MAJOR ISSUES IN LITIGATION INVOLVING 401(k) PLANS

Transcription

1 MAJOR ISSUES IN LITIGATION INVOLVING 401(k) PLANS KAREN L. HANDORF COHEN MILSTEIN SELLERS & TOLL, PLLC 1100 NEW YORK AVENUE, N.W. SUITE 500 WASHINGTON, D.C

2 THE MEANING OF LaRUE v. DeWOLFF FOR CLASS CERTIFICATION Over the last ten years, there has been substantial amount of litigation brought by participants and beneficiaries of 401(k) plans against fiduciaries of those plans seeking relief for losses allegedly caused by fiduciary breaches. Those cases can generally be divided into two categories: (1) suits alleging that plan fiduciaries breached their fiduciary duties by imprudently allowing plan participants to continue to invest in employer stock when the fiduciaries knew or should have known that it was no longer a prudent investment; and (2) suits alleging that plan fiduciaries breached their fiduciary duties due to payment of excessive fees, revenue sharing, offering actively managed funds, and misrepresentations. These lawsuits are brought under Section 502(a)(2) of ERISA, 29 U.S.C. 1132(a)(2), which authorizes suits by participants and beneficiaries, fiduciaries and the Secretary of Labor for relief under Section Section 409, in turn, provides for relief to the plan, including make-whole relief. 2 Generally, lawsuits challenging 401(k) plan fiduciary investment decisions are brought as class action lawsuits under Rule 23(b)(1) of the Federal Rules of Civil Procedure. Rule 23(b)(1) provides for certification of a class when individual lawsuits would impede the legal interests of absent class members or the threat of multiple lawsuits might subject the defendant to incompatible standards of conduct. Plaintiffs argue that class actions under 502(a)(2) fit easily within Rule 23(b)(1) because they are derivative actions on behalf of a plan that are dispositive of the interests of all plan participants and beneficiaries. See Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 144 (1985); Graden v. Conexant Sys. Inc., 496 F.3d 291, 295 (3d Cir. 2007)(finding that while various parties are entitled to bring suit..., they do so on behalf of the Plan itself ) (citations omitted). Defendants argue that the Supreme Court s recent decision in LaRue v. DeWolff, Boberg & Assocs., Inc., 128 S.Ct. 1020, 1025 (2008), makes it clear that suits brought against fiduciaries of defined contribution plans are not on behalf of the plan, but are instead on behalf of individuals. Therefore, they argue, class certification is inappropriate. LaRue was a participant in his employer sponsored 401(k) plan who claimed that the plan fiduciaries failed to make requested changes to the investments in his accounts, resulting in losses to his account. He sued plan fiduciaries to recover that loss under 409 and 502(a)(2). The Fourth Circuit relied upon Russell and found that 1 Section 502(a)(2) provides that [a] civil action may be brought by the Secretary, or bay a participant, beneficiary or fiduciary for appropriate relief under Section U.S.C. 1132(a)(2). 2 Section 409 requires a fiduciary which has breached a fiduciary duty, among other things, to make good to such plan any losses to the plan resulting from each such breach

3 LaRue could not bring a claim under those sections because he was only seeking recovery for his own individual account. LaRue v. DeWolff, Boberg & Associates, Inc., 450 F.3d 570 (4th Cir. 2006). The Fourth Circuit emphasized that those sections of ERISA were designed to protect the integrity of the plan and that a 502(a)(2) claim must be brought in a representative capacity on behalf of the plan as a whole. LaRue v. DeWolff, Boberg & Associates, 458 F.3d 359, 362 (4th Cir. 2006) (opinion on denial of rehearing en banc) (quoting Russell). Noting that LaRue sought to obtain money damages to which he believes he is individually entitled, the court concluded that the action was in no sense representative. Id. The Supreme Court reversed, holding that participants in individual account plans can bring suit under 409 and 502(a)(2) for fiduciary breaches that impair the value of plan assets in [their] individual account. 128 S. Ct. at The Court commented that the plan in Russell was a defined benefit pension plan and that references to the entire plan... are besides the point in the defined contribution context. 128 S. Ct. at Noting that the purpose of 409 and 502(a)(2) was to protect the financial solvency of plans and to protect pension benefits, the Court concluded that fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive. Id. Defendants argue that LaRue destroyed the notion that a suit brought under 502(a)(2) is on behalf of a plan as a whole. Instead, they argue, in the defined contribution context, participants may sue to recover the losses in their individual accounts and an adjudication as to one participant no longer determines or impedes the rights of other participants. Defendants argue that the losses recovered are not distributed to the plan generally, but are allocated to individual accounts according to the amount of losses within that account. Because plaintiffs allege breaches that injure some participants but not others and that injure participants in different ways, defendants argue that those lawsuits cannot be certified under Rule 23(b)(1)(B). See Turner v. Talbert, 2009 U.S. Dist. LEXIS (M.D. La. July 30, 2009); In re Computer Sciences Corp. ERISA Litig., 2008 U.S. Dist. LEXIS (C.D. Cal. Sept. 2, 2008). Plaintiffs reply that defendants have turned LaRue on its head. They argue that LaRue simply held that recovery to individual accounts in a defined contribution plan is recovery to the plan. As Justice Thomas stated in his concurring opinion in LaRue, [b]ecause a defined contribution plan is essentially the sum of its parts, losses attributable to the account of an individual participant are necessarily losses to the plan. LaRue, 128 S. Ct. at 1029 (Thomas, J., concurring). Thus, the right of recovery under 502(a)(2) is not individualized. Because recovery under 502(a)(2) must go to the plan, plaintiffs argue that certification under Rule 23(b)(1) is entirely appropriate. See Kanawi v. Bechtel Corp., 254 F.R.D. 102, (N.D. Cal. 2008); Jones v. NovaStar Financial Inc., 257 F.R.D. 181, 190 (W.D. Mo. 2009); In re First American Corp. ERISA Litig., 2009 U.S. Dist. LEXIS (C.D. Cal. July 27, 2009); Beesley v. International Paper Company, 2008 U.S. Dist. LEXIS (S.D. Ill. July 29, 2008)

