ERISA Litigation Update

Key Takeaway: Plaintiffs continued to bring lawsuits regarding ERISA-governed retirement plans, albeit at a somewhat slower rate than in prior years. Average settlement amounts were roughly the same as in 2022, and while plaintiffs continued to target smaller plans, the majority of suits involved large plans.

Notable trends in ERISA retirement plan litigation in 2023 include:

• ERISA lawsuits continued to be filed, but at a lower rate. The number of new cases filed challenging investments and/or fees in 401(k) plans was down in 2023 compared to prior years. In 2023, 44 new cases were filed. By comparison, 88 cases were filed in 2022, and 110 were filed in 2020. This trend, however, may be cyclical. The industry saw a similar drop in cases from 2020 (110) to 2021 (56), and then the number of new filings increased in 2022 (to 88). The highest number of cases filed by any single plaintiff firm to date in 2023 was six. In 2022, four firms filed more than 10 cases apiece, and the most active firm filed more than 20. As cases filed by the most active plaintiff firms in 2022 (and years prior) reach resolution, there may be another uptick in new cases filed in 2024.

• Settlements continued to be lucrative: 2023 saw 37 settlements, up from 25 settlements in 2022. The total value of settlements reached in 2023 was more than $343 million. However, that total includes a $124 million settlement in Ferguson v. Ruane Cunniff & Goldfarb (No. 17-6685 (SDNY)), which settled multiple cases and arbitrations that had been ongoing for nearly eight years and is an outlier in terms of settlement amount.
  
  Setting the Ferguson case aside, there were 36 settlements totaling more than $219 million. That total is roughly on a par with (though slightly higher than) the average 2022 settlement figures: in 2022, the average settlement was nearly $5.2 million; in 2023, the average rose to just over $5.9 million. In 2023, the 36 settlements ranged from $200,000 to $60 million. A breakdown of the total settlements by settlement amount is as follows:

• The plaintiffs’ bar continued to include smaller plans within its focus: In 2023, the plaintiffs’ bar continued to bring suit with respect to smaller plans. Of the plans subject to suit in 2023, nearly three-quarters of the plans had $2 billion or less in assets, with more than one-third of target plans having less than $1 billion. While large plans have historically been the focus of litigation, less than 20% of the plans sued in 2023 had in excess of $5 billion in assets. A breakdown of 2023 complaints by plan size is as follows:

• New lawsuits challenged allocation of forfeitures: In Fall 2023, five lawsuits were filed by a single firm asserting a new theory: that plan sponsors and fiduciaries had violated ERISA by allocating forfeitures to reduce employer contributions rather than to pay plan expenses otherwise borne by participants. The first motion to dismiss such a lawsuit was filed on December 13, 2023, by Clorox, which Goodwin represents. Other defendants in these suits have also moved to dismiss, and we expect rulings on this novel theory in 2024.
• Defendants prevailed in several lawsuits challenging BlackRock TDFs: In July and August 2022, a single plaintiff firm filed 11 cases in multiple different jurisdictions within the span of a few weeks, each challenging the prudence of the respective plan’s retention of the BlackRock target-date fund collective investment trusts (in addition, a 12th case making substantially similar allegations had been filed in January 2022). Specifically, plaintiffs claimed that the BlackRock target-date funds underperformed other, similar investments, and that plan fiduciaries failed to monitor and replace the funds.
  
  In 2023, defendants obtained favorable results in many of the BlackRock target-date fund suits. Specifically, in eight cases, either courts granted motions to dismiss or plaintiffs voluntarily dismissed their claims. Six of the 12 cases are now fully resolved due to dismissals with prejudice, while six remain active (either because a motion to dismiss was denied or because it was granted without prejudice to amend, and plaintiffs amended their complaints).

Key Takeaway: The Second Circuit affirmed dismissal of and summary judgment on fiduciary breach and prohibited transaction claims made against a large university concerning the recordkeeping fees, investment performance, and share classes offered in its 403(b) plans.

