Curtailing Frivolous Litigation?



Settlements to resolve alleged ERISA violations reached record highs in 2023. Claims brought on behalf of plan participants related to fees, investment performance, and more continue to wind through courts. In an effort to curtail the toll of frivolous litigation on businesses, the ERISA Industry Committee is urging the Supreme Court to weigh in. 

ERISA Defense Is Costly and Disruptive

Copy-cat claims related to retirement plan fees are now just one type of case employers need to be on the lookout for: there has also been an increase in allegations concerning investment performance. The harsh reality for plan sponsors is that even when nothing has been done wrong, settlement frequently turns out to be less painful than the cost and disruption of mounting and sustaining defense under the exceptionally high standards of ERISA. Of course settling ERISA allegations also takes a toll on big and small businesses alike: while the average settlement in 2023 was $8.4 million, settlements in the $200,000 range are leaving scars on smaller businesses.

Toward staunching the flow of allegations, the ERISA Industry Committee (ERIC), and a coalition of benefit industry groups, has filed an amicus brief, requesting a Supreme Court review of the decision by the Ninth Circuit Court of Appeals in Bugielski et al v. AT&T, emphasizing that it “misinterpreted an important provision of the Employee Retirement Income Security Act (ERISA) prohibiting certain transactions between an employee benefit plan and other parties”:  

“Under the Ninth Circuit’s interpretation of Section 406 of ERISA, a plaintiff could sue a plan fiduciary for the routine renewal of its contract with its recordkeeper,” said Tom Christina, Executive Director of the ERIC Legal Center. “Based on the Ninth Circuit’s decision, a complaint alleging nothing more than that would survive a motion to dismiss and become an expensive burden for the employer. The amicus brief demonstrates that the resulting legal fees and perverse incentives to settle will make it harder for plan sponsors and administrators to provide benefits, ….The Ninth Circuit’s interpretation of Section 406 will result in the exact opposite of what Congress intended under ERISA. This case would give the Supreme Court a significant opportunity to reaffirm the foundation of ERISA and protect beneficiaries, plan sponsors, and administrators from higher legal costs. Left unchecked, the Plaintiffs’ bar will continue to pursue frivolous and costly litigation.”   

The amicus brief filed by ERIC with a coalition of business and retirement industry leaders was written by Seyfarth Shaw LLP and emphasizes these arguments:

  • The Ninth Circuit’s decision renders standard and ubiquitous contracts, such as renewals of recordkeeper agreements, in American retirement plans presumptively unlawful. 
  • The Ninth Circuit’s decision will open the floodgates to speculative claims regarding routine matters, multiplying frivolous litigation and costing employees and employers. 
  • Allowing claims that all re-negotiations of service provider agreements are prohibited transactions unless proven otherwise will have far-reaching negative consequences for plan sponsors, fiduciaries, and participants. 
  • The Ninth Circuit’s interpretation of federal law did not consider the entirety of § 406 of ERISA or the overall purpose of ERISA as a whole.  

A Long and Winding Road

One of the challenges businesses face with ERISA allegations is the disruption and expense that can continue over years, as cases wind through legal processes. Even if the Supreme Court accepts this case, it is unlikely to be heard until 2025, with a ruling in June 2025. Prior to reaching this point, the ERISA allegations against AT&T have already traveled a long and winding road:

AT&T was initially sued in 2017 for a breach of fiduciary duty when it amended contracts to add brokerage and investment advisory services offered by Fidelity Investments for their participants in 2012 and 2014, respectively. The plaintiffs alleged that AT&T did not evaluate or disclose the compensation paid to Fidelity when it added these services. The complaint added that the fees were a prohibited transaction, did not comply with the terms of any exemption and that the plan sponsor had not followed a prudent process.The district court initially ruled in favor of AT&T and said the compensation Fidelity received was third-party compensation and the plan itself was not a party, and therefore, AT&T was not required to evaluate and disclose it.

The U.S. Ninth Circuit Court of Appeals disagreed and remanded the case back to the district court for further proceedings in October 2022. 

Risks Inherent With Plan Sponsorship

Given their fiduciary obligation to administer retirement plans for the benefit of participants, plan sponsors always have plenty to worry about. As if ERISA litigation over investment options and fees is not enough, there is even the possibility of repercussions associated with how limiting investment options can negatively impact retirement funds over time. Unfortunately, being “darned if you do, and darned if you don’t” is an inherent risk associated with being a plan sponsor. 

Something plan sponsors do not have to do, however, is shoulder all the risks alone: armed with Colonial’s liability coverage, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be protected with defense costs and penalty limits up to $1,000,000. At Colonial, a whole year of Fiduciary Liability coverage is less than a few dollars a day, and we even include Cyber Liability coverage to further protect you, your business and the retirement plan.

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