Friday, December 7, 2012

A New "Trend" in ERISA Litigation?

Few would argue the point that we live in a society that has become somewhat “lawsuit prone”.  Sometimes it’s a matter of people or entities not wanting to accept responsibility for the decisions they make. At other times it’s greed, with the prospect of exploiting a deep pocket too tempting for some to resist.  And of course, there are plenty of legitimate, justifiable legal actions that complete the mix.

The world of ERISA is no exception to the phenomenon of intensified litigation.  The sum and substance of retirement saving is the accumulation of, if not wealth, at least adequate resources to support a reasonably comfortable lifestyle in retirement.  With retirement plan balances usually being one of the top two largest assets(along with their home) an individual has at retirement time, the stakes are high for all who save through an employer sponsored retirement plan.  As such, more litigation over wrongs or perceived wrongs are the result.      

The spectrum of ERISA lawsuits is as broad as litigation in commerce and society in general.  At times there is out-and-out thievery of workers’ assets, which obviously must be rectified.  At other times there is litigation in the wake of poor judgment, bad luck or just bad timing, typically in investment performance.  When a saver’s assets fail to grow as hoped, or worse yet, they “tank,” to use an unscientific term, more and more the matter ends up in court.

ERISA litigation is characterized by many layers of complexity, including employers, trustees, investment providers, third-party administrators, recordkeepers, accountants and actuaries.  These days, the real hot buttons in ERISA litigation are the fairness and disclosure of fees associated with plan administration and investments, and the propriety of investments offered to plan participants. 

A recent “push” of a hot button was the decision by the U.S. Supreme Court not to hear the case known as Santomenno v. John Hancock Life Insurance Co.  This action lets stand an April 2012 ruling by the 3rd U.S. Circuit Court of Appeals, and its effect will be to allow a lawsuit against John Hancock alleging excessive 401(k) plan fees to go forward.

What’s concerning to some about this particular suit is that the plaintiffs sued the service provider, John Hancock, directly, without having exhausted the customary remedies of demanding that the sponsoring employer and/or plan trustee take action, and adding these parties to the lawsuit first.  The Supreme Court in deciding not to hear this case, appears to have given tacit approval to this approach.    

It is probably small comfort that the 3rd Circuit ruled that the plaintiffs could not also sue under the Investment Company Act of 1940 (ICA), because during the course of this lawsuit the lead plaintiffs had divested the investment funds that gave rise to their lawsuit, and technically no longer had standing to sue under that law.  The Supreme Court had been asked to overrule the 3rd Circuit and allow the plaintiffs to sue under the ICA. 

While it is unclear whether John Hancock will ultimately be found to have charged excessive fees, it does seem clear that entities that provide services and investment products to retirement plans are likely to feel more vulnerable to such litigation; vulnerable at least to having to expend resources to defend themselves against direct litigation before the exhaustion of standard legal remedies.  And it’s hard to avoid the conclusion that their costs will ultimately become the costs of plans and their participants.