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Understanding the importance of recent 403(b) ERISA settlements

Ethan Hatch March 20, 2019

A version of this article appeared on the Law360 website on March 18, 2019.

On March 11, 2019, Brown University announced that the school had reached a $3.5 million class action settlement in an ERISA matter brought by participants in Brown’s 403(b) retirement plan over allegations related to the school’s administration of that plan. This most recent settlement marks the latest in a veritable flurry of recent 403(b) excessive fee settlements.[1]

While these may not seem particularly noteworthy on their own, taken together, these settlements highlight the peculiar staying power of  403(b) ERISA cases even in uncharted waters. Whether or not there are more 403(b) settlements on the near horizon remains to be seen, but one thing is clear: Excessive fee ERISA litigation is here to stay and retirement plan fiduciaries of all stripes overseeing plans of all sizes would do well to come to terms with this reality and act accordingly.

These 403(b) settlements are also notable because they are the first of the institutional defendants to settle out of the initial wave of 403(b) ERISA cases which were filed against 12 prominent national universities regarding the administration of their retirement plans. This wave of ERISA class actions against private non-profit institutions of higher education  resembled the original wave of excessive fee ERISA class actions brought in 2006 and subsequent years against for-profit employers, involving these companies’ 401(k) retirement plans.

Echoes from the past

The first series of 401(k) excessive fee cases beginning in 2006 challenged long-established industry practices such as uncapped revenue sharing, and operationalized ERISA’s statutory requirements that the assets of a plan must “be held for the exclusive purpose of providing benefits to participants . . . and defraying reasonable expenses of administering the plan.” 29 U.S.C. §1103(c)(1) (emphasis added).

Not surprisingly, this first generation of excessive fee ERISA cases faced enormous opposition from a number of fronts, including from many operators in the retirement plan industry. These cases also faced hostility from the bench. Three of the first 401(k) cases to be filed were dismissed on their pleadings — with these dismissals being upheld on appeal.[2] Many other judges granted summary judgment against these 401(k) plaintiffs in whole or in part.[3]

Despite these initial setbacks, the 401(k) excessive fee cases persisted and eventually the plaintiffs in these matters were able to attain a number of meaningful milestones beginning with three eight-figure settlements in 2010,[4] followed by successes at trial,[5] and on numerous appeals thereafter, including to the Supreme Court.[6]

The staying power of these first excessive cases undoubtedly contributed to the advancement of ERISA 401(k) fiduciary practices.[7] In doing so these cases (and those that followed in their wake), helped develop a robust landscape of ERISA precedent to guide fiduciary decision-making and contributed to the dramatic decline of retirement fees industry-wide.[8]

As with the 401(k) cases that came before them, the 403(b) cases that were launched a decade later in 2016 faced significant skepticism and a unified opposition from the outset.[9] Over time, however — like the 401(k) cases — the 403(b) ERISA excessive fee cases have, on the whole, demonstrated their own kind of staying power, with the vast majority of these cases surviving motions to dismiss and proceeding into discovery and beyond.[10]

In this uncertain and costly environment, non-profit defendants are faced with a difficult “business” decision between litigating these matters through trial (and likely appeal) — while incurring millions of dollars in expenses along the way and still risking the potential exposure of an adverse judgment —  or engaging in substantive mediation with the aim of achieving resolution through settlement.

Where do we go from here?

If history is to repeat itself, this recent swell of 403(b) settlements may represent a turning point for the next generation of excessive fee retirement plan suits brought against non-profit institutions.

If the 403(b) excessive fee litigation continues along a trajectory similar to its 401(k) predecessors, then we can expect the recent 403(b) settlements to usher in a new volley of suits brought against institutions overseeing slightly smaller retirement plans than the billion-dollar-plus plans at issue in the first wave of 403(b) cases.[11]

Also, because these follow-on cases will challenge the asset-based fees of retirement plans with smaller assets and fewer participants (i.e, less potential damages), expect the plaintiffs in these suits to buttress their familiar stable of core claims with additional causes of action introducing new theories of fund underperformance, challenging the use of unmonitored “tiers” of funds, and examining all manner of payments that might constitute prohibited transactions under ERISA.[12] Legal adaptations and permutations like these have proven critical to sustaining the viability of these cases for over a decade and are likely to factor even more prominently in the decade to come.

Ethan D. Hatch is an associate in Thompson Coburn's Business Litigation practice.

[1] In settling its 403(b) suit, Brown joins (1) the University of Chicago (who previously settled a similar 403(b) action against it in May 2018 for $6.5 million), (2) Duke University (who had its $10.65 million settlement approved by the court earlier this year), and (3) Vanderbilt University (who just a few weeks ago disclosed it had reached a 403(b) settlement with plaintiffs)—and together these four represent the entire universe of settlements of ERISA excessive fee suits involving university retirement plans to date.

[2] See e.g., Hecker v. Deere & Co., 469 F.Supp.2d 957 (W.D. Wis. June 21, 2007), aff’d, 556 F.3d 575 (7th Cir. 2009), Loomis v. Exelon Corp., 2009 WL 4667092 (N.D. Ill. Dec. 9, 2009), aff’d, 658 F.3d 667 (7th Cir. 2011), Renfro v. Unisys Corp., 2010 WL 1688540, (E.D. Pa. Apr. 26, 2010), aff’d, 671 F.3d 314 (3d Cir. 2011).

