In the 45 years since the Employee Retirement Income Security Act of 1974 (ERISA) went into effect, U.S. retirement plan assets have soared to a staggering $28 trillion. With a pool of assets that large, there’s been an explo- sion of ERISA class actions in recent years. Indeed, the 10 highest ERISA class action settlements in 2017 with respect to employer-sponsored retirement plans totaled nearly $1 billion. With courts increasingly siding with plaintiffs in ERISA retirement plan cases, there appears to be little hope that the trajectory of these class actions will reverse. At the same time, plaintiffs are exploring new avenues of attack.

Historically, ERISA litigation has focused on the du- ties, responsibilities, and actions of the retirement plan’s fiduciaries—typically, the board and company executives. Under ERISA, those fiduciaries are charged with one main objective: to act solely in the best interests of plan participants. Class action suits against companies have alleged that fiduciaries have violated that rule by, for example, making imprudent decisions regarding investment choices, or failing to manage plan documentation or monitor people hired to carry out plan duties.

In recent years, ERISA fiduciary litigation has increasingly focused on excessive plan fees and expenses. “There has been an increase in class action litigation by plan participants who are basically saying that their employer’s 401(k) plan charged them too much—and the plan fiduciaries should have shopped around and found better deals,” says David McFarlane, a partner in Crowell & Moring’s Corporate, Health Care, Tax, and Labor & Employment groups in New York. “And those can be huge lawsuits. In some, the employer has ended up being on the hook for reimbursing retirement accounts for millions—sometimes hundreds of millions—of dollars.”

The focus on fees is not the only change taking place in ERISA 401(k) litigation. Under the law, fiduciaries are held personally responsible for their decisions—or even those of their co-fiduciaries—and plaintiffs are beginning to take advantage of that. “Recently, we’ve started to see lawsuits nam- ing individuals as defendants, not just companies,” McFarlane says. “It used to be that only the plan sponsor would be sued by a class of 401(k) participants. Now we’re seeing executives and board and committee members being named individu- ally—meaning that their house, their car, and their savings are at risk for something they may not have known was happening under their watch.” The fiduciaries involved with a retirement plan usually include members of the board of directors, the CEO, the CFO, the vice president of human resources, and “any employee in the company who has discretion to make a decision with respect to the administration of the retirement plan,” he says.

Often, businesses will carry directors and officers’ (D&O) liability ERISA fiduciary insurance as a hedge against per- sonal liability exposure. However, those policies might not be sufficient when it comes to ERISA fiduciary litigation. “D&O policies may not cover ERISA-related liability at all, or there may be special provisions, such as requiring executives to get annual fiduciary training,” McFarlane says. “Even if there is coverage, it might be woefully inadequate compared to the size of the plan or the risks involved.” Insurance companies are beginning to take notice of the size of ERISA class actions and are tightening restrictions on D&O ERISA coverage and adjusting premiums.

Up Next: Health Plans Under ERISA

Retirement-focused litigation has resulted in a significant body of jurisprudence and regulatory interpretation, which has set the stage for the next wave of ERISA litigation: employer-spon- sored health plans. The United States spends approximately $3 trillion a year on health care, making the oversight of company health plans an attractive target for plaintiffs. Such plans have been covered by ERISA since it was passed, but over the course of four decades, there has been comparatively little litigation on that front. However, that has been changing with rapidly ris- ing health care costs and the implementation of the Affordable Care Act, which required more companies to provide medical insurance. These factors prompted employers to collect cost- sharing premiums from employees or become self-insured, thus creating a new target for ERISA fiduciary breach actions.

