial assumptions to use for other purposes, have not provided guidance on the actuarial assumptions to use for making these types of benefit calculations, or how often those assumptions need to be updated.
The first two district courts to consider motions to dismiss these claims — the U.S. District Court for the Central District of Minnesota and the U.S. District Court for the Northern District of Texas, respectively — in Smith v. U.S. Bancorp and Torres v. American Airlines Inc., ruled in favor of the plaintiffs and allowed the claims to go forward.
A third district court, the U.S. District Court for the Southern District of New York in DuBuske v. PepsiCo, ruled in favor of PepsiCo’s motion to dismiss and the plaintiffs subsequently decided to end their class action. The court ruled that the ERISA anti-forfeiture provisions relied upon by the plaintiffs protect only normal retirement benefits that have accrued upon the attainment of normal retirement age, and since none of the plaintiffs alleged they had attained normal retirement age, their complaint failed to state a plausible claim.
In this respect, the PepsiCo decision may prove to be an outlier. Other courts are more likely to adopt a broader interpretation of ERISA’s anti-forfeiture provisions and consider the full range of actuarial equivalence issues raised in these class actions.
Plan sponsors should consult with their actuaries and counsel as to whether it would be appropriate to update the mortality table and other assumptions used to convert normal retirement benefits into other forms of payment. In light of the new class action environment, special care should be taken in implementing and communicating any such updates.
Reducing Exposure to 401(k) Plan Class Actions
There has been a drastic increase in 401(k) class actions since 2016. These lawsuits center on the assertion that plan fiduciaries made inappropriate investment choices and administrative and investment fees were too high.
A person becomes an ERISA fiduciary if they are appointed to that position or are named in the plan document or exercise discretionary authority or control over the plan’s administration and/or investments. Most plan documents provide — and conventional wisdom supports — that the company (and, therefore, the board) is the plan’s named fiduciary.
However, a company that establishes and maintains the plan, the plan sponsor or settlor, is not necessarily a fiduciary. ERISA does not require that the company plan sponsor be a named fiduciary and allows this function to be outsourced by the company.
While it is not free from doubt that the board can completely outsource the named fiduciary function by naming someone else as the named fiduciary, and plaintiffs are likely to include the company/board as a defendant in a lawsuit, the board should take steps to mitigate or avoid being named as, or acting as, a fiduciary.
Optimal Structure for Avoiding ERISA 401(k) Class Actions
The board should limit its role to adopting and amending the 401(k) plan (or having an authorized officer do so) as plan settlor and not as fiduciary. If the company (as plan sponsor) decides to amend its 401(k) plan to designate a benefits committee as the named fiduciary, the amendment should be adopted by an officer who does not otherwise act as a fiduciary.
The officer should play a limited role with regard to the 401(k) plan to hedge against the risk that such an act could be interpreted to make the officer a fiduciary. Finally, the charter of the compensation committee should give the committee only general oversight over all benefits. The committee should not appoint members of the benefits committee or specifically review its performance.
The plan document/summary plan description should name a benefits committee as the named fiduciary responsible for plan administration and investments and identify committee membership based on employment positions/titles. The benefits committee should have a charter with self-perpetuating membership and a specific list of its responsibilities over administration and investments.
The 401(k) plan is an operational matter and falls most prudently and organically with employees with expertise in finance, human resources and legal. We recommend that employees who are not executive officers and who have sufficient time and expertise occupy these roles. Board members generally are not 401(k) plan experts on plan administration and investments.
The benefits committee may want to adopt an investment policy with the assistance of its investment adviser and maintain adequate fiduciary insurance. Benefits committee members should also be indemnified by the company from losses and litigation expenses not arising from misconduct/fraud.
To avoid claims for administration or investment breaches, we recommend that the benefits committee assign its fiduciary duties in writing by appointing (1) a third-party plan administrator to administer the plan, (2) an investment manager to select the plan’s investments, and (3) an investment adviser to review the manager-selected investments/expenses against investment policy benchmarks.
A lawyer who is an ERISA subject matter expert should review all the service provider contracts, the fiduciary insurance policy and the indemnification agreements.
All of these selections and appointments should follow a robust request for proposal with a good record of the selection criteria. The benefits committee should meet with its advisers on a regular basis to track investments and expenses and keep minutes of the meetings. RFPs should be conducted every three to five years.
The foregoing best practices will reduce the risk of 401(k) class action litigation and board members becoming involved in lawsuits.
Class actions have long been a concern for fiduciaries of 401(k) plans, and are now threatening defined benefit plan fiduciaries as well. The steps described above for reducing exposure to 401(k) plan class actions should also be helpful with respect to defined benefit plans.
However, sponsors of defined benefit plans should be wary of adding mandatory arbitration provisions to their plan documents. In the 401(k) plan context, under Dorman, only the individual participant’s plan account would be at issue and, therefore, limiting class action treatment would necessarily narrow the exposure in any particular case.
In the defined benefit plan context, however, an individual participant’s arbitration proceeding alleging a fiduciary breach (such as with respect to investments or actuarial assumptions) could affect the entire plan even in the absence of a class action — fiduciaries would be subject to the mostly unappealable decision of an arbitrator without the benefit of the more limited exposure otherwise available with individual arbitration.
 Munro v. University of Southern California , 896 F.3d 1088 (9th Cir. 2018).
 Dorman v. The Charles Schwab Corp. , 780 Fed.Appx. 510 (9th Cir. 2019).
 Following the publication of the decision by the three-judge panel in August 2019, a Petition for Rehearing En Banc was denied in November 2019. In spite of the Ninth Circuit’s request for additional briefing, no judge requested a vote on the Petition. Accordingly, the decision stands and unless the plaintiff successfully appeals the case, the plaintiff is required to arbitrate his claims.
 Amaro v. Continental Can Co. , 724 F.2d 747 (9th Cir. 1984).
 American Express Co. v. Italian Colors Restaurant , 570 U.S. 228 (2013).
 Thole v. U.S. Bank, N.A. , 873 F.3d 617 (8th Cir. 2017).
 Smith, et. al. v. U.S. Bancorp, et. al. (C.D. Minn. 2019).
 Torres, et. al. v. American Airlines, Inc., et al. (N.D. Texas 2019).
 DuBuske et. al. v. PepsiCo, Inc. et. al., Docket No. 7:18-cv-11618 (S.D.N.Y. Dec 12, 2018).