[3] See e.g., Kanawi v. Bechtel Corp., 590 F. Supp. 2d 1213 (N.D. Cal. 2008); Taylor v. United Techs. Corp., No. 06-3194, 2009 U.S.Dist.LEXIS 19059 (D. Conn. Mar. 3, 2009), aff’d, 354 Fed. Appx. 525 (2d Cir. 2009); George v. Kraft Foods Global, Inc., 684 F.Supp. 2d 992 (N.D. Ill. 2010), rev’d in part, 641 F.3d 786 (7th Cir. 2011); Tibble v. Edison Int’l, 639 F. Supp. 2d 1074 (C.D. Cal. 2009), aff’d, 729 F.3d 1110 (9th Cir. 2013), vacated, 135 S. Ct. 1823 (2015), aff’d on remand, 820 F.3d 1041 (9th Cir. 2016).

[4] In 2010 alone, the author’s former employer, Schlichter Bogard & Denton, secured the following notable settlements of 401(k) excessive fee suits with large corporate defendants: Will v. General Dynamics ($15.15 million), Martin v. Caterpillar ($16.5 million), and Kanawi v. Bechtel ($18.5 million).

[5] See e.g., Tussey v. ABB, Inc., 2012 WL 1113291 (W.D. Mo. Mar. 31, 2012) (awarding plaintiffs $36.9 million in damages), aff’d in part, rev’d in part, 746 F.3d 327 (8th Cir. 2014); see also Tussey v. ABB Inc., 850 F.3d 951 (8th Cir. 2017).

[6] See e.g., Tibble v. Edison Int’l, 639 F.Supp.2d 1074 (C.D. Cal. July 16, 2009), vacated and remanded, 843 F.3d 1187 (Dec. 16, 2016); see also Tibble v. Edison Int’l, 729 F.3d 1110 (9th Cir. 2013), rev’d and vacated, 135 S. Ct. 1823 (2015).

[7] Tussey v. ABB Inc., No. 2:06-CV-04305-NKL, 2015 WL 8485265, at *2 (W.D. Mo. Dec. 9, 2015), vacated and remanded, 850 F.3d 951 (8th Cir. 2017) (finding that excessive fee litigation has “clarified ERISA standards in the context of investment fees” and has “educated plan administrators, the Department of Labor, the courts and retirement plan participants about the importance of monitoring recordkeeping fees and separating a fiduciary's corporate interest from its fiduciary obligations.”).

[8] Nolte v. Cigna Corp., No. 2:07-CV-2046-HAB-DGB, 2013 WL 12242015, at *2 (C.D. Ill. Oct. 15, 2013) (holding that as of 2013 the nationwide “fee reduction attributed to Schlichter, Bogard & Denton’s fee litigation and the Department of Labor’s fee disclosure regulations approach $2.8 billion in annual savings for American workers and retirees.”).

[9] See e.g., Brief of Amici Curiae American Council On Education and Other Higher Education Associations in Support of Defendants-Appellees, in the Third Circuit Court of Appeals supporting the University of Pennsylvania’s position on appeal in its ERISA case concerning the management of the school’s retirement plan:

Plaintiffs cannot paper over the historical and present-day differences between corporate and educational retirement plans to require that they all look alike. If the flimsy allegations of plaintiffs’ complaint—which rest on apples-to-oranges comparisons between 403(b) and 401(k) plans—are sufficient to state a claim for breach of fiduciary duty under ERISA, then there is no meaningful way for fiduciaries to protect themselves from being sued. Such an outcome would discourage thoughtful individuals from serving as fiduciaries in the first instance, which would undermine the good governance that these plaintiffs claim to be pursuing.

see also Brief for TIAA As Amicus Curiae In Support of Appellees and Affirmance, April 12, 2018, see also Rebecca Moore, What the 403(b) Excessive Fee Lawsuits Do Not Consider, PLANSPONSOR, August 18, 2016, available at: https://www.plansponsor.com/what-the-403b-excessive-fee-lawsuits-do-not-consider/.

[10] Of the 12 university 403(b) cases filed by Schlichter Bogard & Denton in 2016, only two — Northwestern and UPenn — failed to survive motions to dismiss. See https://www.bna.com/university-retirement-fee-n73014481848/.

[11] This occurred previously in the 401(k) litigation. After only one excessive fee ERISA case was filed in 2009 and 2010 respectively, following the trilogy of eight-figure 401(k) excessive settlements in 2010 (referenced above), five ERISA excessive fee suits were filed in 2011 alone.

[12] The follow-on ERISA 401(k) class actions cases that followed the first wave of cases brought these types of additional claims, and others. See e.g., Diebold v. Northern Trust Investments N.A., N.D. Ill. Case No. 1:09-cv-01934 (alleging Northern Trust breached its duties to retirement plans and their participants by imprudently investing collateral received from securities lending activities and by charging impermissibly high fees); Krueger v. Ameriprise, D. Minn. Case No. 11-cv-02781 (alleging Ameriprise engaged in prohibited transactions associated with its receipt of compensation from the 401(k) plan); Gordan v. Mass Mutual, D. Mass. Case No. 3:13-cv-30184 (alleging Mass Mutual imprudently retained a fixed-income investment option that was “unduly risky and expensive”); Bell v. Anthem, S.D. Ind. Case No: 1:15-cv-2062 (alleging Anthem imprudently included a microsomally low-yielding money market fund by failing to consider a stable value alternative with higher returns).