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Focusing on process is the best defense against ERISA fiduciary duty lawsuits

March 7, 2017

Focusing on process is the best defense against ERISA fiduciary duty lawsuits

March 7, 2017

Authored By

Todd Smith

Todd G. Smith


courtroom gavelNationwide, lawsuits continue to be filed against plan sponsors and benefits committees acting as fiduciaries of employer-sponsored retirement plans. Often plead as class actions, a common claim is that these committees breach fiduciary duties by not prudently selecting and monitoring the service providers they hire to provide administrative and investment services to the plan.

A well-established body of case law has held that plan fiduciaries have a duty, arising from ERISA and the common law of prudence, to select service providers that will provide competent services, for competitive fees, while achieving suitable investment returns over time. Benefits committees, or other fiduciaries, must select and monitor these providers solely in the interest of plan participants, for the exclusive purpose of paying benefits and defraying expenses, with the care, skill and diligence that a prudent person would use under the same circumstances. See 29 U.S.C. § 1104(a)(1).

While plaintiffs were initially successful in extracting seven and eight figure settlements from defendants, more recent cases have suggested that courts will look at these claims with increasing skepticism. In particular, several recent decisions have made clear that plaintiffs have a high pleading burden and must allege facts showing a reasonable inference of wrongdoing, rather than simply alleging that cheaper options were available and that, with the benefit of hindsight, higher investment returns could have been realized. Most significantly, recent decisions have emphasized that plaintiffs must be able to show a failure of the fiduciary’s decision-making process, and that benefits committees that can document appropriate consideration of relevant issues, as well as a prudent rationale for their decisions, will ordinarily be shielded from liability.

The recent case of White v. Chevron Corp. (N.D. Cal. 2016) is instructive. Chevron’s 401(k) plan had over 40,000 participants and over $19 billion in assets. A class of plaintiffs brought suit, alleging many of the typical claims.

First, the plaintiffs alleged that the plan utilized high-cost investment options when lower-cost options were available. The court rejected these claims, stating that fiduciaries have a duty to consider more than simply cost, and that the plaintiffs had not alleged a failure of the decision-making process in selecting plan investment options.

Second, the plaintiffs alleged that one of the plan’s investment options significantly underperformed over time. The court rejected these claims as well, holding that plaintiffs must allege facts to show that the underperformance was predictable and that fiduciaries used a flawed process in evaluating fund options.

Finally, the plaintiffs alleged fiduciaries agreed to pay excessive fees to the plan’s recordkeeper. The court rejected the plaintiffs’ theory, stating that they failed to allege the compensation was excessive, particularly in light of the benefits committee’s periodic adjustments over time. Importantly, the case was dismissed at the pleading stage, before expensive and burdensome discovery could be imposed on the plan.

Increased focus on process is a positive development for plans and fiduciaries in these claims. Opinions such as Chevron Corp. provide hope that fiduciaries that engage in reasoned decision-making, and who document the process used, the decision made and the rationale employed, will ultimately avoid liability.

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