Emerging signs of hope: challenges to the relentless tide of fiduciary litigation

A year ago (literally) we published an article, Litigation’s Bleeding Edge, detailing several developments that signaled (and not in a good way) a crisis in fiduciary litigation:

• In Cunningham v. Cornell University, the Supreme Court held that, to survive a motion to dismiss, a plaintiff bringing an ERISA prohibited transaction claim against plan fiduciaries need not plead that there was no available exemption with respect to it. The result: theoretically every fiduciary of a plan that pays for recordkeeping can be sued, with no possibility of get that lawsuit dismissed on motion.

• In that litigation, it is likely that plan fiduciaries will have to prove that the recordkeeper’s compensation is reasonable.

• In that regard, third party payments to the recordkeeper may have to be considered.

• And the ultimate decision about reasonableness may be made by a jury.

Signs of hope

Over the last year, however, we have seen developments that represent a pushback against that (seemingly) overwhelming tide.

We have separately covered each of those developments – in this article we simply want to summarize them (and pull them together in one place).

• No damages = no standing to sue. A North Carolina district court, in Peeler v. Bayada, rejected plaintiffs’ claims that, in including two funds in the fund menu, defendant plan fiduciaries violated ERISA’s prudence and prohibited transaction rules, dismissing them based on plaintiffs failure to show they suffered “a non-speculative financial loss” and thus did not have standing to sue.

  • One plaintiff did not participate in any of the challenged funds. The court found that the other plaintiff had not adequately alleged that she had “suffered a non-speculative financial loss traceable to the T. Rowe Price New Horizons Fund.” In this regard, the court set a high bar for establishing causation of what (in nearly all underperformance litigation) is a highly speculative loss, e.g., some other fund that could have been picked (in retrospect) performed better.

• The implications of this case for Cornell-copycat litigation are significant. But its implications for underperformance litigation generally are also game-changing.

• The Fourth Circuit holds that class actions in defined contribution plan fiduciary litigation are generally inappropriate. The Fourth Circuit, in Trauernicht, et al. v. Genworth Financial Inc., reversed class certification in a fund underperformance fiduciary claim, holding:

  • In fiduciary claims for money damages in DC fiduciary litigation, class actions are generally inappropriate.

  • As “individualized monetary claims” they cannot be joined in a “mandatory certified class.”

  • Class certification under an alternative rule, where “there are questions of law or fact common to the class,” could not be applied because in a DC plan there is no such “commonality” between plaintiffs. Each class member’s claim would be different because it would depend on, e.g., which target date fund sleeve he or she invested in, during what period.

• This decision makes it much harder for plaintiffs to bundle a large group of (in many cases small) claims to make “one big lawsuit.”

• Supreme Court to review standards for fund underperformance lawsuit. The Supreme Court has granted certiorari in (agreed to hear) Anderson, Winston, et al. v. Intel Corp. Inv., et al., litigation challenging the prudence under ERISA of the investment by two Intel defined contribution plans in (plaintiffs claim) “costly and underperforming hedge and private-equity funds.” This case promises to be critical to how courts handle underperformance litigation – cases in which plaintiffs challenge the prudence fiduciary/committee investment decisions based on a retrospective (“rear view mirror”) analysis of the targeted plan funds vs. other investment options.

• DOL proposes guidance on fund menu construction/alternatives. Under the proposal:

  • Only “illegal” investments are per se prohibited.

  • General ERISA prudence standards apply to all funds except a brokerage window.

  • The key to compliance is a prudent process.

  • Adequate consideration of six factors adds up to a prudent process:

    • Performance

    • Fees

    • Liquidity

    • Valuation

    • Benchmarking

    • Complexity

  • The proposal provides guidance/examples addressing key issues with respect to the use of alternatives in the participant directed DC plan fund menus.

  • And it provides for a “safe harbor”: a fiduciary who adequately considers these six factors is presumed have been prudent.

* * *

With respect to each of these developments, there is much that remains to be seen. Will the decisions on standing and class certification be adopted by other courts/other circuits? How will the Supreme Court rule in the Intel litigation? And what will final DOL regulations on fund menu construction look like and to what extent will courts adopt it?

We will continue to follow these issues.