2016 was the year that church plans went to the Supreme Court, excessive fee claims came to elite universities and the Department of Labor’s authority to alter its regulation of fiduciary conduct was challenged in multiple courts. Of course, stock drop litigation, excessive fee cases, and other assaults on the make up of 401(k) plans continued apace, even if they yielded the spotlight to flashier, more novel types of cases.
Church Plans Go To the Supreme Court
Over the past few years, at least 36 class action suits have been filed across the country against large medical institutions affiliated with religious entities attacking the status of their retirement plans under ERISA’s exemption for church plans. The lawsuits assert that these plans are not properly within that exemption and therefore must be brought compliant with ERISA. The relevant statutory language governing that exemption – which allows retirement plans to escape regulation under ERISA if they qualify as “church plans” – lacks clarity and leaves room to dispute when a plan qualifies for the exemption. Medical institutions affiliated, even if only remotely, with religious organizations have long designed their retirement plans without adhering to the strict terms of ERISA in reliance on a broad interpretation of the exemption’s scope taken by the Internal Revenue Service. Three federal courts of appeal have now narrowly construed the exemption in a manner contrary to the reading given it by regulatory agencies. The United States Supreme Court recently agreed to address this issue and decide the proper meaning to be given to ERISA’s church plan exemption.
Elite Universities Get the Excessive Fee Treatment
Perhaps the biggest media sensation in ERISA litigation in 2016 was the coordinated and nearly simultaneous filing of multiple lawsuits against many of the nation’s most prestigious universities. The suits, almost all of them filed by Schlichter Bogard & Denton LLP, which pioneered the concept of suing private industry 401(k) plans for excessive fees and undisclosed revenue sharing, accuse universities of paying excessive fees and having other allegedly costly deficiencies in their retirement plans. The lawsuits charge the plans with the typical panoply of complaints about retirement plans built around investment menus, including the use of overly expensive investment choices and excessive administrative costs. However, the suits also charge that the university plans not only include excessive fees and costs, but also an excessive number of investment options leading to poor returns for individual participants.
The Department of Labor Fiduciary Rule Litigation
If the litigation campaign mounted against university retirement plans was not the biggest media splash in the world of ERISA litigation in 2016, then it was only because it was eventually overshadowed by the high profile lawsuits filed seeking to set aside the Department of Labor’s new regulations concerning the definition of fiduciary under ERISA. Not long after the Department issued its new regulations, six different lawsuits were filed in multiple federal courts seeking to have the regulations set aside, arguing that, among other claims, the Department’s regulations exceeded its authority or, if not, then the Department’s rule making was suspect. The courts have upheld the Department’s rule making in two of the cases, while the other actions remain pending.
“Stock Drop” Litigation After Dudenhoeffer
“Stock drop” cases continued along their merry way during 2016, even if the theory of liability, and related cases, fell from the lofty perch they had long held as a hot litigation topic. The term “stock drop” has long referred, in this context, to claims arising from the loss in value of a retirement plan holding that consists of the publicly traded stock of the plan sponsor. Clever lawyering had insulated plan fiduciaries from incurring liability as a result of large losses in the value of such holdings through the creation and enforcement of a legal rule known as the “Moench presumption,” which held that fiduciaries could not be held liable for declines in the value of company stock held in retirement plans absent extraordinary circumstances, such as an existential threat to the company’s very existence. Back n 2014, however, the United States Supreme Court rejected that test in Fifth Third Bancorp v. Dudenhoeffer, holding instead that fiduciaries are subject to liability if they were imprudent in managing or overseeing company stock holdings.
In 2016 , litigation continued apace over dramatic declines in company stock prices and their impact on the value of retirement accounts. However, despite the loss of the “Moench presumption,” overall, plan sponsors and fiduciaries generally fared well in defending against such claims. The highest profile court decision in 2016 in this area was likely Whitley v. BP, PLC, which was a stock drop claim arising from the explosion of the Deepwater Horizon offshore drilling rig, resulting in “a massive oil spill in the Gulf of Mexico and a subsequent decline in BP’s stock price.” The Court held that there was no viable defensive action the fiduciaries could have taken to protect the value of the company stock holdings in the plan that would not have simply inflamed the collapse in the stock price, and that this precluded liability for breach of fiduciary duty due to the loss of value in the holdings of company stock.
The central issue in the Whitley action turned out to the be the key issue in stock drop cases during much of 2016, and clearly will be moving forward into 2017 as well: namely, the need for plan participants to prove, for their stock drop claims to proceed, that plan fiduciaries could have taken an action during, or before, the collapse in value of company stock that would have made the situation better, and not worse.
Continued Litigation Over 401(k) Plans
Last but not least, 2016 saw the continuation of extensive litigation over the investment options in 401(k) plans. Many of these claims, both those newly filed in 2016 and those that were filed earlier but that continued to be litigated, were excessive fee cases, alleging that plan fiduciaries included investment options in plans that were more expensive – thus generating excessive fees for vendors – than were necessary. One of the foundational cases alleging this theory, Tibble v. Edison International, continues along after 10 years of litigation, including multiple trips to the Ninth Circuit Court of Appeals and one to the United States Supreme Court. In 2016, the Ninth Circuit reinstated the claims of plan participants that the fiduciaries breached their fiduciary duties by failing to monitor, and then remediate, excessively high fees charged by investment options in the company’s 401(k) plan.
One of the key trends in litigation in 2016 was the expansion of such lawsuits to include more novel and arguably sophisticated theories beyond simply alleging that fees were paid that were higher than necessary. One high profile example consists of the many claims filed charging that financial and similar companies included their own in-house products in the retirement plans of their own companies for the purpose of generating outsize fees for the plan sponsor, in breach of the fiduciary duty to manage the investments for the benefit of the participants. The year 2016 saw an expanding panoply of theories for attacking investment options and other aspects of the administration of 401(k) plans, and more of the same can be expected going forward.