ERISA Litigation – The Year in Review

There were a lot of ERISA litigation settlements in 2019 – but how are those trending?

An analysis by Bloomberg Law finds that class settlements in employee benefit disputes hit $449 million in 2019 – a figure that they noted was up significantly from 2018’s $291 million, but well short of the $559 million in settlements recorded in 2017.

That said, “only” about half of the 2019 “tab” – some $193 million – came from excessive fee suits, according to the report. The average of such settlements? $12 million.

In March, the parties in Tussey v. ABB, one of the oldest (2005) excessive fee suits, came to terms for $55 million. Other settlements announced included:

• Northrop Grumman ($16.5 million); 
• a 2017 stable value suit settlement finally approved; 
• the settlement terms of two fiduciary breach suits involving Safeway’s 401(k) plan, its investment structure, plan consultant, and selection of target-date funds have been submitted for court approval; 
• another suit involving the $2.3 billion 401(k) and 403(b) plans of the Allina Health System (which was for $2.425 million); and 
• a $1.2 million settlement with the $96.5 million 401(k) plan of Gucci America Inc. This settlement pales in comparison to the normal multi-billion dollar plans that normally draw the attention of the plaintiffs’ bar, but even here the plaintiff cited the plan’s “substantial assets” and said that the plan fiduciaries “…have significant bargaining power and the ability to demand low-cost administrative and investment management services within the marketplace for administration of 401(k) plans and the investment of 401(k) assets.” 

‘Excessive’ Forces

Another grouping came with the so-called excessive fee suits involving university 403(b) plans. The year saw five of those settled, the largest – and in many ways the most bizarre (allegations of a quid pro quo between the University and recordkeeper Fidelity, whose CEO Abigail Johnson sits on the university’s Board of Trustees) – was with MIT, which settled with plaintiffs represented by Schlichter Bogard & Denton for $18.1 million – and, what seems to be emerging as a trend in these cases, a series of non-monetary commitments for RFPs, changes in revenue-sharing practices, and even training for plan fiduciaries.

The largest settlements prior to MIT were with Vanderbilt University, which in April 2019 announced a $14,500,000 cash settlement, as well as a long list of process/procedural changes that were also to be monitored over a three-year period, and Johns Hopkins, which settled for $14,000,000, also alongside a number of plan design/procedural changes. In March, Brown University settled for $3.5 million, as well as “other, structural relief” – and a $10.65 million settlement, also alongside a series of changes in plan administration was approved in February.

However, on that “score,” it’s worth noting that St. Louis-based Washington University, New York University and Northwestern University have thus far prevailed in making their cases in court. The University of Pennsylvania, which in 2017 won at the district court level, in 2019 had that decision partially overturned by an appellate court. The plan fiduciaries’ motion for an en banc review of that decision was rebuffed earlier this year, but just ahead of the holidays, they petitioned the nation’s highest court to weigh in on the threshold for getting to trial.

‘Self’ Serving?

Financial services companies that included their own funds in their 401(k)s also found themselves a target of litigation in 2019, among those striking deals were SEI ($6.8 million), MFS ($6.875 million), Eaton Vance ($3.45 million), Franklin Templeton ($4.3 million, announced in 2018) – though the terms in the latter, particularly as regards the attorney fees – were not without controversy.
In November, the parties in a suit involving Invesco announced a settlement, but those terms haven’t yet been announced.

As it turns out, those settlement numbers are lower than those seen in 2018, according to Bloomberg. However, it’s also worth noting that we began the year with a big victory by the American Century plan fiduciaries where many of the allegations that have been widely made in these excessive fee cases were refuted by testimony and documentation that revealed the kind of thoughtful, ongoing, due diligence process that plan fiduciaries are often counseled to undertake.

But if you’re wondering where the “big” money was in ERISA litigation in 2019 – there was $100 million by Dignity Health to end a church plan lawsuit (though that settlement hasn’t yet been approved, pending a resolution on the issue of attorneys’ fees), and SSM Health Care Corp. and St. Anthony Medical Center Inc. settled church plan lawsuits for $60 million and $4 million, respectively, according to the report. These (and a number of 2018 settlements) came in the wake of a 2017 decision by the U.S. Supreme Court regarding these programs at religiously affiliated hospitals that treat their pension plans as ERISA-exempt “church plans.” The lawsuits alleged that the hospitals abused ERISA’s religious exemption to significantly underfund their pensions.

