In recent months, Wisconsin federal courts have witnessed a dramatic increase in class litigation raising breach of fiduciary duty claims under the Employee Retirement Income Security Act of 1974 (ERISA). These claims target sponsoring employers and individuals who oversee plan investments and plan fees for employer-sponsored 401(k) plans. Generally summarized, the causes of action typically claim that plan managers and administrators chose excessively expensive investment options and/or incurred high administrative fees that caused plan participants to suffer losses compared to other less expensive options available on the open market. A particular target of plaintiffs is the method of paying third-party recordkeepers known as “revenue sharing,” which compensates recordkeepers based on the value of plan investments rather than a flat fee. Plaintiffs have sued company boards of directors as well. The relief sought includes the money that plan participants allegedly lost because of the fiduciaries’ faulty decisions, as well as attorneys’ fees. Due to the number of alleged class members, and a damages period typically running six years prior to the filing of a complaint, defendants face claims asserting that plan participants incurred losses of up to millions of dollars in deficient investments or excessive fees.
The Relevant Law
Under ERISA § 1002(21)(A), individuals have a fiduciary duty with respect to a qualifying benefit plan if they exercise discretionary authority or control to manage or administer the plan or control of plan assets. ERISA § 1104(a)(1) requires that such individuals (i.e., plan fiduciaries) discharge their duties “solely in the interest of the participants and beneficiaries and for the exclusive purpose of (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan.” Under ERISA’s regulations at 29 C.F.R. § 2250.404a-1(b)(1), with respect to plan expenses, a fiduciary satisfies its duties if it “(i) [h]as given appropriate consideration to those facts and circumstances that … are relevant to the particular investment or investment course of action involved … and (ii) [h]as acted accordingly.” Ultimately, ERISA requires a fiduciary to act in a prudent manner, given the facts and circumstances at the time of the fiduciary’s action. A fiduciary that breaches the duty of prudence may be personally liable for damages that include, but are not limited to, losses caused to the plan by the breach, as well as the plaintiffs’ attorneys’ fees.
In 2015, the Supreme Court of the United States issued a watershed decision in Tibble v. Edison International addressing 401(k) breach of fiduciary duty claims under ERISA. In Tibble, the Court addressed whether the imprudent retention of an investment was an event that started the statute of limitations period or whether the statute of limitations expired six years after the fiduciary first included the investment option in the plan menu. The Court held that a fiduciary of a 401(k) plan has an ongoing duty to monitor investments and that an ERISA plaintiff may timely raise a claim for breach of fiduciary duty by alleging the fiduciary failed to properly monitor and remove imprudent investments if such breach occurred within the statute of limitations period. That is, the Court found that the accrual of ERISA’s statute of limitations for fiduciary breaches is not limited to the date when an investment was first included in a plan but instead continues as the fiduciary monitors the investment over time.
In March 2020, the United States Court of Appeals for the Seventh Circuit narrowed options for plan participants suing 401(k) plan sponsors and fiduciaries in a case alleging that a plan had included too many investment options—investment options that were allegedly too expensive because they included actively managed mutual funds rather than less expensive index funds—and that the recordkeeper should have been compensated based on a flat fee rather than revenue sharing. In Divane v. Northwestern University, the court affirmed a lower court’s decision that had granted the defendants’ motion to dismiss the lawsuit. The Seventh Circuit rejected the plaintiffs’ contention that a flat-fee structure was always preferable to pay a plan’s recordkeeping expenses, rejected the plaintiffs’ claim that the plan had too many investment options, and rejected the plaintiffs’ claim that it was imprudent to have included more expensive actively managed funds when the plan also included index funds and participants were free to choose among options to invest their money.
Despite the decision in Divane, the state of the case law regarding 401(k) fee allegations remains a mixed bag. In contrast to the defendants’ victory in the Divane case, a class of plan participants in May 2020 obtained judgment regarding excessive plan administrative fees before the United States District Court for the District of Colorado. In Ramos v. Banner Health, a class made up of current and former employees brought suit alleging breaches of fiduciary duties that included, but were not limited to, failing to monitor plan offerings, paying excessive recordkeeping fees, and using plan assets to pay prohibited expenses. The plaintiffs sought, among other things, a recovery of approximately $85 million in plan losses as relief.
Following a bench trial, the court rejected the plaintiffs’ claim that the defendants had breached their fiduciary duties with respect to the funds offered by the plan. However, the court granted judgment to the plaintiffs with respect to administrative fees after it faulted the defendants for not having changed to a per-participant fee model sooner. A key point for the court on this claim was its conclusion that the defendants had not undertaken a request for proposal for recordkeeping services in nearly 20 years. The court concluded that the lack of regular review of recordkeeping fees was imprudent. On this claim, the court awarded the plaintiffs losses of nearly $1,662,000 and invited briefing to support an award of attorneys’ fees.
In terms of the ERISA breach of fiduciary duty cases filed in Wisconsin, the significant uptick in case filings is recent and can be traced to a common source. Prior to June 2020, there had been only four cases claiming breach of fiduciary duty under ERISA filed in Wisconsin since the Supreme Court’s 2015 decision in Tibble. However, in June and July 2020, the same plaintiffs’ counsel, a longtime professor of law who recently returned to private practice, filed six new cases.
Employers and fiduciaries that maintain 401(k) or 403(b) retirement plans may want to diligently monitor investment options and periodically compare administrative fees on the open market. Given the recent upturn in court filings, including in Wisconsin, plan fiduciaries are clearly under a microscope when making decisions about what investment options to include in their plans and what recordkeepers to hire to provide services to the plans. Moreover, these duties are ongoing, as circumstances may change and require plan administrators to make different investment and administrative services decisions to meet their fiduciary duty obligations. ERISA’s venue provision is very generous, allowing suit to be filed wherever a plan is administered, meaning that plan sponsors with Wisconsin operations now find themselves in a jurisdiction with plaintiffs’ counsel who are actively pursuing claims and litigation on behalf of plan participants and beneficiaries.