ERISA Litigation Update

Key Takeaway: In one of the first appellate opinions since the U.S. Supreme Court’s Hughes v. Northwestern University decision, the Seventh Circuit interpreted Hughes narrowly and affirmed the district court’s order granting the motion to dismiss.

On August 29, 2022, the U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s dismissal of a lawsuit filed against Oshkosh Corporation (Oshkosh). The complaint alleged that the fiduciaries of the Oshkosh 401(k) plan allowed the plan to pay excessive recordkeeping, investment advisor, and investment management fees; engaged in prohibited transactions; and failed to disclose how the plan calculated revenue sharing fees. In broad strokes, the district court ruled that the plaintiff’s chosen comparisons for recordkeeping and investment fees were insufficient to plausibly infer that Oshkosh acted imprudently.

The Seventh Circuit affirmed. In doing so, it narrowly construed the Supreme Court’s Hughes decision, holding that Hughes only stands for the proposition that there is no “categorical rule” that including low-cost investment options in the at-issue plan always mitigates concerns about the plan’s inclusion of higher-cost investments (Goodwin’s analysis of the Hughes decision can be found here). In affirming dismissal, the court relied on prior Seventh Circuit decisions, which the court held were not impacted by the Hughes decision. Specifically, the court dismissed the challenge to the plan’s recordkeeping fees because the plaintiff did not allege whether the plan could obtain comparable recordkeeping services for a lower price. The court also dismissed the plaintiff’s prohibited transaction claim, holding that ERISA’s prohibited transaction provisions do not exclude the use of plan assets to pay routine plan expenses. Finally, the court dismissed the plaintiff’s claim that Oshkosh failed to disclose the plan’s revenue sharing calculation, finding that the Department of Labor regulation cited by the plaintiff does not require disclosures of that kind.

The decision is Albert v. Oshkosh et al., No. 21-2789, in the Seventh Circuit Court of Appeals, and is available here.

Key Takeaway: The Eighth Circuit agreed with the district court that a defendant can act loyally when its actions are motivated by an interest it shares with investors, even if in doing so it advances its own interests.

On September 2, 2022, the U.S. Court of Appeals for the Eighth Circuit affirmed the trial decision of the U.S. District Court for the Southern District of Iowa in favor of Principal Life Insurance Company (Principal) in a class action brought on behalf of individuals who had invested in the Principal Fixed Income Option (PFIO), a stable value product that Principal manages (Goodwin’s analysis of the district court decision can be found here). After a bench trial, the district court had rejected the plaintiff’s contention that Principal breached its duty of loyalty under ERISA when it set the PFIO’s rate of return in order to achieve profit objectives rather than to pay maximum returns. Instead, the court found that the interests of both Principal and PFIO investors were aligned because Principal set a reasonable rate of return that would result in a safe and secure investment product that provided guaranteed rates of return to the PFIO investors. The plaintiff appealed this ruling.

The Eighth Circuit affirmed the district court’s decision. On appeal, the plaintiff argued that the lower court’s holding was erroneous on the ground that ERISA’s duty of loyalty is violated by any action a fiduciary takes to advance its own interests, even if that action also advances the interests of the investors. The Eighth Circuit rejected this bright-line rule and instead agreed with the district court that a defendant can act loyally when it acts pursuant to a shared interest, even if that action also benefits itself. The court further agreed that Principal and the investors share an interest that the PFIO’s rate of return “appropriately account for Principal’s risks and costs in offering the PFIO . . . because a guaranteed [rate] that is too high threatens the long-term sustainability of the guarantees of the PFIO.”

This case is Rozo v. Principal Life Insurance Co., No. 21-2026, in the Eighth Circuit Court of Appeals. The decision is available here.

Key Takeaway: The Sixth Circuit largely affirmed the grant of a motion to dismiss, but reversed the district court’s dismissal of the plaintiffs’ claim that the defendants had failed to select the lowest-cost share class of the at-issue investments.

On July 13, 2022, the U.S. Court of Appeals for the Sixth Circuit affirmed in part and reversed in part the district court’s dismissal of a lawsuit against TriHealth, Inc. (TriHealth). The complaint alleged that the fiduciaries of TriHealth’s 401(k) plan had violated ERISA’s duty of prudence by (i) selecting underperforming, high-cost funds for that plan, (ii) failing to offer cheaper institutional share classes of investments in the place of more expensive retail share classes, and (iii) allowing the Plan to pay excessive administrative fees. The district court granted TriHealth’s motion to dismiss.