“The plaintiffs’ bar is now arguing that those employee premiums and other costs, such as pharmacy rebates, are ERISA plan assets, and that every decision that a plan sponsor makes with respect to use of those plan assets is a fiduciary deci- sion,” says McFarlane. “The idea is that if you are not keeping your eye on details like co-pays, types of coverage, pharmacy benefits, and lower premiums, you may have committed a fiduciary breach and may be sued under well-developed theories from retirement plan litigation.” As a result, he adds, “fiduciaries overseeing health plans have to be exceptionally careful to follow the same golden rule that they have to follow with retirement plans. Make sure that what you’re doing is solely in the best interest of participants.” Personal liability is especially relevant in this area, because there are often more fiduciaries involved in the administration of health plans than retirement plans.

Looking ahead, fiduciaries’ decisions about monitoring costs and who they appoint and hire to administer health plans will be important drivers of ERISA litigation—and often, companies are not fully aware of this growing threat. At the same time, the already intense focus on 401(k)s and pensions can be expected to continue. Altogether, these trends have the potential to put more companies and a wider group of company fiduciaries at risk of becoming class action targets. In addition, says McFarlane, a growing interest in areas such as cybersecurity breaches of plan accounts and the recovery of plan assets can be expected to open up new areas of fiduciary exposure.

In all of these ERISA issues, the key is prevention. McFarlane notes that the best protection for employers and D&O insurers is to demonstrate that the plan sponsor has undertaken regular and in-depth compliance reviews of retire- ment and health plans. That means providing proof that the plan sponsor has reviewed plan documentation for compli- ance with applicable law, undertaken review of governance and delegation of authority structures, provided external fiduciary training, and demonstrated regular monitoring and benchmarking. In general, companies need to make sure that their fiduciaries perform due diligence and follow clear decision-making processes. “One of the best ways to get early dismissal of a lawsuit is to show that the plan fiduciaries did their job—not a job held to the standard of perfection, but one that demonstrates reasonable and prudent compliance with their fiduciary duties,” he says.

With the increasing emphasis on personal liability, com- panies also need to make sure that people in those roles are qualified for the job—a factor that may be getting more scrutiny. In September 2018, after losing a class action lawsuit against New York University over the handling of retirement funds, the plaintiffs turned around and sued for the removal of two of the fiduciaries involved—an action based on the court’s ruling that noted that the two lacked the capabilities needed to effectively oversee the plan. “It’s more important than ever to have people in those fiduciary roles who un- derstand their responsibilities and the issues involved,” says McFarlane. “You don’t want someone who is just going to rubber-stamp the decisions of others.”

Recovery and the Retirement Plan

Taking action to recover damages awarded in class ac- tion suits has become an increasingly common prac- tice for companies—but they need to pay attention to recovering retirement and health plan assets, as well.

“Plan sponsors have a duty to consider and partici- pate in antitrust and other class action recovery efforts in order to maximize returns and assets for plan invest- ments on behalf of plan participants,” says Crowell & Moring’s David McFarlane. “Companies haven’t really focused much on their retirement and health plans when thinking about recovery. But they need to.” Pur- suing recovery may well be in the best interest of plan participants. As a result, he says, “failure to do so may expose the officers, directors, and others to personal liability under ERISA.”

For example, a class action suit might involve faulty equipment purchased by a corporation. At the same time, however, the corporation’s retirement plan might have invested in that equipment manufacturer and thus have a potential claim against it. The corporation needs to keep the two identities separate—that is, the pension committee needs to pursue its own claim, in- dependent of the company. And if there is a settlement that covers both parties’ claims, the committee needs to sign off on its portion—the company cannot do so for that portion. If it does, it could be at risk of violating its fiduciary duties to plan recipients.

At times, a corporation may decide not to pursue recovery of damages against another company for business reasons—the company in question might be a partner or customer, for example. However, says McFarlane, “the pension plan cannot consider those factors as governing—it can only consider what is in the best interest of the plan participants. So except in extraordinary situations, it has a compelling duty to go after those plan assets.” Otherwise, he adds, “plaintiffs could bring a class action lawsuit against the com- pany and the fiduciaries individually, arguing they have breached their duty by not attempting to bring those assets back into the pension plan.”