ERISA Litigation Update

Key Takeaway: The Fifth Circuit reversed a district court’s dismissal of claims concerning allegedly overpriced investments and excessive recordkeeping fees.

On April 11, 2024, the Fifth Circuit Court of Appeals issued an opinion and order reversing the dismissal of a case regarding United Surgical Partners International, Inc.’s 401(k) plan. The complaint alleged that the plan’s fiduciaries breached the Employee Retirement Income Security Act’s (ERISA) duty of prudence by not selecting the lowest-cost shares for the plan’s investment options and by failing to manage and mitigate the plan’s recordkeeping costs. The defendants moved to dismiss the plaintiffs’ claims, and the U.S. District Court for the Northern District of Texas granted their motion and dismissed the case with prejudice. The plaintiffs appealed.

On appeal, the Fifth Circuit reversed the dismissal of plaintiffs’ claims concerning the allegedly more-expensive share classes the plan offered. The Fifth Circuit reasoned that the plaintiffs alleged—and the defendants did not dispute—that the more expensive retail shares offered in the plan were identical to the institutional share classes the plaintiffs alleged should have been offered in all ways except costs. To the extent that the defendants argued that the plaintiffs failed to account for the alternative explanation that the retail shares were offered to defray and better allocate recordkeeping costs through revenue sharing, the Fifth Circuit found that another plausible explanation was that the fiduciary committee simply mismanaged the plan. Additionally, it noted that the plaintiffs alleged that the plan’s recordkeeping costs were significantly higher than comparable plans, which the Fifth Circuit found undercut the defendants’ argument regarding the defrayment of costs. As to the allegations of excessive recordkeeping fees, the Fifth Circuit reversed the dismissal of the plaintiffs’ claims and held that the plaintiffs’ allegations about comparative costs and services of the plan relative to comparable plans were sufficient to survive dismissal.

The appeal was captioned Perks et al. v. United Surgical Partners International, Inc., No. 23-10375, in the Fifth Circuit Court of Appeals. The decision is available here. As a result of the Fifth Circuit’s reversal, the case has been remanded back to the U.S. District Court for the Northern District of Texas, No. 21-973.

Key Takeaway: A district court dismissed claims concerning the allocation of forfeitures in a 401(k) plan in one of several similar lawsuits filed in 2023 and 2024.

On June 17, 2024, the U.S. District Court for the Northern District of California dismissed an ERISA lawsuit against HP Inc. and the committee responsible for overseeing the administration of HP’s 401(k) plan. The complaint — one of 10 similar lawsuits filed in late 2023 and early 2024 against different plan sponsors and fiduciaries — alleged that the defendants had violated ERISA by allocating plan forfeitures to reduce HP’s company contributions to the plan rather than to pay plan expenses borne by its participants. The plaintiff alleged that this conduct violated ERISA’s duties of prudence and loyalty, anti-inurement rule, and prohibited-transaction provisions. The defendants moved to dismiss the complaint for failure to state a claim.

The district court granted the motion to dismiss in its entirety. The court found that the existing and proposed Internal Revenue Service (IRS) regulations that permit plan forfeitures to be allocated to reduce company contributions (as well as decades of other guidance acknowledging that forfeitures can be used in this way) made the plaintiff’s allegations that this conduct constituted violations of ERISA’s fiduciary duties implausible. The court additionally ruled that the breach of fiduciary duty claims failed to state a claim because ERISA contains no duty to interpret a plan to maximize a participant’s benefits. Moreover, the court dismissed the plaintiff’s anti-inurement and prohibited-transaction claims on the grounds that the forfeitures did not leave the plan’s trust fund and were still used to pay benefits.

The case is Hutchins v. HP Inc., No. 23-5875, pending in the Northern District of California, and is available here. The court granted the plaintiff leave to amend the complaint within 30 days of the date of the decision. This decision came after — and explicitly disagreed with — a decision denying a motion to dismiss similar claims concerning the allocation of forfeitures in Perez-Cruet v. Qualcomm, Inc., No. 23-1890, pending in the Southern District of California. That decision is available here.

Key Takeaway: A district court dismissed a lawsuit challenging the offering of proprietary funds in a 401(k) plan, due largely to the plaintiffs’ failure to adequately plead underperformance of sufficient duration or magnitude.