What Next?

It seems likely that proprietary fund suits will continue to emerge (as a couple did in Q4), and while the American Century case would seem to provide a solid roadmap for defense, settlement – and settlement on the scheduled date of trial – seems to be becoming the order of the day. While the university suits seem likely to continue, that could change if the Supreme Court takes up, and decides in favor of the University of Pennsylvania defendants. As for whether excessive fee litigation will (finally) move down market – there’s evidence (the Gucci case noted above) that such things remain possible, though the contingent fee nature of compensation for the plaintiffs’ bar may serve to hold such things in check for a while longer. And yet, there are smaller law firms just now entering the “fray”… 

Advisors? Well, they’ve mostly avoided being drawn into the crosshairs of ERISA litigation – but not always.

If we’ve learned nothing else from this year of litigation, it’s what we’ve always known: a prudent process (eventually) prevails.

But sometimes it’s (apparently) cheaper to just settle.

- Nevin E. Adams, JD

A Retirement Savings Santa Claus?

A few years back — well, now it’s quite a few years back — when my kids still believed in the reality of Santa Claus, we discovered an ingenious website that purported to offer a real-time assessment of their “naughty or nice” status.

Now, as Christmas approached, it was not uncommon for us to caution our occasionally misbehaving brood that they had best be attentive to how those actions might be viewed by the big guy at the North Pole.

But nothing we said or did ever had the impact of that website — if not on their behaviors (they were kids, after all), then certainly on the level of their concern about the consequences. In fact, in one of his final years as a “believer,” my son (who, it must be acknowledged, had been particularly naughty that year) was on the verge of tears, worried – after a particularly cautionary status - that he'd find nothing under the Christmas tree but the coal and bundle of switches he so surely “deserved.”

In similar fashion, must of those responding to the ubiquitous surveys about their retirement confidence and preparations don’t seem to have much in the way of rational responses to the gaps they clearly see between their retirement needs and their savings behaviors. Not that they actually believe in a retirement version of St. Nick, but that’s essentially how they behave. That despite the reality that a a significant number will, when asked to assess their retirement confidence, express varying degrees of doubt and concern about the consequences of their “naughty” behaviors.

Indeed, one could certainly argue that many Americans act as though at retirement some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole. They carry on as though, somehow, their “bad” savings behaviors throughout the year(s) notwithstanding, they'll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snowsuit.

Unfortunately, like my son in that week before Christmas, many worry too late to influence the outcome.

Ultimately, the volume of presents under our Christmas tree never really had anything to do with our kids’ behavior, of course. As parents, we nurtured their belief in Santa Claus as long as we thought we could (without subjecting them to the ridicule of their classmates), not because we truly expected it to modify their behavior (though we hoped, from time to time), but because we believed that children should have a chance to believe, if only for a little while, in those kinds of possibilities.

We all live in a world of possibilities, of course. But as adults we realize — or should — that those possibilities are frequently bounded in by the reality of our behaviors. And while this is a season of giving, of coming together, of sharing with others, it is also a time of year when we should all be making a list and checking it twice — taking note, and making changes to what is “naughty and nice” about our personal behaviors – including our savings behaviors.

Yes, Virginia, as it turns out, there is  a retirement savings Santa Claus — but he looks a lot like you, assisted by “helpers” like your workplace retirement plan, the employer match, and your retirement plan advisor.

Happy Holidays!

- Nevin E. Adams, JD
 
P.S.: Believe it or not, the Naughty or Nice website is still online, at http://www.claus.com/naughtyornice/index.php.htm.

Easy Come, Easy Go?

Earlier this year, I commented that it would be interesting to see how expanded access to hardship withdrawals might impact that activity. Now we have some answers.

