Ruling in second lawsuit alleging failure to vet retirement plan fees is expected to focus on statute of limitations and consider companies' monitoring practices
The marathon case Abbott v. Lockheed Martin, involving claims that Lockheed mismanaged its 401k plan, finally settled on December 16, on the eve of trial. Though the terms are not yet public, plaintiffs had claimed more than $1.3 billion in losses, a yardstick for eventually assessing the deal. While the outcome in Lockheed and a similar case to be argued before the US Supreme Court in February—Tibble v. Edison— will not directly affect other companies and their 401k plans, they do illustrate the risks of (at least allegedly) failing to appropriately monitor the plans, and they indicate ways to reduce that risk. Both cases are critical for compliance officers to understand and track for those reasons, says James Fleckner, chair of Goodwin Procter’s ERISA litigation practice.
Fleckner represents companies in these types of cases, although neither he nor his firm represents the parties in either Lockheed or Tibble. (Goodwin Procter will file an amicus brief in Tibble.) Fleckner explains that Lockheed was originally filed in 2006 as one of about a dozen such cases brought by the same plaintiffs’ attorney. Tibble and a case against ABB Ltd have already been tried, and a couple of others have settled or been dismissed. Thus Lockheed is best viewed as ‘just another in a line of cases that have been developing in recent years, making it easier for plan participants to sue for excessive fees,’ says Ary Rosenbaum of The Rosenbaum Law Firm, an ERISA litigator who has written extensively about these issues.
The core issues in the original cases were whether mutual funds were too expensive an investment option to include in plans, and ‘whether it was appropriate to share revenue between the mutual funds and the plan’s record keeper,’ says Fleckner. Revenue sharing is an issue because the ownership of the shared revenues is in dispute; do they belong to the plan participants, or are they properly owned by the fund’s managers and thus available to offset other costs? ‘Before these cases, nobody thought that a provision in the plan that [stipulates] the company will pay the costs of investing would prevent revenue sharing,’ he says.
In the eight years of litigation leading up to the Lockheed trial, Fleckner says, the mutual fund and revenue sharing claims had been thrown out. Lockheed then focused ‘only on the alleged excessiveness of the totality of the fees charged, whether the management of the funds was inconsistent with plan documents and disclosures, and whether allegedly imprudent management of the funds damaged plan participants’ returns.’
Tibble resulted in a judgment of $371,000 based on three of the six allegedly excessive fee funds; the claims relating to the other three funds were thrown out on a statute of limitations basis. The statute of limitations issue is the one before the Court: can investors sue about allegedly excessive fees only within the six years after the high-fee fund is made a plan option, or does the statute of limitations get reset every day the high-fee fund remains an investment option?Â
Fleckner isn’t sure how important the Court’s answer will be. ‘Tibble is a very interesting question from a legal standpoint,’ he says, but ‘whether a decision will have significant practical application isn’t clear. That will depend on precisely what the Supreme Court says. [As a baseline impact,] if the Court finds the statute of limitations does not apply, pending cases will be affected and probably more cases will be filed than otherwise would be.’ However, the practical consequences will be more significant if the Court decides to ‘wade into the ways in which fiduciaries are required to monitor plan investments.’
Fleckner and Rosenbaum agree that Lockheed and Tibble—really, the whole genre of cases—should prompt companies to reexamine their plan documents and disclosures, and engage in strong monitoring practices. Rosenbaum said that the companies with the biggest plans were those most at risk of excessive fee litigation, ‘both because the plan size makes a potential settlement or judgment large, and also because the plan size means the sponsor has bargaining power; fees can and should be more competitive for larger plans.’
Fleckner suggests companies make sure management of the funds in their plans is consistent with the plan documents and disclosures, and highlights three occasions when a company needs to pay most attention: ‘when it takes action with respect to its funds; when any disclosures about its funds are being made; and at the meetings of the fiduciary committee tasked with the oversight or management of the plan, which are generally quarterly.’
Another critical action step is verifying that the plan’s language about who bears the cost of investing is clear and ‘reflects the company’s preference about who bears the costs,’ he says. ‘The procedures to amend the plan to fix ambiguities depend on [the plan’s] own terms, but the language can and should be amended as necessary.’
