Q4 Litigation Landscape:  A “Historic” Excessive Fee Suit, Supreme Court Takes Up ERISA Burden of Proof Case, While More Forfeiture Reallocation Suits Fall Short  

Here’s What You Really Need to Know:

• A record settlement was reached in an excessive fee case where the plan sponsor fiduciaries continually failed to remove the underperforming target date funds.
• The United States Supreme Court has agreed to hear a case regarding which party bears the burden of proof in Employee Retirement Income Security Act (ERISA) cases; the answer to this question may impact the future of ERISA litigation.
• Forfeiture reallocation suits continue to emerge and the results of such cases continue to be mixed, yet consistently consider forfeiture decisions to be fiduciary decisions.
• Pension risk transfer lawsuits continue to be filed, specifically targeting transfers to a particular provider.

Let’s Dive In!

Supreme Court to Weigh in on ERISA Burden of Proof Case

Participant-plaintiffs in a long-standing excessive fee suit have convinced the United States Supreme Court to consider a case that could resolve the question of which party bears the burden of proof in ERISA litigation. Specifically, the case will address which party bears the burden of proof once an injury has been established.  Federal district courts historically have been split on the issue as the Eighth and Ninth Circuits have favored the defendants, while the Second, Third, Seventh, and Tenth Circuits have “required plaintiffs to allege additional elements to state a claim.”

The Department of Labor (DOL) has weighed in suggesting that the fiduciary defendants should have the burden of proof. Practically speaking, if this question is resolved, the answer may impact the future of ERISA litigation and the number of cases that are filed given the ultimate difficulty in establishing a claim.  However, this is not the first time the issue has come before the nation’s highest court – though they have yet to squarely address it.

Forfeiture Reallocation Suits Continue to Proceed as Judges Look at “Fiduciary” Decisions

Some two dozen suits have already been filed, challenging the use of forfeitures to offset employer contributions instead of reducing plan expenses or reallocating funds to remaining participants. One of the latest – a case involving the Clorox 401(k) plan – was dismissed by a federal judge who determined that even though the plaintiffs had standing to bring suit, that the use of forfeiture funds was a fiduciary decision, and that the forfeited monies were plan assets, the judge found the claims were “impermissibly broad.”

The judge advised that the plaintiffs failed to explain how the law would allow using forfeitures to offset employer contributions without constituting a fiduciary breach, but gave them time to amend their suit. Currently, four of these suits have been dismissed, two are proceeding to discovery, and one has been directed to arbitration.

The most recent dismissal was won by the fiduciaries of the Honeywell 401(k) plan. In that case, the judge agreed with the plaintiffs that the decision to use forfeitures was a fiduciary decision (the cases that have gone before a judge thus far are unanimous on that point), but disagreed that the decision was a breach of fiduciary duty since it was permitted by Internal Revenue Service (IRS) and Treasury regulations. As in the Clorox case above, ultimately – and citing language from a decision in favor of HP – the judge ruled that the claims were overly broad to be “plausible” but provided a 30-day window for the plaintiff to address those shortcomings.

These forfeiture reallocation challenges also continue to “piggyback” on traditional excessive fee claims. The latest lawsuit was filed by participant-plaintiffs against the fiduciaries of Pearson Retirement Plan, which has 19,135 active participants and nearly $2.3 billion in assets as of December 2023. The suit also targets the Board of Directors of Pearson Education, Inc. and the Administrative Committee for the Benefit Plans of Pearson. It alleges that using forfeitures to offset employer contributions constitutes a fiduciary breach and self-dealing. Additionally, it challenges the fees associated with the plan’s managed account default, comparing them not to target date fund alternatives, but with other managed account options.

Federal Courts Continue to Insist on More Than Size-Based “Comparables”

While excessive fee suits continue to be filed, federal courts now expect more specific allegations to establish that fees are “excessive.” Recently, an excessive fee suit against the $22 billion Pfizer Savings Plan was dismissed in federal court for “failure to state a claim”, with the court noting that a “flawed” methodology was used to determine comparator plans, which were not actually comparable. Similarly, a suit against the $700 million (4,600 participant) Mitsubishi Chemical America Employees’ Savings Plan was dismissed, with the judge commenting that without describing the ‘basket of services’ provided to each plan, Plaintiffs’ comparison was only an apples-to-apples comparison in name.”

