ERISA Issues: Proposed Rules, Regulatory Initiatives and Litigation

Retirement plan providers can be forgiven if they sometimes feel they have a target on their backs. These days, it could actually be two.

“Service providers, including stable value providers, are prime targets for both the Department of Labor and the plaintiffs’ bar,” said Jeremy Blumenfeld, partner and co-chair of the ERISA litigation practice at the law firm of Morgan, Lewis & Bockius LLP, during a presentation at the 2015 SVIA Spring Seminar in Key Biscayne, Florida.

Since fiscal 2013, Blumenfeld said, the DOL has been looking into fiduciary service providers under a National Enforcement Project aimed at uncovering improper or undisclosed compensation received by benefit plan consultants and investment advisors. The DOL referred 161 investigations for litigation in fiscal 2014, although no data is available to indicate how many of those were service provider cases.

Meanwhile, plaintiffs’ attorneys are targeting stable value providers in class-action lawsuits that typically allege either that a stable value fund was imprudently selected as an investment option for a retirement plan, underperformed a stable value benchmark, or charged excessive fees.

In the performance-related cases, Blumenfeld said, plaintiffs’ attorneys often compare a stable value fund’s performance—unfairly, in his view—to that of the Hueler Analytics Stable Value Pooled Fund Comparative Universe. That’s an average of 15 different stable value funds, and by definition, he pointed out, there will always be some funds that underperform it.

In fee-related cases, one common argument from plaintiffs’ attorneys is that service providers shouldn’t have been able to charge what they charged because they were fiduciaries with respect to the plan, and, in effect, should have negotiated with themselves to charge a lower fee. Courts have largely rejected that argument, Blumenfeld said, but he warned that “in litigation, a lot depends on the specific judge you’re faced with. It can be a close call.”

In a closely watched case filed in 2001 a firm recently agreed to settle for $140 million. The lawsuit centered on revenue-sharing practices and alleged that the firm had used high-cost outside mutual funds in the defined contribution plans it managed in order to maximize “undisclosed kickbacks.”

Blumenfeld said it’s not uncommon for service providers to view the settlement of such lawsuits as a cost of doing business. “I was not a defense lawyer in that case, but as somebody who’s been monitoring that case for years, there is nothing I saw that was specific to the firm that suggested they did anything bad that anybody else in the industry doesn’t do,” he said. “They were just a target at the wrong place at the wrong time, with mostly I think the wrong judge who was deciding some of these issues. It might be that at the end of the day the firm would have won that case. But I’m also confident the plaintiffs had experts that articulated damages theories that were many multiples of $140 million.”

Blumenfeld said service providers who want to minimize their litigation risk may want to consider aligning their products and services with what others in the industry are doing to avoid being singled out by the plaintiffs’ bar, even though that runs counter to conventional wisdom contending that companies should seek to distinguish themselves from their competitors. He said that in contract negotiations, stable value providers also might want to fight for less rather than more discretion in providing services to their clients, which could further minimize their risk. “I’m not saying litigation should be driving business decisions,” he said, “but these are important things to consider.”

While courts continue to weigh in on how service providers should be treating their clients, regulators have been fairly quiet recently. Michael Richman, who serves as counsel in the employee benefits and executive compensation practice at Morgan, Lewis & Bockius, said service providers are still waiting, for example, for final regulations from the Department of Labor on how to create a guide to the disclosures they make to plan sponsors under ERISA Section 408(b)(2). The DOL is expected to hold focus groups this fall to discuss the issue.

Elsewhere, Richman said, the DOL:

  • Has refined its Rule 404a-5 disclosure rules for plan participants to say that those disclosures must be provided at least once every 14 months rather than every 365 days.
  • Has been asking service providers, as part of the DOL’s National Enforcement Project, for copies of their 408(b)(2) and 404a-5 disclosures, although it is not clear exactly what the department is doing with them.
  • Is continuing to look into whether it should require additional disclosures from service providers about self-directed brokerage windows in defined contribution plans.
  • Appears to be closing in on new rules that will define what constitutes investment advice as it relates to determining fiduciary status under ERISA.