The Door’s Wide Open: ERISA Litigation



In follow-up to last year’s decision by the Supreme Court to remand the Hughes v Northwestern case, the 7th U.S. Circuit Court of Appeals has ruled that two of three claims against the plan sponsor require further consideration by the district court. Attorneys caution: the ruling opens doors for more lawsuits against plan sponsors.


Under The Magnifying Glass: Prudence

The decisions made by retirement plan fiduciaries, especially related to plan fees and “best available” investment opportunities are likely to undergo even more scrutiny as high profile cases open the floodgates for copycats. As Plan Sponsor reports:


The circuit court’s “focus on ‘plausibly alleging fiduciary decisions outside a range of reasonableness’ and conducting a context-specific inquiry into that range of reasonableness will likely result in more questions—and most certainly more litigation,” Faegre Drinker ERISA attorneys Kimberly Jones and Isaac Hall wrote in response to the ruling. The three claims the 7th Circuit considered from the plaintiffs, a group of Northwestern employees as represented by April Hughes, were: 1) failure to monitor and manage recordkeeping fees; 2) failure to swap out higher-fee retail shares of mutual funds and annuities for cheaper, yet identical, institutional shares; and 3) keeping duplicative funds in the plan that caused participant confusion in making investment decisions.The panel ruled that the first two claims can go ahead.


Applying the high standards of 1974s Employee Retirement Income Security Act (ERISA), the 7th Circuit panel focused on the duty of prudence. Specifically, for example,  the panel pointed out that a “plan fiduciary is required to ‘systematically review’ funds in the plan both at inclusion and at regular intervals. It also noted precedent that a fiduciary only incur ‘reasonable’ costs because ‘expenses, such as management or administrative fees, can sometimes significantly reduce the value of an account in a defined-contribution plan.’” A review of the legal action by attorneys at Faegre Drinker resulted in a head’s up for retirement plan sponsors:


Plan fiduciaries may find the 7th Circuit’s latest decision “particularly troubling.” The decision, they noted, does not require plaintiffs to allege actual alternatives for the retirement plan decisions; only that other options are possible.“The standard does not affect how plan fiduciaries review, choose, and monitor investment choices and recordkeeping fees, but makes it easier to second-guess those decisions without fully understanding the ‘circumstances prevailing’ at the time the fiduciary acts….”


With responsibilities—and scrutiny—on the rise, plan sponsors are advised not to go it alone: protection has become ever more essential and Colonial Surety is here to help with affordable Fiduciary Liability Insurance. With this protection, for a few dollars a day, you’ll have coverage for defense costs and penalty limits up to $1,000,000 if faced with alleged or actual breaches of duty in connection with the employee retirement plan. Cyber Liability coverage is included at no extra cost, providing additional protection against regulatory actions related to data and privacy, as well as expert response services.


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Winding Through Court Rooms

In addition to the swell of litigation Hughes v Northwestern has ushered in, attorneys specializing in ERISA law are also carefully monitoring several cases that are likely to set precedent related to “prudent procedures” for the cybersecurity of participant data and assets. As plan participants press to recover lost funds, it is anticipated that the decisions emerging from cybersecurity related litigation will expand the scope of fiduciary liability. Experts at The Wagner Law Group remind retirement plan sponsors:


DOL guidance indicates that the duty to monitor a service provider requires a plan fiduciary to review the service provider’s performance; review any reports it provides; check the fees charged; ask about its policies and procedures; and follow up on participant complaints. In the context of cybersecurity, the DOL has provided additional, more specific guidance, suggesting that the plan fiduciary specifically require the recordkeeper’s cyber and other protections for plan data and assets to be consistent with the plan’s own policies and procedures.


Until regulatory and judiciary guidance clarifies as to whether or how the duty to monitor TPAs and/or recordkeepers applies in the context of cybersecurity protection and/or identity verification, plan sponsors and fiduciaries should enact policies and procedures that assume the fiduciary obligation to monitor will be applicable to them.


Be sure to use the Department of Labor’s Cybersecurity Guidance, which explicitly directs plan sponsors to check on the cybersecurity protocols of all service providers. Legal experts also advise retirement plan sponsors to put cyber breach response plans in place. In fact, doing so is one of the specific best practices prescribed by the Department of Labor. Wisely, plan sponsors and their third party administrators are getting expert response plans in place quickly and efficiently, via Colonial Surety’s affordable Cyber+Fiduciary Liability Insurance. Along with defense costs and penalty limits up to $1,000,000, our coverage includes:


  • Expert-led response services following a data breach.
  • Protection from lawsuits and regulatory actions related to the breach.
  • Legal services.
  • Computer forensic services.
  • Public relations and crisis management expenses.
  • Notification services.
  • Call Center services.
  • Credit and Identity monitoring


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Colonial Surety Company is rated “A Excellent” by A.M. Best Company, U.S. Treasury listed and in business all across the country. Serving customers since 1930, we are the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors — and keep their businesses compliant — with pain-free, efficient, and friendly service every time.