PLANADVISER - March/April 2018 - 43

Fee Litigation
One important theme Senderowitz says he sees these days
" [is] lots of investment lineups where you have actively
managed funds that will be in A-shares with 30 basis points
[bps], 40 bps or even 50 bps of revenue sharing, " and these
active funds stand side by side on the menu with indexed
Vanguard funds. In this situation, a participant investing
in Vanguard products is generating no revenue to offset his
administrative expenses, while the person in the A-shares
is very likely contributing excess revenue relative to what
would be needed to cover his per-capita share of the overall
recordkeeping costs.
" You might think this would be ripe territory for a lawsuit,
given the disparity, but, in fact, it is all about the documentation
and the process, " Senderowitz reiterates. " As long
as the investment committee has had a rational discussion
and documented that discussion about why this is the
appropriate and reasonable fee structure for the plan, that
arrangement is completely fine. "
This is not necessarily a fair arrangement from the
participant's perspective, he allows, but if the plan officials
have had the discussion and they have documentation of
the rationale for their fee allocation-then the non-level
arrangement is fine under ERISA.
" We cannot stress the point enough: Process and documentation
are what is most important, " Senderowitz
concludes.
Fiduciary Liability Insurance
Speaking to a related issue, Carol Buckmann, a founding
ERISA attorney with Cohen & Buckmann P.C. in New York
City, says one common failure when it comes to documentation
and process relates to fiduciary liability insurance.
" Every fiduciary and other person who handles plan funds
is required to be bonded against losses caused by their fraud
and dishonesty-that's been a legal requirement since even
before ERISA was enacted, " she says. " All too often, though,
when I ask to see any supplemental fiduciary liability insurance
policies, the document that arrives is not fiduciary
insurance but the ERISA bond. When I inquire further, it
often turns out that these fiduciaries don't have fiduciary
liability insurance at all. "
While fiduciary liability insurance is not required, Buckmann
feels plan sponsors' failure to purchase it reflects an
all too common misunderstanding.
" There is a big difference [between fiduciary liability
insurance] and the ERISA bond, " she says. " The plan is the
named insured under the bond, which means that the plan
gets the reimbursement if there's a claim. The ERISA bond
doesn't protect the fiduciaries themselves, however, who
can be personally liable for losses caused by a fiduciary
breach. To protect themselves, fiduciaries need to have
special coverage called fiduciary liability insurance. "
This insurance is necessary for plan sponsors and fiduciary
officials as a practical matter, even though it is not
legally required, she argues.
" Why not [have it]? Your corporate policy will not protect
you if you are accused of fiduciary breaches-fiduciary activities
are usually excluded, " she observes. " Your company's
agreement to indemnify you may be limited by state law, or
worthless if your company goes bankrupt. Even if you win a
fiduciary breach lawsuit, and are found to have done nothing
wrong, you will have legal defense fees that could be high.
Settlements and court awards in fiduciary breach cases have
been substantial. Some have exceeded $50 million. "
Once the decision has been made to purchase fiduciary
liability insurance, the adviser, attorney and client should
closely discuss how it all works.
" There are many different policies in the market, and
they are not fungible, " Buckmann notes. " They will all have
deductibles and exclusions. Some will require that there
be an actual claim, but others will even cover operational
violations that are discovered and voluntarily corrected
under the IRS' voluntary correction program. Some will give
you a say in picking the lawyer to defend a lawsuit. "
No End in Sight
Perhaps the best way to conclude this analysis is with the
simple observation that the number of ERISA lawsuits
winning class certification last year far outstripped the
number for which it was denied. Looking across all 12 U.S.
federal appellate court circuits, in total 17 groups of plaintiffs
earned class action certification in an ERISA challenge
in 2017, whereas just five groups of plaintiffs formally saw
their appeals for certification denied, according to data
shared by law firm Seyfarth Shaw LLP.
Obviously, class certification is still an early procedural
step in any litigation, but the overwhelming success of
ERISA plaintiffs' attorneys in earning it across a diversity of
cases is an important trend and may speak to the validity of
at least some of their broad claims, attorneys warn.
Throughout 2017, federal courts issued a wide variety
of rulings on procedural and substantive matters in ERISA
class action litigation, adding additional layers of complexity
to this discussion. The rulings touched on everything from
how to assess attorneys' fees and costs, to defining a breach
of fiduciary duty, to contending with a multitude of issues
such as those relating to: damages, discovery, DOL and
Pension Benefit Guarantee Corporation (PBGC) enforcement
litigation, employee stock ownership plans (ESOPs),
independent contractors in ERISA class actions, and preemption,
procedures and coverage-not to overlook stock
drop class actions and tolling, statute of limitations and
exhaustion requirements in ERISA class actions.
Asked to speak broadly about the litigation environment,
David Kaleda, a principal with Groom Law Group, Chartered,
in Washington, D.C., admits he is " ever amazed by the ingenuity
of plaintiffs' firms when it comes to figuring out new
ways to sue people in our industry.
" One point that may ease some of the concern for the
smallest plan sponsors is that the litigation wave has limits
in terms of how far down-market it will move in any big
way, " he says. " However, there are still many attractive
targets out there from the litigators' perspective, say in the
$100 million-plus marketplace. And this is not just 401(k)
plans, by any means. We're seeing university 403(b) plans as
a big new target for class action lawyers, and other categories
as well. " -John Manganaro
planadviser.com march-april 2018 | 43
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PLANADVISER - March/April 2018

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