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.

Products January 13, 2021

AICPA Provides Resource for Plan Sponsors to Evaluate Partial Plan Terminations

An advisory describes what constitutes a partial plan termination as well as what steps plan sponsors need to take to fulfill their fiduciary duties if one has occurred.

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As the COVID-19 pandemic has increased the number of employee layoffs and furloughs, many retirement plan sponsors have needed a reminder of what constitutes a partial plan termination under the Employee Retirement Income Security Act (ERISA) and IRS rules.

The American Institute of Certified Public Accountants (AICPA)’s Employee Benefit Plan Audit Quality Center (EBPAQC) has issued an advisory titled “Partial Employee Benefit Plan Terminations.”

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“Partial plan terminations may occur when there is substantial employer-initiated employee turnover, either due to a significant event, such as a plant or division closing or as a result of adverse economic conditions or other events that are outside of the employer’s control. A partial plan termination may also be the result of plan amendments that adversely affect the rights of employees to vest in benefits under the plan. Certain factual circumstances may affect the assessment of a partial plan termination,” the report says.

The latest COVID-19 relief bill, attached to the Consolidated Appropriations Act, 2021, enables certain retirement plan sponsors that laid off or furloughed employees due to the economic effects of the pandemic to avoid a partial plan termination. “In effect, this provision gives companies until March 31, 2021, to rehire laid off workers and avoid a partial plan termination,” law firm Eversheds Sutherland noted on its website.

Even still, plan sponsors will have to assess whether a partial plan termination has occurred, and they need to know what steps to take if it has.

The EBPAQC’s advisory provides plan sponsors, administrators or trustees with an understanding of partial plan terminations under ERISA and their related responsibilities. It describes what constitutes a partial plan termination; discusses the plan administrators’ fiduciary responsibilities related to partial plan terminations; describes actions that must be taken to implement consequences of a partial plan termination; and explains how plan sponsors can rebut the presumption of a partial plan termination.

The advisory also provides suggestions for best evaluating whether a partial plan termination has occurred.

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