On March 25, 2024, the U.S. District Court of the Southern District of New York dismissed an ERISA lawsuit against AllianceBernstein L.P. and the fiduciary committees of AllianceBernstein’s 401(k) plan. The complaint alleged that the defendants breached their fiduciary duties of loyalty and prudence by maintaining AllianceBernstein’s own target date funds and four other proprietary investment options in the plan, all of which the plaintiffs alleged underperformed their benchmarks. The complaint also alleged that the defendants committed prohibited transactions under ERISA by including these funds in the plan. The defendants moved to dismiss the complaint for failure to state a claim.

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 duty of loyalty claim, the court found that the allegations failed to give rise to an inference of disloyalty since AllianceBernstein waived all the fees on the proprietary funds it offered in the plan. The court also found the plaintiffs’ allegation that AllianceBernstein retained its own funds in the plan to prop up its assets under management implausible where the plan accounted for only 0.2% of the firm’s overall assets under management. With respect to the duty of prudence claim, the court found that the alleged underperformance versus the funds’ benchmark of up to 4.57% on a one-year basis and up to 2.25% on a 7.5-year basis was “not of sufficient duration or magnitude to create an inference of misconduct.” Finally, the court dismissed the prohibited-transaction claims because the initial selection of the funds for inclusion in the plan occurred outside ERISA’s six-year stature of repose and because the subsequent retention of the funds during the class period did not constitute a transaction under ERISA.

The case is Bloom v. AllianceBernstein L.P., No. 22-10576, in the Southern District of New York and is available here.

Key Takeaway: Another motion to dismiss was granted in a case challenging the prudence of a 401(k) plan fiduciary committee’s process based on the alleged underperformance of BlackRock index target date funds (TDFs).

On May 20, 2024, the U.S. District Court for the Northern District of California dismissed an ERISA lawsuit against Cisco Systems, Inc. The lawsuit was one of at least a dozen lawsuits filed beginning in 2022 challenging the inclusion of BlackRock TDFs in 401(k) plans. As previously covered here and here, nearly all those cases have been dismissed with or without prejudice, and some have been voluntarily dismissed by the respective plaintiffs after receiving a dismissal order with leave to amend. This complaint alleged that the fiduciaries of the Cisco 401(k) plan breached their duty of prudence by selecting and maintaining BlackRock TDFs in the plan. The defendants filed a motion to dismiss the complaint, which the court granted in August 2023 with leave to amend. The plaintiffs amended twice, and the defendants filed its motion to dismiss the second amended complaint on November 10, 2023.

The court granted Cisco’s motion to dismiss the second amended complaint in full, but again did so with leave to amend. First, the court rejected the plaintiffs’ argument that the defendants’ comparison of the BlackRock TDFs to their custom benchmarks plausibly suggested an imprudent process, holding that the use of a custom benchmark aligned with the plan’s investment policy statement and industry standards. Second, the court rejected plaintiffs’ claim that the defendants’ purported misidentification of the BlackRock TDFs as passive investments in the investment policy statement — or the application of passive (as opposed to active) monitoring guidelines for the BlackRock TDFs — stated a claim for imprudence because the investment policy statement applied the same performance monitoring criteria for active and passive funds and allowed for discretion in fund selection and retention. Third, the court held that the plaintiffs failed to plausibly allege imprudence based on the defendants’ failure to compare the BlackRock TDFs to four purported comparator TDFs identified by the plaintiffs. The court held that plaintiffs’ conclusory labeling of those comparator TDFs as “comparable” or “an ideal group for comparison” was insufficient to establish that they were meaningful benchmarks against which to compare the performance of the BlackRock TDFs—especially where two of the comparators were composed of actively managed funds and the other two employed a different glide path strategy than the BlackRock TDFs. Finally, the court held that the defendants’ alleged failure to review the performance of BlackRock TDFs during a particular quarterly plan meeting was insufficient to plausibly suggest imprudence. The court found instead that committee meeting minutes and materials, which were referenced in the complaint and submitted by the defendants with their motion to dismiss, unequivocally demonstrated that BlackRock TDF’s performance was discussed.

The case is Bracalente v. Cisco Systems, Inc., No. 22-04417, in the Northern District of California and is available here. By contrast, on July 3, 2024, a District of Connecticut court denied a motion to dismiss a complaint that had been amended with greater detail about the fiduciary process leading to the inclusion of the BlackRock TDFs for a different plan in Kistler v. Stanley Black & Decker, Inc., No. 22-966. That decision is available here.

Key Takeaway: A district court granted the defendants’ motion for summary judgment, finding that the plan’s fiduciaries employed a prudent process in monitoring the plan’s recordkeeping fees.

