Outlook for 2017 retirement plan litigation

Copycat lawsuits targeting 403(b) plans, as well as litigation probing a fiduciary's duty to monitor investments, the DOL fiduciary rule, church retirement plans and cybersecurity issues are likely to crop up this year

Jan 3, 2017 @ 12:50 pm

By Marcia S. Wagner

2016 saw an uptick in litigation targeting retirement plan fiduciaries, and 2017 will see more of the same, plus the resolution of the definition of a church plan with respect to organizations affiliated with churches, and more cases involving a plaintiff's standing to file a civil action under ERISA.

We can expect to see more litigation with respect to Code Section 403(b) plans alleging various breaches of fiduciary duty. This is a clear example of low-hanging fruit ripe for copycat litigation. It is actually somewhat surprising that it took as long as it did for these suits to be brought.

While 403(b) plans have become closer to 401(k) platforms since the Pension Protection Act of 2006, there were significant differences prior to that date, so it remains to be seen whether those fiduciary-breach claims will stand up.

Clearly, some of the large universities involved in these civil actions will contest the cases vigorously. But they may settle even if they have strong cases because the potentially high cost of an adverse decision makes settlement a cost-effective option.

The lawsuits against the administrators of 401(k) plans for various breaches of fiduciary duty will likely continue, although decisions such as the recent district-court decision in White v. Chevron may give potential plaintiffs pause.

Litigation can also be expected to flesh out the duty to monitor investments addressed in broad terms by the Supreme Court in Tibble v. Edison. Two issues need to be addressed: (1) the frequency of the monitoring activities and (2) the depth of the duty. A duty to monitor cannot be intended to duplicate the activities of the service provider performing the function.

The Supreme Court's decision to grant certiorari with respect to the definition of church plans under ERISA and the Internal Revenue Code could also produce a significant increase in litigation against these church-affiliated organizations. That is, if the Supreme Court agrees with the three circuit courts of appeal that have addressed this issue and concludes that the long-standing view of the Internal Revenue Service was incorrect and defined benefit plans of these church-affiliated organizations are not church plans.

The various defined benefit plans that engaged in de-risking activities such as temporary lump sum windows are also a potential target of litigation, although these may be difficult cases for plaintiffs to win. The allegation will be that there was a breach of fiduciary duty in disclosing to plan participants the advantages and disadvantages of selecting a lump sum.

While in all cases some disclosure would have been made, the allegations will be that because the plan sponsor had the objective of maximizing the number of participants who would elect lump-sum distributions, the disclosure to plan participants was one-sided to some degree.

There will also be more cases exploring the contours of Article III standing. (To bring an action under ERISA, a plaintiff must not only be within the zone of interests intended to be covered by the statute, but must also have constitutional standing under Article III of the Constitution.)

Article III standing was addressed by the Supreme Court in Spokeo v. Robins, in which it held that Article III standing requires a concrete injury even in the context of a statutory violation. Two court of appeal decisions have already addressed the application of Spokeo: the Eighth Circuit in Braitberg v. Charter Communications Inc., and the Fifth Circuit in Lee v. Verizon. Since plaintiffs will no longer be able to allege that a violation of ERISA automatically constitutes an injury in fact for purposes of Article III standing, there will likely be more motions to dismiss because of lack of Article III standing.

The DOL fiduciary rule is a bit of a wild card because there is no assurance that it will continue, or at least continue in exactly the same form it was originally promulgated. It is scheduled to go into effect April 10, but the Trump administration may tinker with it. It was intended to allow IRAs and non-ERISA plans to maintain civil actions; those actions will be forthcoming.

Additionally, by increasing the number of entities that will be treated as fiduciaries, the likelihood is that there will also be an increased number of lawsuits in which a party is joined by a defendant alleging co-fiduciary liability.

Also, it is probably only a matter of time before a data-security breach in a pension plan results in a claim for breach of fiduciary duty. Sponsors of welfare plans are generally familiar with these issues because of the Health Insurance Portability and Accountability Act of 1996 and the recent step-up in audit activity by the U.S. Department of Health and Human Services. But HIPAA is limited to group health plans and the DOL has, to date, not taken a position with respect to possible fiduciary duties with respect to the safeguarding of participant data.

However, in November, the ERISA Advisory Council, while not opining on the fiduciary issue, hoped that the DOL would “provide information to the employee benefit community to educate them on cybersecurity risks and potential approaches for managing these risks.” If plan sponsors do not at least pay some attention to the ways in which cybersecurity risks might be handled, and there is a data breach, some plaintiff may take the lead from the DOL and assert a fiduciary breach.

Finally, there will be additional stock drop cases filed, as plaintiffs attempt to satisfy the pleading standards established by the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer and Amgen, Inc. v. Harris.

Marcia S. Wagner is the managing and founding partner of The Wagner Law Group. She specializes in ERISA and employee benefits.


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