ERISA Litigation Shows No Sign of Slowing in 2018

Proprietary fund lawsuits are viewed by plaintiffs’ firms as one of the types of excessive fee cases that are likely to get past motions to dismiss; and so it stands to reason that more—potentially many more—of these lawsuits are on the way.

According to Nancy Ross, partner and head of the Employee Retirement Income Security Act (ERISA) litigation practice at Mayer Brown LLP in Chicago, the last year in litigation has seen a continued shift away employer stock drop cases in favor of excessive fee cases.

Ross notes that these excessive fee cases have started to divide themselves fairly neatly into a few different categories.

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“The most active sub-category is probably the lawsuits being filed against financial services providers regarding self-dealing within their own retirement plans,” Ross observes. “During 2017 we saw the district courts react in a fairly open manner to these allegations. Many of the cases, as we have discussed during the year, have avoided various preliminary motions to dismiss. As a result there are cases involving Franklin TempletonAllianzBBT, and Deutsche Bank, just to name a few, that will likely move ahead in 2018.”

According to Ross, these proprietary fund lawsuits are viewed by plaintiffs’ firms as “one of the types of excessive fee cases that are likely to get past motions to dismiss.” And so it stands to reason that more—potentially many more—of these lawsuits are on the way.

At a high level, Ross says trends in ERISA litigation tend to be driven by the financial environment.

“When you have a strong stock market, you see employers get attacked for having active management and paying excessive fees,” she explains. “But as the stock market inevitably weakens, you see claims about the failure to offer diversified and defensive lineup. So it’s tough to give employers general guidance about how to protect themselves.”

Ross expects some of the nearly two dozen lawsuits involving 403(b) plans that have emerged in the last several years will move ahead next year: “All but the lawsuit against Penn have escaped preliminary dismissal. The outcomes of these cases could send down some new guidelines on 403(b)s, particularly on the question of whether or not you should have multiple recordkeepers.”

Ross says she is also eager to see how the states’ efforts to offer their own retirement plans may run into ERISA preemption issues. In particular, she will be watching a lawsuit filed to halt the establishment of the Oregon Saves program, which is one of the state-run retirement programs for the private sector which has progressed furthest along. Something else that is important to watch in 2018, Ross says, is the “testing of remedies.”

“Across all of these cases there will be very important procedural issues that could be addressed, and there will be testing of remedies. By this I mean, there will be a testing of what appropriate relief for various allegations and outcomes might be,” Ross says. “If you look at the settlements and decisions that have come down in recent years, we’ve been all over the map in terms of the outcomes. Honestly I don’t know that we could reach anything like uniformity here.”

Ross’ overall assessment is that the litigation environment will indeed remain litigious next year. She says plan advisers and sponsors together are “trying really hard to manage risk in this environment. It’s like the game of Whack-a-Mole trying to manage all the different correlated risks. That’s the time we’re in right now.”

EBRI Data Delivers Fresh Retirement Health Care Cost Concerns

Retired couples, according to EBRI research, can require up to $370,000 to cover premiums for Medicare Parts B and D, premiums for Medigap Plan F, and out-of-pocket spending for outpatient prescription drugs.

The Employee Benefits Research Institute (EBRI) published a new EBRI Notes report on the topic of ballooning retiree medical care costs.

Researchers examine the amount of savings couples will require to cover common medical costs accrued later in life. In particular, premiums for Medicare Parts B and D, premiums for Medigap Plan F, and out-of-pocket spending for outpatient prescription drugs are weighed. Taking all of these costs together, the EBRI analysis comes to an eye-popping sum.

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“In 2017, a 65-year-old man needs $73,000 in savings and a 65-year-old woman needs $95,000 if each have a goal of having a 50% chance of having enough savings to cover premiums and median prescription drug expenses in retirement,” the analysis states. “If they want a 90% chance of having enough savings, the man needs $131,000 and the woman needs $147,000.”

According to EBRI, a couple with median prescription drug expenses needs $169,000 if they have a goal of having a 50% chance of having enough savings to cover health care expenses in retirement. If the couple wants a 90% chance of having enough savings, they need $273,000.

“For a couple with drug expenses at the 90th percentile throughout retirement who want a 90% chance of having enough money saved for health care expenses in retirement by age 65, targeted savings is $368,000 in 2017,” EBRI says. “From 2016 to 2017, projected savings targets increased between 1% and 6%. In contrast, savings targets declined between 2011 and 2014, but then increased from 2014 to 2016 as well.”

Despite the increase in savings targets since 2014, EBRI finds the 2017 savings targets continue to be lower than they were in 2012 almost across the board.

Where the costs come from

The EBRI analysis goes into some depth in explaining how these large sums add up so quickly. Important to the outcome is that the study assumes that all individuals and couples have Medigap Plan F coverage in retirement, and “thus treats all individuals and couples as having the Plan F premium as an expense,  because this approach takes away the uncertainty related to actual use of specific health care services over one’s lifetime.”

“That is, instead of trying to predict when a Medicare beneficiary may use health care services and thus incur health expenses, which are highly dependent on whether the individual has reached their Medicare Part A and/or Part B deductibles, this study assumes that beneficiaries have the most comprehensive health insurance coverage available that is supplemental to Medicare (i.e., Plan F) and thus pay premiums for this coverage on a regular basis,” EBRI explains.

This study includes estimates on out-of-pocket spending for prescription drugs based on data from the Medical Expenditure Panel Survey (MEPS). EBRI researchers highlight that it is currently possible for new Medicare beneficiaries to purchase Medigap insurance (e.g., Plan F) to completely avoid deductibles and other cost sharing associated with Medicare Parts A and B; but it is not possible to avoid the deductibles and other cost sharing associated with Part D outpatient prescription drugs. “Thus, under Part D, for expenses above the deductible, beneficiaries are responsible for 25% coinsurance on expenses between the deductible and the initial benefit limit. And once the initial benefit limit is reached, beneficiaries are in the donut hole until they reach the catastrophic limit, above which they pay 5% coinsurance. When outpatient prescription drug coverage was added to Medicare in 2006, beneficiaries in the donut hole paid 100 % coinsurance. When ACA was enacted, it included a provision to phase in a reduction in the donut hole to 25 percent coinsurance by 2020.”

The research concludes in no uncertain terms that individuals should be concerned about saving for health insurance premiums and out-of-pocket expenses in retirement. 

“Medicare generally covers only about two-thirds of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounts for 12%,” EBRI states. “Furthermore, the percentage of private-sector establishments offering retiree health benefits has been falling. This is also true in the public sector.”

Read the full report here.

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