There’s more than a little irony in a legislative body that has long bemoaned both the paucity of retirement savings and the nefarious impact of “leakage” (pre-retirement withdrawal of retirement savings) opening those floodgates a little wider – but mostly the new law, and clarifying regulations[i] seemed to provide plan sponsors a bit more flexibility in administering these programs, some welcome latitude in helping their workforce navigate choppy financial waters.

What remained unknown was – would participants take advantage – or, more precisely, would they abuse the privilege.

The first sign – and it was a bit of an eye-opener – came from Fidelity who, in a white paper, claimed to have seen a shift in participant behavior. Not in the percentage of participants taking loans and hardships overall, but - at least among Fidelity-recordkept plans, there were fewer loans and more hardships. Less than 6 months after the law took effect, based on the evidenced trends, they predicted that the annual loan rate for 2019 would dip slightly to 9.2%, while the annual hardship rate would rise to 4.4% – up from about 3% in 2018 and an average rate of 2.2% since 2009, according to their data.

Intrigued, I posed the question to NAPA-Net readers in early October – and the responses indicated that while the move to embrace the option was underway, it was – well, it was still underway. Just over a third (35%) said the rules were already in place at most of their clients, and nearly a quarter (24%) said they were already in place at all of their clients, while another 23% said they were in place at “some” of their clients. The rest were in “not yet” territory. The most surprising aspect (to me, anyway) was the lack of plan sponsor response to the impact of the changes (at least in earshot of their advisors).

Now we have a direct response from plan sponsors, courtesy of a “snapshot” survey on the subject by the Plan Sponsor Council of America. The PSCA found that nearly two-thirds (65%) of respondents already have adopted the new hardship provisions. However, most (73%) reported no change in the number of hardship withdrawals since the new provisions were implemented. Fewer than one in five (17.8%) noted an uptick in hardship withdrawals in 2019 – but even among those that did, the vast majority (92%) are not considering any changes to their provisions at this time. Indeed, most plan sponsors amended their plans even where change was not mandatory; 65.1% eliminated the requirement to take plan loans before taking any hardship withdrawal, and 59.6% expanded the assets available for hardship withdrawals to include earnings on 401(k) contributions. More than half (52.3%) voluntarily expanded the list of reasons that qualify for a hardship distribution.

It's still early to assess the long-term impact of these changes, of course, though plan sponsors appear to have embraced them without much hesitation. And if the recent take up rates have been pretty much status quo – well, the markets and unemployment numbers have been good, and the natural disasters that often produce upticks in financial hardships have been muted of late. Yes, it’s early to evaluate the impact – to see if greater access will mean more access, to see if removing barriers does, indeed open floodgates, or if knowing that it will be easier to access the money, individuals are less inclined to do so.

In sum, to see if addressing the hardships of today wind up creating hardships down the road.

- Nevin E. Adams, JD

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[i]The expanded access, of course, came courtesy of the Bipartisan Budget Act of 2018, which, among other things, set aside or made optional several of the penalties and restrictions that had long been in place to discourage usage, and/or to ensure that the request was “serious.” This included aspects like the requirement to take a plan loan first (it’s now optional), and more significantly, the suspension of contributions. The changes not only broadened not only the categories of contributions eligible for hardship (it now includes matching contributions and non-elective contributions, as well as earnings on those accounts), but also included changes in the ability to qualify for a hardship distribution in the case of casualty losses and losses associated with federal disaster areas. The IRS also loosened the rules for determining the status of a hardship – arguably lessening the burden of both requesting and approving these distributions (final regulations were published in September).

7 Smart Shopping Steps to Avoid Buyer’s Remorse

Shopping for a new provider is not something one would normally equate with a Black Friday foray or a Cyber Week scramble. But if you have a plan sponsor — or plan sponsor prospect — who’s thinking about shopping for a new provider, here are some ideas to share.

Make a list — and yes, check it twice.

In an area fraught with as much potential complexity as searching for a retirement plan provider, it’s easy to think you can learn what you need to look for by simply going through the process. And while it’s certainly a learning process, doing so without a sense of core needs is a bit like going grocery shopping on an empty stomach; everything will sound good, and you’ll likely overload on the “sugar” (and perhaps overpay as well).

Even Santa Claus makes a list — so should you: of plan design features (real and anticipated) that you want supported.