On May 23, 2024, the U.S. District Court for the Western District of Kentucky granted the defendants’ motion for summary judgment in a case brought against Humana and the fiduciaries of Humana’s 401(k) plan. The plaintiffs alleged that the defendants breached their duties to monitor the plan’s recordkeeping fees and that this breach led to excessive recordkeeping fees. The district court denied an earlier motion to dismiss, and defendants later moved for summary judgment and to exclude the opinions of the plaintiffs’ recordkeeping expert witness.

On those latter motions, the district court ruled that the plaintiffs’ expert did not demonstrate that the plan’s fees were excessive relative to the services rendered to the plan and that the plan’s fiduciaries had employed a prudent process. As for the expert, the court reasoned that the expert’s opinions did not apply a reliable methodology and therefore should be excluded because the expert had admitted at her deposition that the comparator plans to which she compared the plan were not comparable to that plan, and further, she could not give an example of a comparable plan that had achieved similarly low recordkeeping fees as the plan. Separately, the court also found that the plan’s fiduciaries employed a prudent process when monitoring the plan’s recordkeeping fees. During the class period, the plan solicited a request for proposal for recordkeeping fees—selecting the lowest cost recordkeeper resulting from that process—and conducted annual benchmarking to confirm that the plan’s fees were reasonable. The plaintiff claimed that the defendants acted imprudently by failing to maintain a fee policy statement and by not “continually” seeking to lower recordkeeping fees during the class period. The court disagreed, finding that lack of a fee policy statement is not imprudent per se and that there is no duty to “continually” seek lower fees if the defendants’ process is otherwise prudent.

The case is Moore v. Humana Inc., No. 21-232, in the Western District of Kentucky and is available here. A similar outcome was reached by a court in the Western District of Pennsylvania on June 21, 2024, where it also agreed to strike plaintiffs’ loss expert and granted summary judgment for the defendants due to the lack of evidence of loss without the expert. That decision was in McCauley v. The PNC Financial Services Group, No. 20-1493, and is available here.

Speaking Engagement: The Practising Law Institute’s (PLI’s) ERISA 2024: The Evolving World (August 5 – 6, 2024)

Alison Douglass, Goodwin partner, will speak at PLI’s ERISA 2024: The Evolving World program on the panel “ERISA Litigation 2024 Update” about the latest developments in ERISA class action litigation.

Speaking Engagement: Women, Influence & Power in Law 2024 (September 23 – 25, 2024)

Christina Hennecken, Goodwin partner, will speak at Women, Influence & Power in Law 2024 on the panel “The Regulators are Coming: Gearing Up to Respond to the Next Wave of Enforcement” about emerging trends and best practices for mitigating risks and responding to enforcement actions in the evolving regulatory landscape.

Speaking Engagement: DCIIA/SPARK 2024 Public Policy Forum (June 4 – 5, 2024)

Jamie Fleckner, Goodwin partner and chair of the firm’s ERISA Litigation practice, spoke on the session “Litigation Landscape” at the DCIIA/SPARK 2024 Public Policy Forum in Washington, DC.

Client Alert: “Minding the Store: Unanticipated ESG Issues Affecting ERISA Fiduciary Supervision” (July 11, 2024)

Patrick Menasco, Michael Isenman, Jamie Fleckner co-authored a Client Alert discussing a recent summary judgment decision from the U.S. District Court for the Northern District of Texas in an ERISA class action challenging the alleged impact of ESG policies on fiduciary decisions that highlights the risks to plan fiduciaries of being caught up in litigation premised on political agendas and cultural division.

Client Alert: “The Department of Labor Finalizes Changes to the QPAM Exemption – A Favored Management Tool Gets Less User-Friendly” (April 9, 2024)

Patrick Menasco, Bibek Pandey, and John Cleary co-authored a Client Alert that discusses how the Department of Labor’s final changes to Prohibited Transaction Class Exemption 84-14, commonly known as the QPAM Exemption, make reliance on the QPAM Exemption more burdensome and challenging and how it may affect ERISA and IRA plan investors, their managers, and their counterparties.

Goodwin’s ERISA Litigation practice received top ranking by Chambers USA and The Legal 500 US in 2024. Congratulations to Jamie Fleckner, Alison Douglass, Mike Isenman, Matt Riffee, Dave Rosenberg, and Jaime Santos on being recognized in this year’s tables.

Goodwin associate DeMario Carswell was appointed to The ESOP Association’s Advisory Committee on Fiduciary Issues.