Several troublesome issues faced by Employee Retirement Income Security Act of 1974 (ERISA) plan sponsors, service providers, and attorneys are likely to be resolved in court cases this year. These lawsuits, and the way they are settled, could potentially have widespread effects on plan participants and the retirement plan community for years to come.
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The ERISA practice of one plaintiffs’ law firm, Cohen Milstein, at the start of the year examined key legal challenges in play for employer plan sponsors, and offered perspectives on the cases’ impact in 2019 and beyond.
Teets v. Great-West Life
This case highlights the trend of courts grappling with ERISA’s “functional fiduciary” definition, according to Karen L. Handorf and Daniel R. Sutter of Cohen Milstein. In the year ahead, the 10th U.S. Circuit Court of Appeals will decide whether a plan participant’s ability to divest from an investment option ends a service provider’s fiduciary duty to participants who took that option.
Teets v. Great-West Life & Annuity Ins. Co., 286 F. Supp. 3d 1192, 1196 (D. Colo. 2017), involves a “stable value” product created by Great-West Life & Annuity Insurance Co. that pays participants a rate of return set each quarter by Great-West. The question raised in the case is whether a service provider was an ERISA fiduciary because it had contractual discretion to set the rate of return. Under ERISA, insurance companies are fiduciaries when they exercise any authority or control related to managing or disposing of plan assets.
The U.S. District of Colorado ruled in 2017 that Great-West was not an ERISA fiduciary because the participants who opted for the stable value product in their retirement plan could leave it if they disliked newly set rates. As such, the court said a service provider does not have “discretion” over plan assets if a participant can divest before the rate set by Great-West is paid. That decision has been appealed to the 10th Circuit.
When the 10th Circuit hears the case, there are “wide-ranging implications” if it agrees with the lower court that the burden is on lay participants to determine whether a rate of return is appropriate in given market conditions. Such a ruling would seem to contradict ERISA’s duty of care owed to plan participants, the Cohen Milstein attorneys contend. “Given the implications of the Tenth Circuit’s impending decision, the authors of this article expect to hear more about this case in the coming year and beyond,” they said in their analysis, published January 1.
Thole v. U.S. Bank
Participants in U.S. Bank’s pension plan sued the plan’s fiduciary in 2013 for, among other things, mismanaging the plan by investing 100 percent of it in equities and using expensive proprietary mutual funds to do so, including during the financial crisis of 2008. The plan became severely underfunded as a result.
After the suit was filed, U.S. Bank made contributions to the pension that made it overfunded, and sought to get the case dismissed on multiple grounds. The U.S. District Court in Minnesota ruled in 2014 that the case became moot once the company took action to make the pension plan overfunded.
In Thole v. U.S. Bank Nat’l Ass’n, 873 F.3d 617, 626 (8th Cir. 2017), the 8th Circuit upheld the dismissal, but not on Article III or mootness grounds. Instead, it held that, without an underfunded pension, a participant in the plan does not have “prudential standing.”
The plaintiffs in the case are asking the U.S. Supreme Court to hear it, and there’s “a decent likelihood that the Supreme Court will resolve this thorny legal issue in the coming year,” the lawyers said.
If the High Court does not reverse the appellate court’s ruling, the “pragmatic and essential purpose” of ERISA is thwarted if a participant is only authorized to bring a suit to remedy mismanagement once irreversible harm occurs, the Cohen Milstein lawyers said.
Brotherston v. Putnam Investments
The Putnam case highlights a circuit court split on the issue of “proprietary fee” cases and who bears the burden of proving that losses in a plan were caused by financial companies’ preference for their own investment products.
In Brotherston v. Putnam Investments LLC, 907 F.3d 17, 40 (1st Cir. 2018), the plaintiffs alleged that the investment firm breached its fiduciary duties of loyalty and prudence by offering exclusively proprietary mutual funds in its retirement plan, despite alleged problems with performance and fees. In a bench trial, the judge refused to hold Putnam liable for having an investment process that “was no paragon of diligence,” saying that the plaintiffs had failed to show any losses because, even without an “objective process,” the plan could “still end up with prudent investments, even if it was the result of sheer luck.”
On appeal, the 1st Circuit reversed that ruling, citing three elements to a breach-of-prudence claim: breach, loss, and causation. It found the plaintiffs had proved the first two elements by showing the company failed to monitor its plan investments independently.
The 1st Circuit with that decision joined the 4th, 5th, and 8th Circuits in holding that, once a plaintiff makes a case for violation and loss to the plan, the burden shifts to the fiduciary to disprove causation. The other side of the circuit split—the 6th, 9th, 10th, and 11th Circuit Courts—have interpreted ERISA’s language on fiduciary liability for “any losses to the plan resulting from each such breach” to put the burden on plaintiffs.
If the Supreme Court takes this case, as Putnam has requested, and continues to ground its interpretation of ERISA in the common law of trusts, participants who are harmed by fiduciary misconduct “will find fewer hurdles to recovery in four of the circuits,” the attorneys wrote.
Department of Labor’s Fiduciary Rule
Finally, the Cohen Milstein lawyers examined the status in early 2019 of the hotly contested DOL fiduciary rule.
As reported, a split panel on the 5th Circuit in March 2018 vacated the rule, holding that Congress had not given the DOL the authority to expand the scope of the agency’s regulation to the individual retirement account (IRA) market. The court’s analysis focused mostly on whether the definition of “investment advice” provided by the DOL rule conflicted with the term “investment advice” as used in ERISA.
“While this attempt to fill a regulatory gap in the ever-growing IRA market may have failed, a new chapter is likely to be written,” the lawyers predicted.
The DOL is slated to issue a revised fiduciary rule in September, and the Securities and Exchange Commission (SEC) in 2018 put forth a proposed rule that seeks to establish a “best interest” standard of conduct for broker-dealers when making a recommendation of any securities transaction or investment strategy involving retail customers.