Don’t neglect the problems.

Odds are if a plan sponsor is serious about a change in providers, there’s a reason – and it’s usually a sign of trouble, a problem, or worse – more than one problem. Even if that’s not the primary motivation, even the most well-run plan and satisfied plan sponsor has in their memory some issues, service shortfalls, or perhaps service incapability that have left a bitter taste.

The best way to avoid disappointment is to be clear about expectations – making sure that those are detailed and shared plainly with potential providers, preferably with a preface of “what procedures/protocols do you have in place to prevent something like….”

Give yourself plenty of time.

There’s nothing quite like the adrenaline rush of snagging that last desired item from the store shelves or happening upon that cyber deal minutes before it is slated to expire. And yet those moments are surely outnumbered, if not eclipsed, by the many more times that those who defer action until the last minute walk away empty-handed.

Human beings are, generally speaking, poor judges of time requirements, particularly with things with which they don’t have a lot experience (like provider searches) and that require the involvement/input of committees (like provider searches). Even those who are lucky enough to accurately gauge and/or have sway over the multitude of unforeseen obstacles and distractions that inevitably emerge, may well find that the provider of choice has time restrictions of their own. The good ones tend to fill their on-boarding queues quickly, after all – and plan sponsors who make their decisions late may well find that opportunity door has closed.

Have — and know — your budget.

These services aren’t free, though we all know they may be packaged in such a way that the plan sponsor doesn’t have to write a check. At a minimum, plan sponsors should know how much they are able — and willing — to pay. Beyond that, whether they write a check or not, they’d be well-advised, as a plan fiduciary, to be attentive to the cost(s) of the plan, who’s going to be pay them, and how those who provide services to the plan will be paid, and by whom. And they should have a functional understanding of how that compares with alternatives (including the incumbent arrangement).

Remember that provider rankings are only a starting point.

I’ve never put much stock in online consumer ratings – even before we discovered that some of those are bought and paid for by the products/firms rated. Sometimes those ratings contain clues that can help inform your decision, of course, but I’ve never really understood the value in knowing what a complete stranger thinks/feels about a book, music album, movie or restaurant. Complicating matters is the very human tendency to “weigh in” mostly on things you absolutely love – or absolutely loathe. 

Think about it — a finite number of plan sponsors (often an infinitesimally small percentage of their actual client base) about which you know nothing – including all the things that factor into such perspectives – the complexity of plan design, capabilities of staff or breadth of perspective/experience or tenure with the provider – rate those provider capabilities on some arbitrary point scale, and from that some kind of satisfaction score is gleaned (sometimes, god forbid, it’s an average of averages).

It’s not a bad place to start, if only to winnow the field of consideration — but like those rankings on Amazon, they have a limited value in predicting YOUR satisfaction with that platform. They’ll more likely affirm your preexisting preferences or fuel your imbedded concerns, but they aren’t much benefit in creating new ones.

Trust — but verify — references.

Anybody who’s paying attention will vet references before passing them along. As a consequence, proffered references are, almost by definition, going to be positive (though I never cease to be amazed how many are simply dredged up from an old RPF file without being refreshed).

But even vetted and verified references can provide insights. Press for references that are similar in terms of plan size, design and complexity. It’s often insightful to look for a similar plan who has converted to their platform in the past year — better still, someone who has left that platform in the past year (though it will likely be due to M&A activity, not service or fees). Those who have recently transitioned can be a fount of real-world wisdom on things such as what questions they wished they had asked when they went through their process.

Get help.

Unless they are a serial provider shopper (and if they are, watch out), odds are they aren’t expert at the business of shopping for a provider. It is a complicated and time-consuming process, with an abundance of opportunities for disconnect in expectations simply because the “right” question(s) aren’t asked, and sometimes because the “wrong” answers aren’t recognized as such.
Plan sponsors are, of course, as an ERISA fiduciary, expected to review (and subsequently monitor) those that provide services to the plan with the skill and expertise of a prudent expert. Those who lack that expertise are expected to engage the services of someone who does.

Lest they wind up finding that all that shiny wrapping is just covering up what turns out to be a lump of coal instead.

- Nevin E. Adams, JD