Sponsors and fiduciaries of health and welfare plans should be aware of a recently filed class-action lawsuit against alleged fiduciaries of a health plan. It challenges health-plan fiduciary oversight and reasonableness of fees similar to actions against fiduciaries of defined-contribution retirement plans. The action highlights the importance of establishing and documenting prudent fiduciary processes for making decisions on behalf of health and welfare plans.
The Employee Retirement Income Security Act of 1974 (ERISA) has long been a source of complex and often-expensive litigation for employers. However, as the number of actions brought by employees under ERISA have surged, employer-defendants have often relied on the so-called top-hat exemption to dismiss certain claims involving executives. Now, several federal courts of appeals have addressed the disputed contention that the presence of employee bargaining power is required for a plan to fall under the top-hat exemption. In this article, Elizabeth Rowe, J. Christian Nemeth and Joseph Urwitz look at recent appeals court decisions and their effects on this exemption.
Originally published in Benefits Law Journal, Autumn 2018
The US Court of Appeals for the Eighth Circuit recently affirmed a Minnesota district court’s dismissal of a claim against Wells Fargo & Company (Wells Fargo) under ERISA. A former employee had alleged Wells Fargo breached fiduciary duties by retaining Wells Fargo’s own investment funds as a 401(k) option, and defaulting to those funds when plan participants failed to elect another option.
In holding that the former employee failed to state a claim, the court in Meiners v. Wells Fargo & Co. reasoned that the plaintiff failed to plead facts showing the Wells Fargo investment funds were an imprudent choice. Specifically, the court found that the plaintiff’s allegations that an allegedly comparable fund performed better was not sufficient, especially given the other fund’s differing investment strategy. The court’s prior decision in Braden v. Wal-Mart Stores, Inc. established that plaintiffs could show that “a prudent fiduciary in like circumstances” would have selected a different fund by providing a basis for comparison–in other words, a benchmark. However, the Eighth Circuit declined the plaintiff’s invitation to extend the rationale of Braden by allowing a plaintiff to demonstrate imprudence with a benchmark that only possesses some similarities to the fund at issue.
The Eighth Circuit’s decision is in line with other courts’ rejection of ERISA claims based on the plaintiffs’ subjective views of which funds are the best overall investment. A US district court judge for the Northern District of Illinois recently labeled such breach of fiduciary duty claims “paternalistic” while dismissing a class action against Northwestern University.
ERISA broadly preempts state laws that “relate to” ERISA-governed employee benefit plans to ensure a uniform federal regulatory scheme and to relieve ERISA plans from the burdens of satisfying a patchwork of state laws. Recently, however, several states have enacted legislation designed to regulate the prices that pharmacy benefit managers, as third-party administrators for ERISA-governed plans, agree to reimburse pharmacies for dispensing prescription drugs to ERISA plan members. These regulations run afoul of ERISA, as the US Court of Appeals for the Eighth Circuit has twice held.
A federal judge in Rhode Island recently permitted several claims against Brown University to proceed in a lawsuit alleging that the university and its fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act of 1974, as amended (ERISA), by mismanaging Brown’s defined contribution plans. This decision follows the recent decision in a similar class action lawsuit against Northwestern University (see blog post here) in which a federal judge granted Northwestern a complete victory in its motion to dismiss.
Unlike in that decision, the court in Short v. Brown University allowed plaintiffs to proceed with claims relating to record-keeping services, including engaging more than one record-keeper, incurring excessive administrative fees and failing to conduct a competitive record-keeping bidding process. Of note, the court indicated that whether particular record-keeping fees are excessive involves questions of fact that cannot be resolved on a motion to dismiss. If other courts were to adopt that line of reasoning, a plaintiff who alleged that any level of fees was excessive could survive a motion to dismiss. The court also permitted plaintiffs to advance claims that Brown chose more expensive funds with poor historical performance, including the CREF Stock Account and the TIAA Real Estate Account.
The court dismissed the plaintiffs’ claims that Brown acted imprudently by offering investment options with multiple layers of fees and using revenue sharing and asset-based fees. Like other courts that have ruled on class action lawsuits against fiduciaries of university defined contribution retirement plans, the Brown court also dismissed the plaintiffs’ claim that Brown acted imprudently by including too many investment choices in its lineup.
A federal judge in the Northern District of Illinois recently dismissed a lawsuit against Northwestern University alleging that the University and its fiduciaries mismanaged its retirement and voluntary savings plans. This is the latest decision in a series of class action lawsuits against prominent universities in which plaintiffs allege fiduciary violations of the Employee Retirement Income Security Act of 1974, as amended (ERISA) for retirement plans governed by Internal Revenue Code Section 403(b). Northwestern is the second university to obtain a complete victory on a motion to dismiss in a 403(b) university case; the first university to do so was the University of Pennsylvania in Sweda v. University of Pennsylvania.
In Divane v. Northwestern University et al., No. 16 C 8157 (N.D. Ill. May 25, 2018), plaintiffs alleged that Northwestern University and its fiduciaries breached fiduciary duties, engaged in prohibited transactions under ERISA and failed to monitor other fiduciaries. Specifically, fiduciaries allegedly mandated the inclusion of particular stock accounts in the plans, imposing excessive record-keeping fees, improperly allowed payment for record-keeping expenses through revenue sharing, and included too many investment options. The Court rejected all of plaintiffs’ fiduciary duty claims.
The Court also rejected plaintiffs’ claims that defendants engaged in prohibited transactions. Namely, the Court held that there was no transfer of plan assets that would substantiate a prohibited transaction claim under ERISA Section 1106(a)(1)(D) and similarly rejected plaintiffs’ Section 1106(a)(1)(C) argument that fiduciaries engaged in transactions that resulted in “furnishing of goods, services, or facilities between the plan and a party in interest” as a “circular “argument.
The Court denied plaintiffs’ motion for leave to amend, amounting in a complete victory for Northwestern.
In a recent 2-1 decision, the Fifth Court vacated the US Department of Labor’s controversial expansion of the ERISA fiduciary regulations (the New Fiduciary Rule). If the DOL does not seek a rehearing, the Fifth Circuit will enter a mandate revoking the New Fiduciary Rule nationwide. However, given recent fiduciary regulations proposed by the Securities and Exchange Commission, the DOL may be less likely to appeal the ruling and no longer seek to enforce the New Fiduciary Rule.
Join us for a webinar on Friday, May 4 as McDermott litigation attorney Chris Nemeth joins employee benefit attorney Judith Wethall to discuss what’s new in employee benefits litigation. Chris will give you a peek into a world you hope never to go! Learn about disturbing trends, traps and how to prevent your employee benefit plans from being targeted.
Friday, May 4, 2018
10:00 – 10:45 am PDT
11:00 – 11:45 am MDT
12:00 – 12:45 pm CDT
1:00 – 1:45 pm EDT
McDermott’s Benefits Emerging Leaders Working Group provides benefit professionals with tools to better serve employees in an ever-changing and evolving benefits landscape.
Presentations will tackle the latest benefits hot topics and best practice solutions, supplemented with important networking opportunities aimed to connect tomorrow’s benefit leaders with a broad network of professionals.
Planned agenda topics include:
Joe Urwitz, Todd Solomon and Chris Nemeth discuss provisions of The Employee Retirement Income Security Act of 1974 (ERISA) of particular relevance to tax-exempt entities and their investment managers, as well as ongoing litigation against Section 403(b) plans.
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