The Sixth Circuit affirmed in part and reversed in part. With regard to the plaintiffs’ allegations concerning selection of underperforming and high-cost funds, and excessive administrative fees, the Sixth Circuit affirmed the district court’s dismissal, holding that the plaintiffs’ arguments were foreclosed by the Sixth Circuit’s recent decision in Smith v. CommonSpirit Health, discussed in a prior Goodwin ERISA Litigation Update. The Sixth Circuit reversed, however, with respect to the plaintiffs’ share-class allegations, the only set of allegations the plaintiffs had made that were not present in Smith. The court reasoned that, “taken in their most flattering light,” the plaintiffs’ share-class allegations permitted an inference that “TriHealth failed to exploit the advantages of being a large retirement plan that could use scale to provide substantial benefits to its participants.” However, the court recognized that the claim might ultimately fail at a later stage of the case, if the evidence ultimately shows, for example, that the plan could not qualify for institutional share classes or if the plan’s revenue-sharing arrangement made the retail share classes less expensive than the institutional share classes.

The case is Forman v. TriHealth, Inc., No. 21-3977, in the Sixth Circuit Court of Appeals, and is available here.

Key Takeaway: The Seventh Circuit ruled that the Department of Labor can subpoena non-fiduciaries and investigate cybersecurity breaches.

On August 12, 2022, the U.S. Court of Appeals for the Seventh Circuit affirmed a district court order requiring benefits plan recordkeeper Alight Solutions (Alight) to produce documents to the U.S. Department of Labor regarding cybersecurity incidents that involved Alight. The decision is the latest development in a Department of Labor investigation into Alight with regard to cybersecurity breaches that began in July 2019. As part of that investigation, the Department of Labor sent Alight an administrative subpoena seeking documents. Alight produced some documents, but objected to producing others. The Department of Labor then petitioned the Northern District of Illinois to enforce the subpoena. Alight opposed enforcement of the subpoena, arguing, among other things, that the Department of Labor lacked authority to investigate Alight because it was not a fiduciary in connection with the at-issue conduct. The district court granted the Department of Labor’s petition, and Alight appealed.

The Seventh Circuit agreed with the district court, and affirmed. With regard to Alight’s argument that the Department of Labor could not investigate non-fiduciaries, the Seventh Circuit ruled that nothing in ERISA’s statutory regime limited the scope of the Department of Labor’s investigations to just ones involving fiduciaries. Rather, as the court found, the Department of Labor can obtain documents and information from non-fiduciaries that are relevant to investigations of potential ERISA violations by other entities. Alight also argued—for the first time on appeal—that the Department of Labor lacks authority to investigate cybsersecurity incidents. The court rejected this as well, explaining that “the reasonableness of Alight’s cybersecurity services, and the extent of any breaches,” “is relevant to determining whether ERISA has been violated—either by Alight itself, or by the employers that outsourced management of their ERISA plans to Alight.”

The case is Walsh v. Alight Solutions, LLC, No. 21-3290, in the Seventh Circuit Court of Appeals, and the decision is available here.

Key Takeaway: A 401(k) plan sponsor and plan fiduciaries recently won summary judgment on claims that they breached ERISA fiduciary duties because plaintiffs failed to demonstrate that the purported fiduciary breaches caused a loss to plan participants.

On September 30, 2022, the U.S. District Court for the Northern District of Georgia granted summary judgment for Home Depot and certain plan fiduciaries in connection with claims concerning the company’s 401(k) plan. Plaintiffs had alleged that the defendants breached their ERISA fiduciary duties by: (1) failing to monitor the investment advisory services provided by a third-party managed account service provider, resulting in excessive managed account fees; and (2) failing to monitor and remove certain plan investment options that plaintiffs alleged performed poorly during the class period. The parties filed cross-motions for summary judgment in July 2021.

The court granted summary judgment for defendants on all claims, and denied plaintiffs’ motion for summary judgment, ruling that plaintiffs could not meet their burden to prove that any breaches caused losses. With respect to Plaintiffs’ allegations regarding expensive or underperforming managed account services, the court found that plaintiffs failed to adduce sufficient evidence to show that the plan paid excessive fees relative to other clients, as it was undisputed that the plan’s participants actually paid lower fees for services than almost all other plans serviced by the managed account provider. With respect to the challenged funds, the court held that plaintiffs failed to provide material evidence demonstrating that no prudent fiduciary would have concluded that the performance of those funds would improve in the future. For example, the court explained that the fact that other funds identified by plaintiffs posted better returns at certain points in time did not establish that they were superior to the challenged funds or appropriate for the plan.

The case is Pizarro v. Home Depot, Inc., No. 18-01566, in the United States District Court for the Northern District of Georgia, and the decision is available here. Plaintiffs have yet to indicate whether they intend to appeal the order to the U.S. Court of Appeals for the Eleventh Circuit.