PLANADVISER - November/December 2018 - 48

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403(b) Litigation Update
Court decisions reveal some emerging themes
ALMOST two years ago, I discussed in this column a new
trend: class action lawsuits brought by participants against
fiduciaries of 403(b) retirement plans under the Employee
Retirement Income Security Act (ERISA). Over the course
of those 24 months, at least 22 403(b) lawsuits were filed.
While the majority of these cases continue to slowly move
through the court dockets, there have been a few notable
victories by defendant fiduciaries. What follows is a
summary of the current trends as well as some " lessons
learned " concerning this new area of focus by plaintiffs'
class action attorneys.
In many ways, 403(b) litigation resembles the familiar
territory of the 401(k) litigation that has dominated the last
decade or more. As a threshold matter, the plaintiffs in 403(b)
litigation generally allege, among other things, that the plan
fiduciaries breached the duty of prudence that they owed to
the participants and the plan. Similar to claims in 401(k) litigation,
plaintiffs focus on fees and usually allege that plan
fiduciaries allowed the plan participants to pay too much for
investment, recordkeeping and other plan services. In this
regard, plaintiffs may allege that the plan fiduciaries imprudently
offered " retail " instead of " institutional " share classes
in the plan. Notably, 403(b) litigation plaintiffs also question
the propriety of plan fiduciaries' use of revenue sharing to
pay for plan administration expenses.
On the other hand, plaintiffs have used the actions
brought against 403(b) plan fiduciaries to break new ground
in the context of ERISA litigation. Most notably, 403(b) plaintiffs
are testing the theory that fiduciaries can be imprudent
for offering " too many " investment options, which can allegedly
overwhelm and confuse participants. Plaintiffs are also
challenging the prudence of using multiple recordkeepers,
a practice they allege unnecessarily increases plan costs.
Plaintiffs have even attacked the use of annuity products-
which have long been a standard and, in many cases, the only,
investment option in 403(b) plans-as being too expensive.
While 403(b) plaintiffs have certainly raised novel and
creative theories, some courts have indicated that they
are not persuaded. For example,
in one case, the court
dismissed the action because it found that, on their face,
allegations similar to those described above did not give rise
to breaches of fiduciary duty under ERISA.
In another notable case, the parties to the litigation went
through discovery. Upon reviewing the evidence, the court
determined there was no support for the allegations of breach
of fiduciary duty and dismissed the case. A third case went
to trial, which resulted in the court holding that, notwithstanding
some procedural shortcomings in plan governance,
the fiduciaries did not breach their fiduciary duties.
In a number of other cases, the courts have given the
green light for plaintiffs to proceed to discovery and further
develop their claims.
While all of these cases are in different stages of the litigation
process and none have been completely resolved, we
can see certain themes emerging. First and foremost, the
courts appear to be unpersuaded by the claim that making
too many investment options available under a plan results
in a violation of ERISA's duty of prudence. Additionally,
some but certainly not all courts reject the argument that
the use of revenue sharing to pay plan expenses or the use
of multiple recordkeepers, " lock-in, " or bundling arrangements
violates ERISA.
While 403(b) litigation is certainly breaking new ground,
successfully defending ERISA litigation remains, at
its
essence, dependent on demonstrating procedural prudence.
In this respect, the courts will not conclude a breach of fiduciary
duty under ERISA merely because, for example, fiduciaries
retain multiple recordkeepers, offer more expensive
investment options or certain share classes in the plan,
or use revenue sharing rather than a flat dollar charge to
participant accounts to pay plan expenses.
Plan fiduciaries for 403(b) plans can use these general
principles to develop concrete action plans even in the
context of 403(b) litigation. Fiduciaries should have an
understanding of their plan governance structure and be
able to identify all of the plan's service providers and their
respective compensation. In addition, to satisfy procedural
prudence, plan fiduciaries should: 1) confirm that they and
other fiduciaries have the appropriate expertise to make
prudent decisions that are in the best interest of participants;
2) receive appropriate training so they understand
their fiduciary obligations under ERISA and the extent of
their liability; 3) as needed, retain experts, e.g., an investment
adviser, to assist in making fiduciary decisions; 4)
meet regularly to examine various aspects of the plan, such
as the investment offerings and the level of plan expenses;
and 5) clearly document their fiduciary deliberations and
decisions in their meeting minutes and other materials.
David Kaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered, in Washington, D.C. He has
an extensive background in the financial services sector. His range of
experience includes handling fiduciary matters affecting investment
managers, advisers,
broker/dealers,
insurers, banks and service
providers. He served on the Department of Labor (DOL) ERISA Advisory
Council from 2012 through 2014.
48 | planadviser.com November-December 2018 Art by Tim Bower
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