Compliance October 14, 2024

Argent Trust Co. Petitions for Supreme Court to Provide Guidance on ERISA Arbitration

The Supreme Court has previously declined to review appeals courts’ decisions that held arbitration provisions unenforceable.

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As district courts have been split over the enforceability of arbitration clauses in ERISA plans, the U.S. Supreme Court is once again being asked to weigh in on the issue.

Argent Trust Co. filed a petition, Argent Trust Co. vs. Ramon Cedeno et al., on October 7 in the U.S. 2nd Circuit Court of Appeals asking the Supreme Court to provide guidance on whether complaints under the Employee Retirement Income Security Act should be addressed by arbitration or by trial.

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The Supreme Court last year declined petitions requesting review of 3rd and 10th Circuit Court decisions in which the appeals courts held arbitration provisions unenforceable.

Argent Trust argued in its petition that two circuits—the 9th Circuit and 7th Circuit—have concluded that there is “nothing in ERISA that would preclude individual arbitration of ERISA claims.” However, the 2nd, 3rd, 6th and 10th Circuits have previously reached the opposite conclusion in invalidating ERISA plan arbitration provisions.

Argent Trust also asked the Supreme Court to review and reverse a decision by the 2nd Circuit in May in which the company lost an appeal seeking to force arbitration in a dispute over a $242 million stock ownership plan transaction with Strategic Financial Solutions LLC. Argent served as the trustee for Strategic’s ESOP through October 31, 2019, after which it was replaced.

As trustee, Argent had “exclusive authority to manage and control the assets of the plan and had sole and exclusive discretion to authorize and negotiate the transaction on the plan’s behalf.”

In the 2020 case Dejesus Cedeno v. Argent Trust Co. et al., Ramon Dejesus Cedeno, an employee of Strategic Financial Solutions LLC and a participant in its Strategic Employee Stock Ownership Plan, alleged that the plan’s arbitration provision was unenforceable. The plaintiff relied on a judge-made “effective vindication exception” to argue that ERISA overrides both the plan language (requiring arbitration) and the mandate of the Federal Arbitration Act (requiring the enforcement of valid arbitration provisions).

The 2nd Circuit agreed, holding that because Dejesus Cedeno’s only avenue for relief under ERISA was to seek a plan-wide remedy, and the “specific terms of arbitration agreement [sought] to prevent [Dejesus] Cedeno from doing so,” the agreement is unenforceable.

While the appeals court was still considering the case, the Department of Labor released an amicus brief supporting Dejesus Cedeno, while the U.S. Chamber of Commerce, American Benefits Council and the ESOP Association showed support for Argent.

Argent argued that the 2nd Circuit’s decision is problematic because it concludes that ERISA does not allow individual arbitration of statutory claims, which Argent wrote is a “decision that will have far-reaching unintended effects, even beyond arbitration matters.”

Lee Polk, a partner in Wagner Law Group, says the issue of arbitration in ERISA plans is a “high-stakes issue” and that a lot of people are hanging on pins and needles about whether they have to go to an arbitrator, as appealing an arbitrator’s decision is “extremely difficult.”

“It’s very difficult to overturn an arbitrator’s decision if you’re on the losing end,” Polk says. “Also, the courts have a track record in the last few years of being inconsistent in rulings, and that’s a product of the effective vindication doctrine.”

That doctrine empowers courts to void arbitration agreements that prevent a party from effectively vindicating their legal rights. Polk says this doctrine remains viable in some circuits but is not so strong in other circuits.

Meanwhile, bills were recently introduced in the House of Representatives and the Senate that would make mandatory arbitration clauses unenforceable in all ERISA-covered plans. If passed, it would mean that all retirement plans covered by ERISA would be banned from requiring pre-dispute arbitration as a condition of joining the plan.

The bills would also eliminate discretionary authority for plan administrators in providing benefits.

The Supreme Court considers the thousands of petitions it receives on a rolling basis to decide what it will add to the docket.

Compliance October 14, 2024

Northern Trust, Workers Set to Settle 401(k) Litigation

The parties have agreed to a tentative deal to be considered by the court October 30, ending a TDF-focused lawsuit filed in 2021. 

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Northern Trust Co. has reached a tentative settlement in a class action lawsuit challenging in part the use of in-house target date funds in a company benefit plan.  

A settlement would end a dispute dating back to 2021 when six participants in the Northern Trust Company Thrift-Incentive Plan alleged in part that the company’s plan committee failed to prudently select and monitor investment options both for performance and fees. Specifically, plaintiffs called out the defendants’ decision to retain 11 Northern Trust Focus Funds, a TDF suite from the firm’s asset management division.  

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The terms of the settlement will be considered in an “off-the-record” call on October 30 with Judge Keri L. Holleb Hotaling of the U.S. District Court for the Northern District of Illinois, according to a court filing Thursday. The agreement will require court approval. 

Plaintiffs in the case, Conlon et al v. The Northern Trust Company et al., are represented by lead attorneys with The Law Offices of Michael M. Mulder and Scott+Scott Attorneys at Law LLP; lead attorneys for Northern Trust are with Willkie Farr & Gallagher LLP.  

In March 2022, Northern Trust had sought to get the case dismissed for failure by the plaintiffs to cite a reasonable claim that the committee breached fiduciary duties. The defendants argued that the plan committee had followed correct procedures, and that the Employee Retirement Income Security Act does not mandate what kind of benefits employers must provide, so long as they follow proper and prudent processes.  

In August 2022, Judge Charles Ronald Norgle denied the appeal, siding with the defendants and moving the case to discovery.  

In that opinion, Norgle ruled that plaintiffs had made enough of a case that the plan committee had not sought the best investment options nor negotiated enough for the lowest fees—both acts that may have hindered participant saving outcomes. Norgle pointed, in part, to allegations in the compliant that the Northern Trust Focus Funds had been the only TDF investing option in the plan and were being used as the default investment—even though the funds had underperformed relative to benchmark indices and comparable TDFs for three years. 

“After being included in the Plan, the Focus Funds continued to underperform and generated unreasonable fees, so their retention shows that Defendants followed no prudent management process,” he wrote. 

Norgle went on to cite the 2014 Supreme Court decision in Fifth Third Bancorp v. Dudenhoeffer that acknowledges the various “circumstances facing an ERISA fiduciary” and says that a court must “give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”  

He then, however, went on to cite the Supreme Court’s 2022 ruling in Hughes vs. Northwestern University, in which the court rejected a “categorical rule that would bar breach of fiduciary duty claims” if defendants can provide an adequate roster of competing investment choices. In citing that rule, Norgle pointed to the line that if “the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.”  

The Northern Trust Company Thrift-Incentive Plan held $2.9 billion in assets as of the end of 2023, according to a Form 5500 filing.  

Neither Northern Trust nor plaintiffs’ attorneys responded to request for comment regarding terms of the settlement. 

In September, Salesforce Inc. settled a pair of 401(k) lawsuits alleging excessive retirement plan fees—including allegations of not swapping out lower-cost and underperforming investment options—for $1.35 million. Those complaints, both by participants, were focused on the company’s $5 billion 401(k) plan. 

 

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