4 Plaintiffs also argue that even if class action treatment is not appropriate under Rule 23(b)(1)(B), it is appropriate under Rule 23(b)(1)(A) because individual litigation involving 401(k) plan investment decisions would create a risk of inconsistent or varying adjudications with respect to individual class members that would establish incompatible standards of conduct for the party opposing the class. Because any judgment obtained under 502(a)(2) binds the fiduciary with respect to its actions involving the plan, two conflicting judgments that arise under the same breach of duties to the plan might establish incompatible standards of fiduciary conduct. See e.g., In re Merck & Co. Sec., Derivative & ERISA Litig., 2009 WL , at *12 (D.N.J. Feb. 10, 2009); In re Enron Corp., 2006 WL , at *15 (S.D. Tex. June 7, 2006); Rankin v. Rots, 220 F.R.D. 511, (E.D. Mich. 2004). If the defendants position is accepted by the courts, it will be substantially more difficult to bring class action litigation challenging the imprudent investment decisions of 401(k) plan fiduciaries. Rather than seeking certification under Rule 23(b)(1)(A) or (B), plaintiffs will be required to seek certification under Rule 23(b)(3) which requires that the court find that questions of law or fact common to class members predominate over individual questions, and that a class action is the superior method of adjudication. Notice must be sent to absent class members who have a right to opt out of the litigation. On August 17, 2009, the Seventh Circuit announced that it would consolidate four cases involving individual account plans for the purpose of determining the effect, if any, of LaRue on class certification of 401(k) plan litigation. Two of the cases, Howell v. Motorola Inc. (No ) and Lingis v. Dorazil (No ), involved the alleged imprudent purchase of employer stock. The other two cases, Spano v. Boeing Co. (No ) and Beesley v. International Paper Co. (No ), involve claims that fiduciaries paid excessive and unreasonable fees to service providers. This issue is also pending in the Third Circuit in Wendel v. Herzlinger (No ). ERISA 404(c) DOES IT PROTECT FIDUCIARIES FROM LIABILITY FOR IMPRUDENT INVESTMENT CHOICES? Section 404(c) of ERISA, 29 U.S.C. 1104(c), provides a limited exception to the fiduciary duty rules for a pension plan that permits participants and beneficiaries to exercise control of the assets in their individual accounts. Section 404(c) states that if a participant or beneficiary exercises control over assets in his account as determined under regulations of the Secretary) such participant or beneficiary shall not be deemed to be a fiduciary by reason of such exercise and no person who is otherwise a fiduciary shall be liable under this part for any loss, or by reason of any breach, which results from the participant s or beneficiary s exercise of control U.S.C. 1104(c). As the Conference Report explained, under Section 404(c), if the participant instructs the plan trustee to invest the full balance of his account in, e.g., a single stock, the trustee is not to be liable for any loss because of a failure to diversify or because the investment does not meet the prudent man standard. H.R. Conf. Rep (1974), reprinted in 1974 U.S.C.C.A.N. 5038,