However, in a recent case involving Parker-Hannifin’s 401(k) in the Sixth Circuit (covering Michigan, Ohio, Kentucky and Tennessee) an appeal court (by a 2-1 margin) overturned the dismissal of a similar case. The appeals court found that the allegations of lower-priced alternatives “feasible” and ruled that such a case should be decided at trial rather than at the motion to dismiss stage.  The dissenting opinion argued that this ruling, “weakens an important mechanism” to prevent costly litigation over “meritless claims.”

“Historic’ Excessive Fee Suit Strikes $69 Million Settlement

The parties in an excessive fee suit have settled for what is said to be the “largest ever” settlement in an ERISA case involving poorly performing investment options in a 401(k) plan.  The suit claimed that UnitedHealth refused to remove the allegedly underperforming Wells Fargo Target Fund Suite from its 401(k) plan because “Wells Fargo was a critical customer and financier for UnitedHealth.”  In March 2024, Judge John R. Tunheim, while rejecting some claims in a motion to dismiss, commented that “a reasonable trier of fact could easily find that Plaintiff Kim Snyder caught Defendant UnitedHealth Group, Inc. with its hand in the cookie jar.” The Court substantially denied UnitedHealth’s motion for summary judgment, citing ”genuine disputes of material fact” regarding whether UnitedHealth breached its duties of prudence and loyalty under ERISA by investing its employees’ 401(k) savings in underperforming Wells Fargo funds for over a decade and allowing its business relationship with Wells Fargo to influence this decision. These factors likely contributed to the decision to settle and the size of the settlement.

Pension Risk Transfers Continue to Draw Scrutiny

Another employer has been sued for its pension risk transfer (PRT) decision, with allegations that a breach of fiduciary duty put pensions at risk and that there were conflicts of interest in choosing the provider. The suit, filed by Schlichter Bogard on behalf of several participant-plaintiffs, challenges the actions of the Weyerhaeuser Company, its Annuity Committee, and State Street Global Advisors Trust Company. The suit instigates the transfer of $1.5 billion of its pension obligations to either Athene Annuity and Life Co. or Athene Annuity & Life Assurance Company of New York (collectively, “Athene”), described in the suit as “a highly risky private-equity-controlled insurance company with a complex and opaque structure.”

State Street is also named in the suit because Weyerhaeuser hired it to serve as an independent fiduciary to the plan, which required State Street to select an annuity provider in compliance with the regulations.[1] The suit alleges that not only did State Street have a conflicting interest in ownership of Weyerhaeuser shares and ability to influence the PRT decision. Additionally, between 2020 and 2023, State Street’s ownership of Apollo grew exponentially from $162.41 million to $1.1 billion, making State Street the seventh largest institutional investor in Apollo. State Street also provided custodial services for Athene insurance products, according to the suit.

To date, there are about a dozen of these suits pending, filed by various firms on behalf of plaintiffs. All of the suits challenge the transfer of pension obligations to Athene, citing concerns about the long-term viability and non-compliance with the “safest annuity available standard.”

Action Items for Plan Sponsors

1. For plans that use forfeitures to offset employer contributions, review the plan document to ensure it includes specific language to outline the permissible use of forfeiture funds for this purpose. Consider revising any discretionary language in the plan document to clearly direct how forfeitures will be used.
2. Consider providing regular fiduciary updates and training for plan committee members. This practice has benefited fiduciary defendants and is often required by plaintiffs’ firms in settlement agreements. Ensure new committee members have an opportunity to participate when they join the committee. Document that the training was completed.
3. Ensure there is a prudent process in place to review the plan investment menu, considering asset allocation tools like managed accounts and target date funds, as well as their fees. This process should involve a qualified and engaged investment committee, supported by experts and guided by an investment policy statement.
4. As more courts seek a “meaningful” benchmark understand and document the fees and the service(s) provided for those fees during recurring benchmarking exercises (think: annually or semi-annually).
5. While pension risk transfer litigation to date has focused on one specific provider, remember that this decision is a fiduciary decision, and should be made with care and prudence and thoroughly documented.

[1] See 29 C.F.R. § 2509.95-1.

This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.