ERISA Class Action Watch

The Northern District of California has denied Bechtel’s motion to dismiss the fee class action against its 401(k) plan. Defendants had argued that (1) the complaint failed to allege any violation of applicable statutes or regulations regarding fee disclosure, (2) the plan complied with ERISA Section 404(c), and (3) Bechtel was not a fiduciary.

The court was unpersuaded by these arguments. It held that (1) mere compliance with statutes and regulations regarding fees is not sufficient to show compliance with ERISA, (2) 404(c) is an affirmative defense that is inappropriate on a motion to dismiss, and (3) Bechtel might be a fiduciary because it is alleged to appoint the plan’s fiduciaries.

The National Consumer Law Center has filed an interesting (and possibly procedurally defective) complaint against UNUM Life Insurance in Massachusetts. The core allegation is that instead of paying lump-sum death benefits as required by its policies, UNUM instead gave beneficiaries a check book that drew on an account maintained by UNUM. UNUM thus profited by keeping the assets under its control longer. It’s an interesting suit, but it may be impossible to pursue as an ERISA class action because the plaintiff class involves individuals from many (probably hundreds) of plans.

The RadioShack 401(k) Plan and ESOP are being sued in the Northern District of Texas. A brief look at the complaint shows that this is primarily a company stock drop suit. These suits are becoming as routine as shareholder derivatives following a stock decline, but two things stand out in this complaint:

• Although RadioShack stock has been very volatile, over the past decade it has actually outperformed the S&P 500. Over a five-year holding priod, returns have been only slightly negative. It is hard to see how plaintiffs will establish imprudence or damages without any long-term losses.
• Tacked onto the end of the complaint is a claim that the 401(k) plan’s mutual fund fees were excessive. Is this a sign that 401(k) fee suits are becoming so routine that plaintiffs are beginning to tack these claims onto every class action?

A complaint filed in the WD NC alleges that FedEx deprived North Carolina drivers of benefits by wrongfully classifying them as independent contractors. 

In addition to the widely discussed fee suits involving classes of participants, several purported class actions have recently been filed involving classes of plans. In Beary v. Nationwide, Beary v. ING, and Ruppert v. Principal Life, plaintiffs have accused insurance companies of breaching their fiduciary duties by accepting revenue sharing payments. The suits against Nationwide and ING are being brought on behalf of 457(b) plans using state law causes of action, while the suit against Principal Life is being brought on behalf of 401(k) plans under ERISA.

Thus far, defendants in the ING and Nationwide cases have moved to dismiss, but no rulings have been issued. Principal Life has not moved to dismiss because it is (wisely) attempting to get the suit against it moved out of the plaintiff-friendly S.D. Ill. Selected documents appear below.

• Beary v. ING Motion to Dismiss
• Beary v. Nationwide Motion to Dismiss
• Beary v. Nationwide Opposing Motion to Dismiss
• Beary v. Nationwide Opposing Motion to Dismiss Part II
• Beary v. Nationwide Motion to Dismiss Reply
• Ruppert v. Principal Life Answer

I would also be remiss in my duties if I did not mention Haddock v. Nationwide. It is arguably the model for all of these actions, and is still in the pretrial stages after more than five years.

Below are orders on motions to dismiss from Schlichter 401(k) fee cases:

• Boeing
• Exelon (it’s short!)
• Kraft
• Northrop Grumman

The SDNY has dismissed all claims in Bryerton v. Verizon. In an opinion heavily informed by the Seventh Circuit’s Cooper decision, Judge Chin reasoned that Verizon’s cash balance plan was not age discriminatory under ERISA because the “inputs” actually increased with age. Unsurprisingly, Gottesdiener is appealing the decision.

CIGNA has moved to dismiss the suit against it for excessive 401(k) fees. It argues that Schlichter’s complaint demonstrates its complete compliance with ERISA Section 404(c), and that therefore there cannot have been a breach of fiduciary duty. It is fairly unlikely that this motion will succeed, but it does raise an argument that defendants in all the fee cases will surely make: If aggregate fees are disclosed to participants, why should it matter how the fees are divided up between investment advisors and service providers? It’s an obvious argument — probably a little obvious to be right.

The problem is that 401(k) plans fiduciaries have a duty to select prudent investment options. If a investment option entails excessive fees, it shouldn’t matter that those fees were fully disclosed to participants; e.g., it is doubtful that fiduciaries would be fully shielded by ERISA 404(c) if they selected a 200 bps S&P 500 index fund for a large 401(k) plan. Moreover, to bring some behavorial economics into this, participants have a tendancy to assume that they get what they pay for: A more expensive fund should have better (or at least more active) management. Aggregate fee tallies (such as expense ratios) don’t let participants see that some of their management fees are paying for plan administration, rather than investment management. Participants might choose differently if they knew exactly what they were paying for.

That raises another issue which will probably be raised as fee litigation continues: Does it matter if some 401(k) plan participants subsidize others by choosing investment options that pay lots of revenue sharing? As it stands, many 401(k) participants (e.g, those who invest only in index funds without revenue sharing) may pay nothing towards plan administration. Is it permissible to let these participants “free ride” on revenue sharing paid by other participants?

Keller Rohrback and others have filed a nationwide class action in the E.D. Penn. against Wal-Mart. The complaint builds on allegations (and a jury verdict in Pennsylvania) that Wal-Mart has failed to compensate employees for all of the hours they worked. The idea is that because Wal-Mart makes profit-sharing contributions to 401(k) plan participants’ accounts based on their compensation, shaving the compensation acted to unlawfully reduce the contributions to the plan.  It’s a pretty straightforward theory that could apply to any company that “shaves” wages and also determines retirement plan contributions or benefits based on compensation. It’s also a slick way for Keller Rohrback to use ERISA to leverage the dozens of state-level claims against Wal-Mart for unpaid wages into a single, national class action.

Montoya v. ING – An offshoot of Spitzer’s investigations against ING and the New York State United Teachers. Participants claim that ING paid NYSUT kickbacks to push ING’s 403(b) products.

Boeckman v. A.G. Edwards – Participants allege that A.G. Edwards selected fee-intensive retail mutual fund shares fots it plan when it could have invested more cheaply by buying institutional shares or directly hiring investment managers.

Ruppert v. Principal Life Ins. Co. – Plans allege that Principal violated its fiduciary duties by selecting mutual funds for its bundled arrangements based on the amount of rvenue sharing it would receive.