On November 14, 2023, the US Second Circuit Court of Appeals affirmed dismissal and summary judgment on all claims brought by participants in Cornell University’s 403(b) retirement plans. The plaintiffs alleged that the plan’s fiduciaries breached their duties of prudence because the plans’ recordkeeping fees were too expensive, they selected and retained certain investments that allegedly underperformed, and they made available allegedly higher-cost share classes of certain investments. Plaintiffs further alleged that defendants engaged in prohibited transactions with parties in interest, the service providers for the plan, because the plans’ fees were too high. The defendants moved to dismiss, and the US District Court for the Southern District of New York granted that motion, in part, dismissing plaintiffs’ prohibited transaction claims. Following the completion of discovery, defendants moved for summary judgment on plaintiffs’ remaining claims, and the district court granted summary judgment to defendants. The plaintiffs then appealed.

The Second Circuit first affirmed the dismissal of plaintiffs’ prohibited transaction claim. In doing so, the Second Circuit noted that the appeal presented a matter of first impression in the Second Circuit: whether to state a claim for a prohibited transaction pursuant to 29 U.S.C. § 1106(a)(1)(C), it is sufficient to allege that a fiduciary caused the plan to compensate a service provider for its services. The Second Circuit looked to decisions from the Third, Seventh, and 10th Circuits and held that it is not. Rather, the Second Circuit held that plaintiffs must plausibly allege that the service provider’s fee was unreasonable. Adopting that standard, the Second Circuit affirmed dismissal of the prohibited transaction claims because it found that plaintiffs failed to allege any facts going to the relative quality of the recordkeeping services, let alone facts that the service provider’s fees were so disproportionately large that they could not have been a result of arm’s-length bargaining.

The court similarly affirmed the district court’s grant of summary judgment on plaintiffs’ fiduciary breach claims concerning the plans’ fees, investment performance, and share classes. With respect to the recordkeeping fees, the Second Circuit agreed that plaintiffs failed to meet their initial burden to show loss because they failed to provide evidence of a suitable benchmark against which loss could be measured. On plaintiffs’ investment performance claims, the Second Circuit affirmed the district court’s holding that the evidence did not support a breach of the duty of prudence because no reasonable trier of fact could conclude that the fiduciaries for the plans had a flawed process based on the record before the court. Finally, with respect to plaintiffs’ share class claims, the Second Circuit affirmed summary judgment because the record showed that defendants attempted to move to the lower share classes plaintiffs alleged were more prudent, but they were rebuffed because the plans were not eligible for those share classes at the time.

The case is Cunningham v. Cornell University, Nos. 21-88, 21-96, and 21-114, in the Second Circuit Court of Appeals, and is available here. Following the Second Circuit’s ruling, Plaintiffs moved for a rehearing en banc. The Second Circuit denied the petition on December 20, 2023, and issued a judgment mandate the following week.

Key Takeaway: Defendants’ process for monitoring a company stock fund was found to be sufficient where they had regular meetings, consulted advisers, discussed the risks of both maintaining the company stock fund in the plan and divesting of it, and devised a considered approach to divest.

On December 5, 2023, the US District Court of the Eastern District of Virginia entered judgment for defendants following a bench trial. Plaintiffs had alleged that the defendants, Gannett and fiduciaries of Gannett’s 401(k) plan, breached their duties of prudence and diversification by failing to divest from a company stock fund offered in the plan two years before they in fact liquidated the fund. The plan’s governing document required that the at-issue company stock fund be a plan investment option, but frozen to new investments. The district court held a three-day bench trial on plaintiffs’ claims that began on April 25, 2023.

Defendants prevailed on both counts. The district court analyzed plaintiffs’ prudence and diversification claims by asking itself whether the defendants complied with the process that would have been followed by a “hypothetical prudent fiduciary in a like position with similar information.” It then found that defendants had met that test by: having regular meetings in which they discussed the company stock fund, weighing the risks of single stock funds against the risks of a forced or rapid divestiture, soliciting advice from independent experts, and accounting for and mitigating the exposure that the plan’s participants had to the fund.

The case is Stegeman v. Gannett Co., No. 18-325, in the Eastern District of Virginia, and is available here. 

