Compliance January 14, 2021

Compliance Duties and Litigation Risks in 2021

Attorneys review what regulations plan sponsors must adhere to and legal decisions to keep in mind for the new year.

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Looking ahead after the start of the new year, partners at Groom Law Group and the Wagner Law Group weighed in on new Department of Labor (DOL) rules and potential litigation that plan sponsors should be aware of.

The first DOL rule that sponsors should understand concerns new regulatory standards for fiduciary considerations of environmental, social and governance (ESG) investments, says Ivelisse Berio LeBeau, a partner with the Wagner Law Group. Berio LeBeau says ESG investing is likely to become more prevalent in retirement plans, as “more than 8,700 comments were submitted, the vast majority critical of the proposed regulation.

“The criticisms hit their mark, and the DOL subsequently eliminated all references to ESG factors in the final rule amending the investment duties regulation.” Berio LeBeau says. Thus, beginning January 12, plan fiduciaries must only consider pecuniary factors when considering ESG investments or other types of investments for a plan, she says. This is now a standard of conduct, not a safe harbor, she notes. “Benefit plan fiduciaries would be wise to review their methods for selecting investments and change them as needed to comply with the newly amended regulation,” she says.

Berio LeBeau says DOL investigators have begun to ask questions about cybersecurity issues in their investigations of retirement plans. “Recent cyber incidents with employee benefit plans have resulted in ongoing litigation, where service providers and sponsors are debating in court over their respective responsibilities,” she says. “Plan fiduciaries should consider a self-audit on cybersecurity issues in 2021.”

With respect to missing participants, she says, “the Internal Revenue Service [IRS] offered informal snapshot guidance in 2020 on what to do about missing participants, supplementing information guidance previously offered by the DOL.” The DOL also just released new guidance for plan sponsors. Berio LeBeau says plan sponsors need to “start missing participant searches by exhausting all available plan and employer records and using free internet search tools. If cost effective, plan administrators should consider using resources such as commercial locator services or credit reporting agencies as well.”

Plan sponsors also need to be aware that the Setting Every Community Up for Retirement Enhancement (SECURE) Act, starting with work performed this year, has created a new opportunity for part-time employees who work at least 500 hours in three consecutive years to be eligible for their employer-sponsored 401(k) plan, she adds. “Sponsors should ensure that their systems have been reprogrammed as necessary to comply with this new standard,” she says.

Small and mid-sized retirement plan sponsors should also keep an eye out on the developments of pooled employer plans (PEPs), Berio LeBeau says.

Also under the SECURE Act, starting last September 18, participant benefit statements needed to start disclosing potential lifetime income expectations. The DOL may also issue a rule on this, she says.

Finally, starting this summer, on July 27, retirement plan documents can be sent electronically, she says.

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Litigation

As far as litigation is concerned, the Supreme Court issued four Employee Retirement Income Security Act (ERISA) decisions last year, the most in a single year in the 45-year history of the statute, note Groom attorneys Lars Golumbic, William Delany and Samuel Levin. In addition, there were more than 2,000 ERISA class action lawsuits filed during the year, an 80% increase from 2019.

One of the Supreme Court cases concerned an employee stock ownership plan (ESOP), in which the participants alleged that the price of the company stock was inflated. The Supreme Court remanded the case back to the 2nd U.S. Circuit Court of Appeals for further consideration. However, this case, Retirement Plans Committee of IBM v. Jander “may provide a new road map for other plaintiffs to pursue claims against other ESOP fiduciaries holding public stock,” the Groom lawyers say.

In Intel Corp. Investment Policy Committee v. Sulyma, the court unanimously held that plaintiffs did not necessarily have actual knowledge of a violation sufficient to trigger a three-year statute of limitations. The lawyers say that with electronic disclosures imminent, it may be wise to require participants to acknowledge they have received and read disclosures.

In Thole v. U.S. Bank NA, the court held, in a 5-4 decision, that participants in a defined benefit (DB) plan could not sue over management of the investments because they were receiving the benefits to which they were entitled.

In Rutledge v. Pharmaceutical Care Management Association, the court unanimously held that ERISA did not preempt an Arkansas law regulating pharmacy benefit managers. This could open the door to more states regulating these managers, the lawyers say.