5 Section 404(c), itself, does not define the circumstances under which a participant or beneficiary exercises control. The Conference Report stated that the conferees recognize that there may be difficulties in determining whether the participant in fact exercises independent control over his account. Id. Consequently, Congress granted the Secretary of Labor the authority to issues regulations detailing the circumstances under which participants and beneficiaries exercise control, thus relieving fiduciaries of liability for their investment choices. Id. Pursuant to this authority, the DOL issued a legislative regulation setting forth the circumstances in which a participant exercises control sufficient to relieve a fiduciary of liability. 29 C.F.R c-1 (1992). The regulation states that a fiduciary will not be liable for any loss that is the direct and necessary result of [a] participant s or beneficiary s exercise of control. 29 C.F.R c-1(d)(2)(i) (1992). The DOL did not directly address whether a loss due to the imprudent selection of investment options in a 404(c) plan is a direct and necessary result of a participant s or beneficiary s exercise of control. However, the preamble to the regulation states that the act of limiting or designating investment options which are intended to constitute all or part of the investment universe of an ERISA 404(c) plan is a fiduciary function which, whether achieved through fiduciary language or express plan language, is not a direct or necessary result of any participant direction of such plan. Participant Directed Individual Account Plans (ERISA 404(c) Plans), 57 FR n. 27 (October 13, 1992) (to be codified at 29 C.F.R. pt. 2550). The preamble further states that the plan fiduciary has a fiduciary obligation to prudently select such vehicles, as well as a residual fiduciary obligation to periodically evaluate the performance of such vehicles to determine, based on that evaluation, whether the vehicles should continue to be available as participant investment options. Id. DOL s view has been reiterated in advisory opinions issued by the Department and has been articulated in numerous amicus briefs filed by the Secretary of Labor. See, e.g. DOL Opinion Letter No A, 1998 WL , at *3 n. 1 (May 28, 1998); DOL Information Letter to Douglas O. Kant, 1997 WL , at *2 (Nov. 26, 1997); Brief of the Secretary of Labor, Hilda L. Solis, as Amicus Curiae in Support of Panel Rehearing, Hecker v. Deere & Co. (7th Cir. filed March 17, 2009); Brief of the Secretary of Labor, Elaine L. Chao, as Amicus Curiae in Support of Plaintiffs-Appellants, Langbecker v. EDS (5th Cir. filed April 21, 2005); Brief of the Secretary of Labor, Elaine L. Chao, as Amicus Curiae in Support of Plaintiffs-Appellants, In re Schering- Plough Corporation (3d Cir. 2004). In Langbecker v. Elec. Data Sys. Corp., 476 F.3d 299, (5th Cir. 2007), the Fifth Circuit rejected the Department s position. The Fifth Circuit stated that DOL s view would render the 404(c) defense applicable only where plan managers breached no fiduciary duty, and thus only where it is unnecessary. Id. at 311. The court further stated that we are not holding that a plan fiduciary s duties do not include the selection and monitoring of plan investment alternatives. But the court went on to state that, if participants were given the information required by the 404(c) regulation, the

6 participants are not helpless victims of every error and that in participant-directed plans, the plan sponsor cannot be a guarantor of outcomes for participants. Recently the Seventh Circuit issued a decision in Hecker v. Deere & Company, 556 F.3d 575 (7th Cir. 2009), in which the court stated: Even if [ 404(c)] does not always shield a fiduciary from any imprudent selection of funds under every circumstance that can be imagined, it does protect a fiduciary that satisfies the criteria of [ 404(c)] and includes a sufficient range of options so that the participants have control over the risk of loss. In other words, if the plan offers a broad range and number of investment options, the fiduciaries can rely on the 404(c) defense. In denying a motion for rehearing en banc, the Seventh Circuit clarified that its decision did not mean that plan fiduciaries could insulate themselves from liability for imprudent investment choices simply by including a very large number of investment alternatives in the plan and then shifting to the participants the responsibility for choosing among them. Hecker v. Deere & Company, 569 F.3d 708, 711 (7th Cir. 2009). Instead, the court noted that the plaintiffs had never argued that any of the 26 investment alternatives that Deere made available to its 401(k) participants was unsound or reckless. Id. The court also responded to the argument in DOL amicus brief that it had not given appropriate deference to DOL s interpretation of its 404(c) regulation. The court noted that it had not ignored any language in the actual regulation, but instead had simply not given deference to language in a footnote to the preamble of the regulation. 569 F.3d at 709. The court said that the panel had deferred to the Secretary s concerns to the extent that it refrained from making any definitive pronouncement on whether the safe harbor applies to the selection of investment options for a plan, but left the area open for future development. 569 F.3d at 710. Other courts have concluded that, because plan participants generally do not have any choice with respect to the investment options available under the plan, they do not exercise any control over those options. This has been the conclusion of at least one circuit court and numerous district courts which have considered this issue. See, e.g., Difelice v. US Airways, 497 F.2d 410, 418 n. 3 (4th Cir. 2007); Rankin v. Rots, 220 F.R.D. 511, 519 (E.D. Mich. 2004); In re Ikon Office Solutions, Inc. Sec. Litig., 191 F.R.D. 457, 465 (E.D. Pa. 2000);Rankin v. Rots, 278 F. Supp. 2d 853, 873 (E.D. Mich. 2003); In re Worldcom, Inc. ERISA Litig., 263 F. Supp. 2d 745, (S.D.N.Y. 2003); Franklin v. First Union Corp., 84 F. Supp. 2d 720, 732 (E.D. Va. 2000); In re Polaroid ERISA Litig., 240 F.R.D. 65 (S.D.N.Y. 2006). It is also the view of several commentators. See Langbecker at 321 n. 4 (citing treatises). Other courts have Wendel v. Herzlinger (No )distinguished the facts in Hecker and held that the 404(c) defense did not apply to the prudence of the particular plan investment choices at issue in the case. Tibble v. Edison International, 2009 U.S. Dist. LEXIS (C.D. Calif. July 16, 2009). This issue is currently pending in the Third Circuit in Wendel v. Herzlinger (No )