Key Takeaway: A district court dismissed an ERISA lawsuit due largely to the plaintiffs’ failure to plead appropriate benchmarks to support their allegations that target-date funds included in the plan suffered from poor performance and unreasonable expenses.

On December 4, 2023, the US District Court for the Northern District of Ohio dismissed claims brought against Parker-Hannifin Corporation and other defendants by participants in Parker-Hannifin’s defined-contribution retirement plan. The complaint alleged that the fiduciaries of the plan violated ERISA’s duty of prudence by (i) selecting and retaining target-date funds despite underperformance, and (ii) failing to obtain lower-cost shares of the challenged funds. The defendants filed a motion to dismiss the complaint.

The district court granted the motion to dismiss and held that the plaintiffs had failed to allege facts sufficient to support a plausible inference of a breach. With respect to the performance allegations, the court rejected each of the plaintiffs’ proposed comparators as inappropriate. The court reasoned that a non-investable data composite and actively managed funds could not serve as meaningful comparators for the passively managed target-date funds. Furthermore, the complaint failed to demonstrate that the passively managed target-date funds that plaintiffs put forth as comparators had similar strategies to the challenged funds, which the court found had a “uniquely conservative” investment strategy and asset allocation. With respect to the allegations regarding costs, the court rejected an argument that a motion to dismiss should be denied every time a complaint alleges that lower-cost share classes were available. It found that, because the plan did not qualify for lower-cost share classes, it was not a breach of fiduciary duty to offer other share classes. On January 6, 2024, the plaintiffs appealed the decision.

The case is Johnson v. Parker-Hannifin Corp., No. 21-256, in the Northern District of Ohio, and is available here.

Key Takeaway: A district court dismissed an ERISA lawsuit due to lack of standing where plaintiffs did not allege the recordkeeping fees they paid or that they had invested in the challenged funds.

On November 13, 2023, the US District Court for the Southern District of New York granted Montefiore Medical Center’s motion to dismiss. The plaintiffs alleged that Montefiore and the fiduciaries of Montefiore’s 403(b) plan had caused participants to pay excessive recordkeeping fees and further failed to replace certain higher-cost, underperforming funds in the plan. The defendants moved to dismiss.

The district court dismissed the complaint due to lack of standing while also ruling that, even if the plaintiffs had standing, their complaint failed to state a claim. With regard to standing, the court explained that plaintiffs did not have standing to assert either of their two categories of claims. First, they lacked standing to challenge the plan’s recordkeeping fees where those fees were calculated based on the amount of assets in each participant’s account, and the plaintiffs had failed to allege what recordkeeping fees they had paid or that those fees that were in fact charged were excessive. Second, the plaintiffs did not have standing to challenge the inclusion of allegedly expensive and/or poorly performing funds where they did not invest in those funds. With regard to the merits, the district court found that the plaintiffs had failed to adequately plead their claims. They had failed to make the necessary “apples to apples” comparison for their recordkeeping claim because they did not allege with specificity what recordkeeping services the plan or their comparator plans received. The plaintiffs’ allegations regarding the alleged excessive fees and underperformance of the challenged funds failed to state a claim because (i) the plan’s Form 5500s demonstrated that the plan received a benefit, in the form of revenue sharing, from the higher-cost funds, and therefore the lower-cost funds plaintiffs pointed to were not apt comparators, and (ii) the plaintiffs failed to provide any other basis beyond underperformance to argue for an inference of an imprudent process, which the court held inadequate to support such an inference.

The case is Boyette v. Montefiore Medical Center, No. 22-5280, in the Southern District of New York, and the decision is available here.

Article: Investments in Brokerage Windows: Understanding Fiduciary Responsibilities Under ERISA Section 404(c) (January 2, 2024)

• Goodwin partners Alison Douglass and Bibek Pandey co-authored an article in the Benefits Law Journal that explains that Section 404(c) of the Employee Retirement Income Security Act of 1974 and the US Department of Labor’s regulations are clear that a fiduciary’s investment responsibilities extend only to designated investment alternatives.