Last year also saw lawsuits being brought against plans with fewer than 1,000 participants and less than $100 million in assets. The themes of these cases included: not using the lowest cost share classes of funds, not offering enough index funds, offering underperforming funds or funds associated with the recordkeeper, paying for recordkeeping as a percentage of assets under management (AUM) rather than per participant, and not submitting requests for proposals (RFPs) to multiple recordkeepers.

The attorneys say they expect similar lawsuits to be brought this year.
Compliance January 14, 2021

Summary Judgment Denied in BlackRock ERISA Dispute

A district court has rejected dueling summary judgment motions filed by the plaintiffs and defendants in an ERISA self-dealing lawsuit involving BlackRock.

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The U.S. District Court for the Northern District of California has filed a new order in an Employee Retirement Income Security Act (ERISA) lawsuit targeting BlackRock.

Underlying the lawsuit are allegations that BlackRock engaged in self-dealing within its own retirement plan. The complaint suggests plan fiduciaries selected and retained high-cost and poor-performing investment options with “excessive layers of hidden fees that are not included in the fund expense ratios.”

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Technically, the new ruling comes in response to several motions before the court, including the defendants’ motion for summary judgment, the plaintiffs’ cross-motion for partial summary judgment and a motion to strike. The parties also filed numerous administrative motions to file documents under seal in connection with their briefs. In sum, it denies both motions for summary judgment and the motion to strike, while granting the parties’ administrative motions to file under seal. Short of a voluntary withdrawal by the plaintiffs, such a ruling allows the case to proceed to either a trial or settlement.

The text of the short ruling covers each of these motions in turn, starting with plaintiffs’ motion for partial summary judgment, in which they argue that there are no genuine disputes of material fact as to render a trial necessary. Their motion suggests the record clearly establishes that fiduciary violations occurred.

“The court finds that there are genuine disputes of material fact relevant to whether defendants failed to follow the BlackRock plan’s investment policy statement [IPS] and whether they thereby violated their fiduciary duties,” the ruling counters. “To give one, non-exhaustive, example, plaintiffs argue that defendants failed to obtain an opinion of counsel as required by the IPS before including BlackRock-affiliated funds in the BlackRock plan. The IPS does not define what qualifies as ‘an opinion of counsel.’ Defendants point to evidence in the record that BlackRock’s ERISA counsel were present at the relevant investment committee meetings. … Similarly, the court also finds that there are genuine disputes of material facts relevant to liability under [the U.S. Code].”

The defendants’ motion for summary judgment is similarly rejected.

“Like plaintiffs, defendants also seek resolution of disputed issues of material fact in their favor in their motion for summary judgment,” the ruling states. “As discussed with regard to plaintiffs’ motion, there is a genuine dispute as to whether defendants complied with the IPS’s direction to ‘obtain an opinion of counsel’ that a prohibited transaction exemption [PTE] applied when selecting a fund managed by BlackRock or one of its subsidiaries. This disputed issue is material to the court’s fiduciary duty analysis.”

The ruling notes that the defendants also argue that they are entitled to summary judgment on plaintiffs’ prohibited transactions claims because their actions satisfied certain prohibited transaction exemptions.

“But these exemptions require that the court analyze the reasonableness of the compensation received by defendants,” the ruling states. “As discussed above in relation to plaintiffs’ motion for summary judgment on their [fiduciary liability] claims, analysis of the reasonableness of defendants’ compensation requires resolution of disputed issues of fact; summary judgment is therefore inappropriate.”

On the plaintiffs’ motion to strike the expert testimony of a defense witness, the court is also skeptical. 

“[The witness] is not being offered as an expert in ERISA law but rather as an expert on the processes 401(k) plan fiduciaries apply in their selection and monitoring of funds for plan participants,” the ruling states. “Given the purposes for which [her] testimony is being offered, the court finds that her qualifications provide a reliable basis in the knowledge and experience of the relevant discipline. Given that plaintiffs’ claims are based on defendants’ alleged breaches of fiduciary duty, the testimony about fiduciary processes and practices is also relevant. Therefore, plaintiffs’ motion to strike is denied.”

The full text of the ruling is available here.

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